<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-15323
NETWORK EQUIPMENT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 94-2904044
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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800 SAGINAW DRIVE
REDWOOD CITY, CALIFORNIA 94063
(415) 366-4400
(Address of principal executive offices, including zip code,
area code, and telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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<S> <C>
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
(Title of each class) (Name of each exchange on which registered)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
7 1/4% CONVERTIBLE SUBORDINATED DEBENTURES
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
- ---
- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant on May 31, 1996 was $578,989,208.
The number of shares outstanding of the Common Stock, $0.01 par value, on
May 31, 1996 was 20,886,937.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant's Annual Report to Stockholders for the fiscal year ended
March 31, 1996 is incorporated by reference in Parts I, II and IV of this Form
10-K to the extent stated herein. The registrant's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on August 13, 1996 is
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
Exhibit Index is located on page 17.
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EXHIBIT INDEX
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<CAPTION>
EXHIBIT NO. DESCRIPTION NOTE
- ----------- --------------------------------------------------------------------------------------------- ---------
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3.1 Registrant's Restated Certificate of Incorporation, as amended. n.1
3.2 Registrant's Bylaws, as amended. n.1
4.1 Indenture dated as of May 15, 1989, between Registrant and Morgan Guaranty Trust Company of
New York. n.4
4.2 Rights Agreement dated as of August 15, 1989, between Registrant and The First National Bank
of Boston, as amended. n.6
4.3 Certificate of Designations of Series A Junior Participating Preferred Stock filed with the
Secretary of State of Delaware on August 24, 1989. (Exhibit 4.1 in the Registrant's Form S-8
Registration Statement.) n.5
10.2 Seaport Centre Phase Three Industrial Net Lease Agreement, dated August 12, 1987, between
Registrant and Lincoln Property N.C., Inc. n.2
10.7 Officer Employment and Continuation Agreement dated October 27, 1995, between Registrant and
Joseph J. Francesconi.*
10.8 Officer Employment and Continuation Agreement dated October 30, 1995, between Registrant and
Raymond E. Peverell.*
10.9 Officer Employment and Continuation Agreement dated October 27, 1995, between Registrant and
G. Michael Schumacher.*
10.10 Officer Employment and Continuation Agreement dated October 27, 1995, between Registrant and
Craig M. Gentner.*
10.11 Officer Employment and Continuation Agreement dated October 27, 1995, between Registrant and
Roger A. Barney.*
10.12 Employment Agreement dated October 5, 1994, between Registrant and Walter J. Gill.*
10.13 Form of Officer Employment and Continuation Agreement as signed by all other Executive
Officers of the Company in October 1995.*
10.14 Form of Director Indemnification Agreement as signed by all Directors of the Company.
10.15 Form of Officer Indemnification Agreement as signed by all Executive Officers of the
Company.*
10.16 Corporate Director Compensation Deferral Election Program and 1996 Deferral Form.
10.17 Corporate Officer Compensation Deferral Election Program and 1996 Deferral Form.*
10.18 Corporate Officers Long Term Variable Compensation Program.*
11.1 Statement Regarding Computation of Per Share Income.
13.1+ 1996 Annual Report to Stockholders. (Such Report, other than those portions thereof that are
expressly incorporated by reference herein, is furnished solely for informational purposes
and shall not be deemed to be "filed" herewith.)
16.1 Registrant's Registration of Form S-8. n.10
21.1 Subsidiaries of Registrant as of June 1, 1996.
23.1 Independent Auditors' Consent.
99.1 Registrant's 1983 Stock Option Plan.* n.8
99.2 Registrant's 1988 Restricted Stock Award Plan.* n.7
99.3 Rules of Registrant's 1988 U.K. Stock Option Scheme.* n.3
99.4 Registrant's 1989 U.K. Stock Option Plan.* n.7
99.5 Registrant's 1990 Employee Stock Purchase Plan.* n.9
99.6 Registrant's 1993 Stock Option Plan, as amended.* n.10
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* A management contract or compensatory plan required to be filed as an Exhibit
to Form 10-K.
+ Filed herewith.
17
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SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NETWORK EQUIPMENT TECHNOLOGIES, INC.
(Registrant)
Date: June 21, 1996 By: /S/ JOSEPH J.
FRANCESCONI
--------------------------------------
Joseph J. Francesconi
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
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<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------------- ---------------------------------------------- -----------------
<S> <C> <C>
/S/ JOSEPH J. FRANCESCONI
- ------------------------------------
Joseph J. Francesconi President, Chief Executive Officer and June 21, 1996
Director (Principal Executive Officer)
/S/ JOHN B. ARNOLD
- ------------------------------------
John B. Arnold Chairman of the Board June 21, 1996
/S/ DIXON R. DOLL
- ------------------------------------
Dixon R. Doll Director June 21, 1996
/S/ JAMES K. DUTTON
- ------------------------------------
James K. Dutton Director June 21, 1996
/S/ CRAIG M. GENTNER
- ------------------------------------
Craig M. Gentner Senior Vice President, Chief Financial Officer June 21, 1996
and Corporate Secretary (Principal Financial
Officer and Principal Accounting Officer)
/S/ WALTER J. GILL
- ------------------------------------
Walter J. Gill Director June 21, 1996
/S/ FRANK S. VIGILANTE
- ------------------------------------
Frank S. Vigilante Director June 21, 1996
/S/ HANS A. WOLF
- ------------------------------------
Hans A. Wolf Director June 21, 1996
</TABLE>
19
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EXHIBIT 13.1
(FRONT COVER)
N.E.T. Logo
"N.E.T. Value - 1996 Annual Report"
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CORPORATE OVERVIEW
N.E.T. supplies wide-area networks (WANS) to enterprises and carriers around the
world. These organizations manage vast amounts of critical information and
require reliable, cost-effective networking solutions.
Most of these organizations also need a combination of voice, video, and data
capabilities -- which the N.E.T. -TM- multiservice backbone network provides. A
network constructed of N.E.T. multiservice bandwidth managers frees our
customers from being locked into a single technology or application. It gives
them the flexibility to customize a network so that it meets their unique needs
and allows them to add technologies and applications as required.
For more information on N.E.T. join us at our world wide web site at
http://www.net.com
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share amounts)
HIGHLIGHTS FOR YEARS ENDED MARCH 31, 1996 1995
- --------------------------------------------------------------------------------
Revenue $ 338,899 $ 284,036
Operating income 47,408 25,970
Net income 31,350 27,070
Primary earnings per share 1.50 1.44
Working capital 174,425 128,683
Total assets 281,957 232,046
7 1/4% convertible subordinated debentures 33,526 68,625
Stockholders' equity 184,430 101,662
Number of employees 1,318 1,189
- --------------------------------------------------------------------------------
Results for fiscal 1995 include a $9.9 million tax benefit. Excluding this tax
benefit, primary earnings per share would have been $.91.
(Dollars in thousands, except per share amounts)
1996 HIGHLIGHTS BY QUARTER FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------------
Revenue $ 79,609 $ 82,958 $ 84,561 $ 91,771
Net income 6,422 7,448 8,215 9,265
Primary and fully diluted earnings
per share .32 .36 .39 .43
- --------------------------------------------------------------------------------
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EXHIBIT 13.1
Three graphs are displayed showing quarterly Revenue (dollars in millions), Net
Income (dollars in millions, excluding a $9.9 million tax benefit in Q4 FY95),
and Primary Earnings Per Share (dollars, excluding a $9.9 million tax benefit in
Q4 FY95).
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TO OUR SHAREHOLDERS
N.E.T.'s outstanding year can be attributed in part to excellent teamwork: an
attitude infused throughout the organization. Along with responsible stewardship
of resources, it has enabled us to consolidate our position in the fast-moving
telecommunications industry.
STRENGTHENING YOUR COMPANY . . . OUR GOALS FOR FISCAL 96
We began this year with clear company objectives - to continue to increase both
revenue and profitability while further strengthening your company across the
board.
Another year of record results
Our financial results are evidence that we achieved the first objective,
increasing revenue and profitability. Revenue for the year was $339 million, up
almost 20% from the previous year, and reached an all-time high of over $91
million in the fourth quarter. Operating income grew 83% to over $47 million.
Net income for the year was $31 million, or $1.50 per share. Our record
operating results were complemented by an equivalent strengthening of the
balance sheet - cash resources grew by over $25 million to $112 million, and
long-term debt was reduced by more than 50 percent to less than $34 million.
Overall company performance
Our improvement and results as a dedicated team go deeper than financial
highlights can reveal. We achieved the second objective - to strengthen your
company - through well-executed initiatives throughout the organization. Some of
these activities include . . .
Sales and marketing
We continued to reallocate and direct our sales and marketing teams to achieve a
greater share of the international, carrier, and government marketplaces -
growth areas for the best-of-class products that N.E.T. is delivering today. In
fact, our performance and excellent financial results this year are based on the
worldwide competitive success of our Multiservice Bandwidth Managers. Obviously,
as a trusted vendor to many world-class organizations, our loyal customer base
is a key strength. We are determined to keep on earning this trust, delivering
the right products and services through appropriate channels.
Business relationships
During the year we announced our Vista architecture, describing how N.E.T.
networks can grow to support broadband network needs for the future. A key
element designed into this architecture is the ability to integrate
complementary, best-of-class products with our own internally developed
products. Consequently, we initiated or strengthened several key business
partnerships this year. Our objective is to be able to provide more complete
solutions - matching a comprehensive product portfolio, greater than any single
vendor can offer, with our world-class service and support capabilities.
Engineering . . . and Reengineering
Our internal engineering capabilities have improved significantly over the past
year. We have increased both the size and the quality of our engineering staff,
and made aggressive capital investments to enhance our overall development
environment. We are investing in major new developments in ATM and network
management and enhancements to our Multiservice Bandwidth Managers.
Other initiatives such as the ISO 9000 program, begun several years ago and
aimed at raising our product-related activities to unparalleled standards,
have resulted in greater efficiencies and predictability of our product
operations, as well as greatly enhanced product quality.
PREPARING FOR GROWTH . . . OUR GOALS FOR FISCAL 97
As we move ahead through FY97, our objective is to prepare the company for
faster growth as the market for the new broadband technologies hits stride. The
initiatives we took in FY96 to strengthen the company for the long-term will be
reinforced this year with even greater zeal. For example, we will deepen our
reengineering efforts for further improvements in business processes and
practices. Increased operational efficiencies will be achieved through the
closer integration of our engineering
<PAGE>
and manufacturing teams to reduce product costs; and, at the same time, we are
combining our field sales and service teams to make us more efficient in
handling the needs of our customers. Also in this fiscal year, results of major
engineering developments are planned for announcement and availability.
Our understanding of the markets in which we operate and our core technology
competencies come together in N.E.T.'s Vista architecture - providing network
solutions for today and tomorrow. You'll learn more about this in the pages that
follow.
Our business is bringing value in an industry beset with choices and change. Our
value is in blending trust with best-of-class products and services, thus
enhancing our customers' ability to deal with the relentless change in
telecommunications and in their business environments.
Sincerely,
Joseph J. Francesconi
President and Chief Executive Officer
<PAGE>
MARKETS
Wide-area networking around the world
Market Strategy
Global Focus
N.E.T. has selected key segments of the wide-area networking market to provide
the company with a broad range of regional and global opportunities. Our success
is in supplying and bringing value to four main market segments while balancing
their distinct requirements.
U.S. Commercial
Customers value our total network solutions, trusting us to deliver products and
services for their heartbeat networks. We are continuing to enhance that value
by adding service overlays - such as ISDN, frame relay, and internetworking -
for our prestigious installed base. In an ever-changing telecommunications
environment, our flexible multiservice platforms allow enterprises to leverage
their network alternatives: choosing private or public elements as required, and
switching between them easily.
U.S. Federal
As a supplier of highly reliable wide-area networking solutions, N.E.T. has
earned the respect of the federal government. We have grown a highly successful
Department of Defense (DoD) business, and the DoD depends on our staff to add
extra value through systems integration. Opportunities abound for N.E.T. to
serve the needs of civilian agencies and international allies.
Carriers
Carrier consortia need highly flexible platforms as a foundation for global
managed network services. N.E.T. continues to be a leading vendor for those
global carriers, proving that our Multiservice Bandwidth Manager is the right
solution for today's applications. The company also provides highly reliable
systems to cellular network operators domestically and has begun to extend this
business internationally.
International
The deregulation of telecommunications markets around the world is driving the
need for flexible network solutions, offering tremendous opportunities for
N.E.T. to capitalize on the strengths of our Multiservice Bandwidth Manager.
Carriers in many countries are increasing their investment in network
infrastructure. They require leading-edge capabilities to satisfy today's
increasingly demanding network customers. Internationally, N.E.T. has focused
both on large enterprises and regional carriers, supplying backbones for several
large digital data networks (DDNs).
<PAGE>
TECHNOLOGIES
Managing bandwidth for circuits, frames, packets, and cells
Technology Strategy
Multiservice
N.E.T.'s technology strategy grows from our firm belief in the benefits of
multiservice backbone networks. Our success stems from the value customers place
on our approach. "Multiservice" means that a single network or system supports
multiple applications with multiple technologies - using the most appropriate
technology for each application. For example, N.E.T.'s Multiservice Bandwidth
Manager integrates packet switching (such as frame relay and routing) and
time-division multiplexing (TDM). Key benefits include minimal equipment, ease
of management, economies of bandwidth aggregation, and service flexibility. The
overall result: a high-value, low-cost solution.
Complementary technologies
By design, every technology is optimized for certain speeds and types of traffic
and is less efficient for others. TDM, which supports a full range of speeds, is
optimized for speeds up to T1/E1 and for constant traffic, especially voice.
Similarly, most packet traffic uses narrowband technologies optimized for bursty
traffic at speeds up to T1/E1. The combination of TDM and packet technologies in
N.E.T.'s Multiservice Bandwidth Manager offers an extremely powerful solution
for narrowband multiservice networks. Narrowband technologies represent more
than 90 percent of today's communications facilities and will hold this lead
position well into the next century.
Broadband ATM
A small but increasing proportion of applications need large and variable
amounts of bandwidth. This is where ATM will prove most effective. ATM is a
broadband technology optimized for speeds greater than T1/E1 and designed to
carry multiservice traffic. It is an important emerging technology being
introduced mainly for multimedia or to build backbones for packet or frame
traffic.
Technology strategy
N.E.T. will offer broadband and narrowband support in a single multiservice
network through the use of ATM, TDM, and packet technologies. N.E.T.'s Vista
architecture, the framework for implementation of this strategy, is described on
pages 8 and 9. Key elements are our ATM switch, Multiservice Bandwidth Manager,
and ATM Service Interfaces, united by network management.
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VISTA
The true multiservice network architecture
Vista Architecture
Systems view
N.E.T.'s Vista is a true multiservice network architecture for the wide area. It
comprises products and services for data and voice networking: it encompasses
narrow and broadband applications, leveraging packet and circuit technologies,
for carriers and enterprises. N.E.T.'s Vista architecture differs from
competitive ATM product strategies: our systems view includes an ATM switch
element, but does not stop there!
ATM switching core
At the heart of the Vista architecture is N.E.T.'s multiservice ATM switch. This
highly scalable, standards-based core will offer the availability carriers
demand and enterprises are coming to expect. It will support broadband
applications directly and interwork with N.E.T.'s Multiservice Bandwidth Manager
to support narrowband applications. This facilitates the evolution of our
multiservice backbones to incorporate ATM capabilities.
Best-of-class products
Vista uses open standard interfaces to connect architectural elements. Devices
known as ATM Service Interfaces (ASIs) connect to the ATM switch core to support
legacy applications over the ATM backbone. The Multiservice Bandwidth Manager,
edge router, and frame ASIs are three classes of devices that provide specific
adaptation and aggregation functions. The real power of this ASI concept is that
it gives N.E.T.'s network designers freedom to select from several best-of-class
products. This simplifies the integration of partner products while providing
flexibility in Vista network design. Further benefits stem from the "loosely
coupled" nature of the Vista architecture - which enables individual elements to
be upgraded quickly and simply. For example, the ATM switch component in a
system could be upgraded to take advantage of the rapid rate of change in ATM
implementation technology, without requiring changes to the ASIs surrounding it.
United with NMS
The Vista network management system (NMS) will oversee N.E.T. and partner
products, providing the support that carriers require for their network
applications. It will present a standards-based view of the Vista network and
will have tightly integrating characteristics to complement our loosely coupled
network architecture.
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STRATEGY
Adding value for customers and shareholders
Company Strategy
Global market focus
Global entities select N.E.T. for our flexibility and reliability: large
enterprises trust us to equip and support their private heartbeat networks;
global carrier partners trust us to provide the best managed platforms. We are
directing our efforts to increase our penetration of carrier and international
markets while continuing to be a leader in enterprise networking.
Wide-area network focus
In line with the long-term trend towards broadband networking, we are expanding
our strategic core competencies by developing wide- area ATM products for our
Vista architecture. N.E.T.'s powerful distributed intelligence will maximize
bandwidth efficiencies for both data and voice across the full range of
switching technologies, including ATM.
World-class services and support
N.E.T. is renowned for its superior service organization. Our well-known
strengths in technical assistance, installation, and maintenance are enhanced by
our more recent successes with systems integration and project management. We
plan to further expand our professional services to leverage our expertise in
designing, planning, and operating networks around the world.
Value to customers
Within our Vista architecture, several well-considered design goals - such as
the loose-coupling of elements to enable change and the key expanding role for
our Multiservice Bandwidth Manager - allow our network solutions to be deployed
to meet current customer requirements while offering a path to leading-edge
capabilities in the future. Also, Vista anticipates a wide range of ASIs and
leverages our partnerships with industry leaders for best-of-class products. As
a result, the breadth of interfaces and network services offered by N.E.T. is
expansive.
Value to shareholders
Company objectives have been defined to strengthen the company long-term. Over
time, we believe that the achievement of this goal will yield increasing
shareholder value. Recognizing that our employees - some of whom are featured
throughout these pages - are key to the company's success, we are investing
heavily in their training and development. We will continue our reengineering
initiatives to maximize organizational efficiencies while striving to fulfill
customer requirements better than ever before.
"Fiscal 96 was a year of strong revenue and income growth. It was also a year
in which we made significant investments in research and development and capital
equipment to position the company for future growth." Craig M. Gentner, Senior
Vice President and Chief Financial Officer.
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EXHIBIT 13.1
Eight graphs are displayed for each quarter Fiscal 1995 and 1996 showing: 1)
Product Revenue (dollars in millions; product revenue increased 17% over fiscal
year 1995); 2) Operating Income (dollars in millions; compared to fiscal year
1995, income from operations grew 83%); 3) R & D Spending (dollars in millions);
4) Capital Expenditures (dollars in millions); 5) Primary Earnings Per Share
(dollars; compared to fiscal year 1995 (excluding a Q4 FY95 tax benefit),
primary earnings per share grew 65%); 6) Cash & Investments (dollars in
millions; the Company continued to generate cash from operations); 7) Debt to
Equity (ratio; debt was reduced more than 50% by completing a partial call of
the convertible subordinated debentures); 8) Stockholders' Equity (dollars in
millions; stockholders' equity increased 81% from March 1995).
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QUARTERLY FINANCIAL DATA (UNAUDITED)
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(Dollars in thousands, except per share amounts) FIRST SECOND THIRD FOURTH
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FISCAL QUARTER 1996
Revenue $ 79,609 $ 82,958 $ 84,561 $ 91,771
Gross margin 38,722 41,566 43,671 47,202
Net income 6,422 7,448 8,215 9,265
Primary and fully diluted earnings per share .32 .36 .39 .43
- -----------------------------------------------------------------------------------------
FISCAL QUARTER 1995
Revenue $ 61,538 $ 66,851 $ 73,839 $ 81,808
Gross margin 30,081 32,404 38,175 40,956
Net income 1,427 2,919 5,259 17,465
Primary earnings per share .08 .16 .27 .87
Fully diluted earnings per share .08 .16 .27 .83
- -----------------------------------------------------------------------------------------
</TABLE>
Results for the fourth quarter of fiscal 1995 include a $9.9 million tax
benefit. Excluding this tax benefit, primary and fully diluted earnings per
share would have been $.38. See Note 11 to the Consolidated Financial
Statements.
FIVE YEAR FINANCIAL SUMMARY
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(Dollars in thousands, except per share amounts)
YEARS ENDED MARCH 31, 1996 1995 1994 1993 1992
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Revenue $ 338,899 $ 284,036 $ 237,672 $ 218,846 $ 180,805
Net income (loss) 31,350 27,070 (6,324) (11,097) (11,213)
Primary earnings (loss) per share 1.50 1.44 (.38) (.71) (.76)
7 1/4% convertible
subordinated debentures 33,526 68,625 68,625 68,625 68,625
Other long-term obligations - - - 52 1,212
Total assets 281,957 232,046 187,015 186,596 178,605
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Results for fiscal 1995 include a $9.9 million tax benefit. Excluding this tax
benefit, primary earnings per share would have been $.91. See Note 11 to the
Consolidated Financial Statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the accompanying notes. The Company's future operating
results may be affected by a number of factors, trends, and risks - many beyond
the Company's control. These factors are discussed in more detail below and
include, among others: advances and trends in new technologies; competitive
pressures in the form of new products or price reductions on current products;
changes in product mix; changes in domestic and international economic and/or
political conditions or regulations; ability to develop and deliver new
products; customer acceptance of existing and new products; and other factors
identified below.
RESULTS OF OPERATIONS
The following table depicts data derived from the Consolidated Statements of
Operations expressed as a percentage of revenue for each of the three years in
the period ended March 31, 1996.
Percent of Revenue 1996 1995 1994
---- ---- ----
Product revenue 66.7 67.9 69.8
Service and other revenue 33.3 32.1 30.2
----- ----- -----
Total revenue 100.0 100.0 100.0
----- ----- -----
----- ----- -----
Gross margin product revenue 59.9 58.9 56.2
Gross margin service and
other revenue 31.6 30.7 31.4
----- ----- -----
Total gross margin 50.5 49.9 48.7
----- ----- -----
----- ----- -----
Sales and marketing 22.2 24.8 29.9
Research and development 10.8 12.0 14.2
General and administrative 3.5 4.0 5.6
----- ----- -----
Total operating expenses 36.5 40.8 49.7
----- ----- -----
----- ----- -----
Income (loss) from operations 14.0 9.1 (1.0)
Interest income 1.8 0.9 0.6
Interest expense (1.4) (1.8) (2.2)
Other (0.2) 0.0 (0.1)
----- ----- -----
Income (loss) before income taxes 14.2 8.2 (2.7)
Income tax (provision) benefit (4.9) 1.3 0.0
----- ----- -----
Net income (loss) 9.3 9.5 (2.7)
----- ----- -----
----- ----- -----
COMPARISON OF 1996 AND 1995
REVENUE
Total revenue in fiscal 1996 increased $54.9 million, or 19.3% from fiscal 1995.
Product revenue and service and other revenue increased $33.2 million and $21.7
million, respectively, for the year. The 17.2% increase in product revenue is
principally due to increased IDNX -Registered Trademark- product
<PAGE>
sales across all sales channels. Over one-half of this increase is attributable
to the U.S. federal channel. Total product sales in the U.S. federal channel,
which includes U.S. government sales and sales to U.S. government contractors,
increased 38.3% to 27.4% of product revenue. International product sales
increased 11.4% to 34.1% of product revenue, primarily due to growth in the
European region. Growth in other product lines includes a 13.6% year-over-year
increase in STM -TM- product sales and incremental revenues earned in fiscal
1996 on sales of OEM equipment sold under recent marketing alliances.
Service and other revenue increased 23.8% from the prior year. This increase is
attributable to increases in systems integration services in support of product
sales to the U.S. government and, to a lesser extent, to continued growth in the
installed base of the Company's products.
Overall, revenue in the U.S. federal channel grew 37.4% over last year and
increased as a percentage of total revenue from 31.6% in fiscal 1995 to 36.4% in
fiscal 1996. Total international revenue increased 15.2% over last year and in
fiscal 1996 represented 27.1% of the Company's total revenue as compared to
28.1% in fiscal 1995.
GROSS MARGIN
Total gross margin as a percentage of total revenue increased to 50.5% in fiscal
1996 from 49.9% in fiscal 1995. Product gross margin increased to 59.9% in
fiscal 1996 from 58.9% in fiscal 1995. The increase in fiscal 1996 was primarily
due to favorable manufacturing variances from higher production volumes.
Favorable sales channel and IDNX product mix in fiscal 1996 was partially offset
by lower margins on sales of OEM equipment.
The gross margin for service and other revenue increased to 31.6% in fiscal
1996 from 30.7% in fiscal 1995 as a result of improved margins on both service
and systems integration services provided under a U.S. government contract. The
gross margin on these systems integration services increased to 14.8% in fiscal
1996 from 11.5% in fiscal 1995 due to changes in the mix of OEM products and
services provided.
Management expects product gross margin to continue to be affected by sales
channel and product mix as well as manufacturing volume variances, and expects
service and other revenue gross margin to continue to fluctuate as a result of
the changes in mix between systems integration services and other service
revenue.
OPERATING EXPENSES
Operating expenses increased $8.1 million in fiscal 1996. Operating expenses as
a percentage of total revenue decreased to 36.5% in fiscal 1996 from 40.8% in
fiscal 1995. Management expects operating expenses as a percentage of total
revenue to continue to trend downward in fiscal 1997 as planned revenue growth
exceeds that of operating expenses.
Sales and marketing expense increased $5.1 million in fiscal 1996 due to the
addition of personnel to support expansion of the sales infrastructure, and
commissions and travel expenses commensurate with the increase in sales volume
and the geographic dispersion thereof. Despite the increase in spending, sales
and marketing expense decreased as a percentage of total revenue to 22.2% in
fiscal 1996 from 24.8% in fiscal 1995. Management expects sales and marketing
expense to increase in fiscal 1997, while decreasing as a percentage of planned
revenue.
Research and development expense increased $2.5 million in fiscal 1996 due to an
increase in direct project funding, primarily salary-related expenses and
purchases of hardware and software tools to support product development. The
expense as a percentage of total revenue decreased to 10.8% in fiscal 1996 from
12.0% in fiscal 1995. In fiscal 1996, $1.9 million of software costs were
capitalized as compared to $2.0 million in fiscal 1995. Management plans to
continue funding research and development efforts at levels necessary to advance
product
<PAGE>
programs and expects research and development spending to increase in fiscal
1997, while remaining fairly constant as a percentage of planned revenue.
General and administrative expense increased $.5 million in fiscal 1996, but
decreased to 3.5% of total revenue as compared to 4.0% in fiscal 1995.
Management expects general and administrative expense to increase moderately in
fiscal 1997.
NON-OPERATING ITEMS
Interest income in fiscal 1996 increased $3.4 million from fiscal 1995 due to
higher cash balances and higher interest rates. Interest expense, primarily
related to the 7-1/4% convertible subordinated debentures, decreased $.5 million
to $4.7 million for fiscal 1996 compared to $5.2 million for fiscal 1995 as a
result of the partial call of the Company's convertible debentures. The
decrease consists of $1.0 million in interest savings offset by $.5 million of
one-time costs associated with the redemption. Other expense increased $.4
million in fiscal 1996 from $.1 million in fiscal 1995.
For the fiscal year ended March 31, 1996, the Company recorded income tax
expense of $16.9 million at an effective rate of 35% as compared to a tax
benefit of $3.8 million for fiscal 1995. As a result of the significant
increase in profitability during fiscal 1995 and in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"("SFAS
109"), the Company recorded a tax benefit in the fourth quarter of fiscal 1995
of $9.9 million. See Note 11 to the Consolidated Financial Statements.
RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This standard defines a fair value method of
accounting for stock-based employee compensation plans. The Company plans to
adopt the disclosure-only alternative, and, accordingly, SFAS 123 will have no
impact on the Company's results of operations or financial position.
COMPARISON OF 1995 AND 1994
REVENUE
Total revenue in fiscal 1995 increased $46.4 million or 19.5% from fiscal 1994.
Product revenue and service and other revenue increased $27.1 million and $19.3
million, respectively, over the same period. The 16.3% increase in product
revenue was principally due to increased IDNX sales in the international and
U.S. federal channels. International product sales increased 52.9% to 35.9% of
product revenue in fiscal 1995. Contributing to the growth in international
product sales was the Asia Pacific/Latin American region which grew 102.0%.
Product sales in the U.S. federal channel increased 15.5% to 23.2% of product
revenue in fiscal 1995. STM sales increased 44.9% in fiscal 1995. Service and
other revenue increased 26.9% from fiscal 1994. This increase was attributable
to increases in systems integration services in support of product sales to the
U.S. government, and, to a lesser extent, to continued growth in the installed
base of the Company's products. Overall, international sales increased 52.7%
from fiscal 1994 and in fiscal 1995 represented 28.1% of the Company's total
revenue as compared to 22.0% in the prior year. Sales to the U.S. government
grew 19.7% from fiscal 1994 and represented 27.5% of total revenue in both
fiscal 1995 and fiscal 1994.
GROSS MARGIN
Total gross margin as a percentage of total revenue increased to 49.9% in fiscal
1995 from 48.7% in fiscal 1994. Product gross margin increased to 58.9% in
fiscal 1995 from 56.2% in
<PAGE>
fiscal 1994. Fiscal 1994's product margin was negatively impacted by a $3.8
million charge to cost of product revenue related to a writedown of excess ATMX
inventory and fixed assets. Excluding this writedown, product gross margin in
fiscal 1994 would have been 58.5%. The increase in fiscal 1995, excluding the
fiscal 1994 writedown, was primarily due to favorable manufacturing variances
from higher production volumes. This was partially offset by a higher volume of
lower margin sales to new customers in the Asia Pacific/Latin American sales
channel. The gross margin for service and other revenue declined to 30.7% in
fiscal 1995 from 31.4% in fiscal 1994 due to a significantly higher mix of lower
margin systems integration services provided under a U.S. government contract.
The gross margin on these systems integration services increased to 11.5% in
fiscal 1995 from 9.9% in fiscal 1994 due to a change in the mix of OEM products
and services provided.
OPERATING EXPENSES
Operating expenses decreased $2.4 million in fiscal 1995 from the prior year.
Operating expenses as a percentage of total revenue decreased to 40.8% in fiscal
1995 from 49.7% in fiscal 1994. This decrease was the result of management's
continuing focus on cost control and increased operating efficiencies.
Sales and marketing expense decreased $.7 million in fiscal 1995 due to lower
operating costs as a result of increased operating efficiencies offset by an
increase in advertising expense. Sales and marketing expense decreased as a
percentage of total revenue to 24.8% in fiscal 1995 from 29.9% in fiscal 1994.
Research and development expense increased $.2 million in fiscal 1995 due to an
increase in direct project funding, including salary related expenses, offset by
a decrease in other operating expenses. The expense as a percentage of total
revenue decreased to 12.0% in fiscal 1995 from 14.2% in fiscal 1994. In fiscal
1995, $2.0 million of software costs were capitalized as compared to $2.7
million in fiscal 1994.
General and administrative expense in fiscal 1995 decreased to 4.0% of total
revenue as compared to 5.6% in fiscal 1994. The decrease was primarily due to
lower personnel costs realized as a result of consolidating and streamlining the
Company's operations.
NON-OPERATING ITEMS
Interest income in fiscal 1995 increased $1.2 million from fiscal 1994 due to
higher cash balances and higher interest rates. Interest expense, primarily
related to the 7 1/4% convertible subordinated debentures, remained relatively
unchanged at $5.2 million for fiscal 1995 compared to $5.3 million for fiscal
1994. Other expense decreased $.1 million in fiscal 1995 as compared to fiscal
1994.
For the fiscal year ended March 31, 1995, the Company recorded an income tax
benefit of $3.8 million. As a result of the significant increase in
profitability during fiscal 1995 and in accordance with SFAS 109, the Company
recorded a tax benefit in the fourth quarter of fiscal 1995 of $9.9 million.
Due to the net loss in fiscal 1994, no income taxes were provided. See Note 11
to the Consolidated Financial Statements.
BUSINESS ENVIRONMENT AND RISK FACTORS
When used in this annual report, including Management's Discussion and Analysis,
the President's letter to shareholders and elsewhere, the words "believes,"
"anticipates," "future," "expects," "will" and similar words identify
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties. Actual results may differ materially from such
forward-looking statements as a result of risks and uncertainties, including
those
<PAGE>
described below and others as set forth in the Company's periodic reports filed
with the Securities and Exchange Commission.
Historically, the majority of the Company's revenue in each quarter results from
orders received and shipped in that quarter. Because of these ordering patterns
and potential delivery schedule changes, the Company does not believe that
backlog is indicative of future revenue levels. Furthermore, if large orders do
not close when forecasted or if near-term demand for the Company's products
weakens, the Company's operating results for that or subsequent quarters would
be adversely affected.
Expense levels are relatively fixed and are set based on expectations regarding
future revenue and margin levels. These expectations derive from making
judgments on issues such as future technology trends, competitive products and
services, pricing and customer requirements, a process that involves evaluation
of information that is often unclear and in conflict. All markets for the
Company's products are very competitive and dynamic and many are susceptible to
changing regulations and political conditions. The Company has limited
visibility into factors that could influence its revenue, mix of product and
other revenue sources and margins, particularly in international markets that
are served primarily by non-exclusive resellers.
The Company's products incorporate intellectual property and technology owned by
the Company or licensed from third parties. The Company's ability to maintain
and enhance the value of its intellectual property and technology and third
party licenses will affect future product and service offerings. Moreover, the
Company believes that operating results will depend on successful development
and introduction of new products and enhancements to existing products and
service offerings. There can be no assurance that the Company will succeed in
such efforts or that customers will accept new, enhanced and existing products
and services in quantities and at prices an margins that are consistent with the
Company's expectations. The Company's success also depends on its ability to
attract and retain employees necessary to support planned growth.
The Company's products include components, assemblies and subassemblies that are
currently available from single sources and, in some cases, are in short supply.
Testing and manufacturing is performed at the Company's Redwood City,
California, facility. Availability limitations, price increases or business
interruptions could adversely impact revenue, margins and earnings.
The Company has distribution, product and technology relationships with a number
of significant customers and entities that are considered by the Company to be
strategic. Most of the Company's competitors have similar relationships with
their respective customers and other parties. Changes in the Company's
relationships or changes in similar relationships among competitors could have a
material impact on competitive and other factors described above, including the
Company's operating results. Also, litigation or other claims based on
securities, intellectual property, patent, product, regulatory or other factors
could materially adversely affect the Company's business, operating results and
finances.
A significant portion of the Company's revenue comes from contracts with the
U.S. government, most of which do not include purchase commitments. There can
be no assurance that orders from the U.S. government, or from other customers,
will continue at historical levels, or that the Company will be able to obtain
orders from new customers.
Because of the factors described above, as well as others that may affect the
Company's operating results, past financial results may not be an accurate
indicator of future performance.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had cash, cash equivalents and temporary cash
investments of $112.2 million, as compared to $86.6 million at the end of fiscal
1995. Cash provided from operations was $40.2 million in fiscal 1996, a $3.2
million decrease over the prior year. This decrease was principally due to an
increase in accounts receivable partially offset by an increase in accrued
liabilities. Accounts receivable increased $20.8 million during fiscal 1996
due to the increase in sales volume, particularly in the last month of the
fiscal year.
Net cash used for investing activities in fiscal 1996 consisted primarily of
purchases of property and equipment of $17.2 million, which increased $8.9
million from fiscal 1995, most significantly for the purchase of R&D equipment.
Cash used for investing activities also included net purchases of temporary cash
investments of $7.2 million and additions to software production costs of $1.9
million.
Net cash provided by financing activities in fiscal 1996 is composed of $12.7
million from the issuance of Common Stock relating to the employee stock benefit
plans, partially offset by $10.1 million used to redeem a portion of the
Company's 7 1/4% convertible subordinated debentures.
In the third quarter of fiscal 1996, the Company completed a partial call of its
outstanding 7 1/4% convertible subordinated debentures due May 15, 2014,
reducing long-term debt by $35.1 million to $33.5 million. To redeem a portion
of the debentures, $10.1 million in cash was used, $.3 million of which
represents the premium paid in excess of principal. An additional $25.3 million
of principal was converted into 802,078 shares of Common Stock at a conversion
price of $31.50 per share.
As of March 31, 1996, the Company had available an unsecured $10.0 million line
of credit. Borrowings under this committed borrowing facility are available
through May 1997 and bear interest at the bank's base rate (which approximates
prime). At March 31, 1996, there were no outstanding borrowings under this
facility.
The Company believes that current cash and cash equivalents, temporary cash
investments and cash flows from operations will be sufficient to fund
operations, purchases of capital equipment and research and development programs
currently planned at least through fiscal 1997.
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands)
March 31, 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 52,319 $ 33,886
Temporary cash investments 59,892 52,734
Accounts receivable, net of allowances of $4,533 in 1996
and $2,514 in 1995 76,966 56,983
Inventories 31,705 32,314
Deferred income taxes 11,830 9,900
Prepaid expenses and other assets 5,714 4,625
- -----------------------------------------------------------------------------------
Total current assets 238,426 190,442
- -----------------------------------------------------------------------------------
Property and equipment:
Machinery and equipment 92,653 98,969
Furniture and fixtures 5,874 6,863
Leasehold improvements 10,290 10,241
Construction in progress 438 1,694
- -----------------------------------------------------------------------------------
109,255 117,767
Less accumulated depreciation and amortization (78,215) (90,618)
- -----------------------------------------------------------------------------------
Property and equipment, net 31,040 27,149
Software production costs, net 4,146 4,691
Other assets 8,345 9,764
- -----------------------------------------------------------------------------------
$ 281,957 $ 232,046
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,559 $ 18,315
Accrued liabilities 42,442 43,444
- -----------------------------------------------------------------------------------
Total current liabilities 64,001 61,759
- -----------------------------------------------------------------------------------
7 1/4% convertible subordinated debentures 33,526 68,625
Stockholders' equity:
Preferred Stock, $.01 par value
Authorized: 5,000,000 shares
Outstanding: none - -
Common Stock to be issued - 32
Common Stock, $.01 par value
Authorized: 50,000,000 shares
Outstanding: 20,839,000 shares in 1996 and 18,714,000
shares in 1995 208 187
Additional paid-in capital 165,414 113,846
Net unrealized loss on available-for-sale securities (12) (10)
Accumulated translation adjustment (931) (794)
Retained earnings (deficit) 19,751 (11,599)
- -----------------------------------------------------------------------------------
Total stockholders' equity 184,430 101,662
- -----------------------------------------------------------------------------------
$ 281,957 $ 232,046
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Years Ended March 31, 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Product revenue $ 226,070 $ 192,901 $ 165,842
Service and other revenue 112,829 91,135 71,830
- --------------------------------------------------------------------------------------
Total revenue 338,899 284,036 237,672
- --------------------------------------------------------------------------------------
Cost of sales:
Cost of product revenue 90,588 79,227 72,647
Cost of service and other revenue 77,150 63,193 49,277
- --------------------------------------------------------------------------------------
Total cost of sales 167,738 142,420 121,924
- --------------------------------------------------------------------------------------
Gross margin 171,161 141,616 115,748
- --------------------------------------------------------------------------------------
Operating expenses:
Sales and marketing 75,432 70,348 71,064
Research and development 36,437 33,923 33,736
General and administrative 11,884 11,375 13,229
- --------------------------------------------------------------------------------------
Total operating expenses 123,753 115,646 118,029
- --------------------------------------------------------------------------------------
Income (loss) from operations 47,408 25,970 (2,281)
Interest income 6,044 2,626 1,411
Interest expense (4,713) (5,213) (5,276)
Other (508) (73) (178)
- --------------------------------------------------------------------------------------
Income (loss) before income taxes 48,231 23,310 (6,324)
Income tax (provision) benefit (16,881) 3,760 -
- --------------------------------------------------------------------------------------
Net income (loss) $ 31,350 $ 27,070 $ (6,324)
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Net income (loss) per share:
Primary $ 1.50 $ 1.44 $ (.38)
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Fully diluted $ 1.50 $ 1.37 $ (.38)
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Shares used in per share computation:
Primary 20,833 18,768 16,778
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Fully diluted 20,908 19,794 16,778
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended March 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents at beginning of year $ 33,886 $ 23,854 $ 30,080
- ----------------------------------------------------------------------------------------------
Net cash flows from operating activities:
Net income (loss) 31,350 27,070 (6,324)
Adjustments required to reconcile net income (loss)
to cash provided by operations:
Depreciation and amortization 15,481 17,591 19,469
Writedown of ATMX inventory and assets - - 3,764
Restricted stock compensation 368 10 391
Deferred income taxes (1,930) (9,900) -
Changes in assets and liabilities:
Accounts receivable (20,839) 2,077 (7,042)
Inventories 506 2,280 (12,293)
Prepaid expenses and other assets (1,185) (621) (81)
Accounts payable 3,356 (2,092) 4,621
Accrued liabilities 13,099 6,941 (351)
- ----------------------------------------------------------------------------------------------
Net cash provided by operations 40,206 43,356 2,154
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of temporary cash investments (85,960) (60,816) (30,414)
Proceeds from maturities of temporary cash investments 78,800 25,786 34,722
Purchases of property and equipment (17,165) (8,258) (14,273)
Additions to software production costs (1,875) (1,968) (2,681)
Other 955 903 1,728
- ----------------------------------------------------------------------------------------------
Net cash used for investing activities (25,245) (44,353) (10,918)
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Sale of Common Stock 12,684 12,583 4,179
Repurchase of convertible subordinated debentures (10,117) - -
Purchase of Common Stock - - (600)
Repayments of borrowings - (26) (1,074)
- ----------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,567 12,557 2,505
- ----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 905 (1,528) 33
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 18,433 10,032 (6,226)
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 52,319 $ 33,886 $ 23,854
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Other cash flow information:
Cash paid during the year for:
Interest $ 4,136 $ 5,213 $ 5,276
Income taxes $ 5,496 $ 2,061 $ 65
Non-cash investing and financing activities:
Conversion of convertible subordinated debentures
into Common Stock (including accrued interest
and debenture offering costs) $ 25,532 $ - $ -
Income tax benefit arising from employee stock
option plans $ 12,972 $ 2,718 $ 111
Net unrealized loss on available-for-sale securities $ 2 $ 10 $ -
- ----------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Common Gain (Loss) on
Stock Additional Available- Accumulated Retained
To Be Common Paid-In For-Sale Translation Earnings
(Dollars in thousands) Issued Stock Capital Securities Adjustment (Deficit)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1993 $ 3,529 $ 160 $ 90,984 $ - $ (1,005) $ (32,345)
- -------------------------------------------------------------------------------------------------------------------------------
Sale of 620,000 shares of Common
Stock under employee stock benefit plans - 6 4,506 - - -
Exercise of 6,000 warrants - - 58 - - -
Stock issued in connection with merger (3,261) 6 3,255 - - -
Purchase of 80,000 shares of
Common Stock - (1) (599) - - -
Income tax benefit arising from
employee stock option plans - - 111 - - -
Accumulated translation adjustment - - - - (152) -
Net loss - - - - - (6,324)
- -------------------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1994 268 171 98,315 - (1,157) (38,669)
- -------------------------------------------------------------------------------------------------------------------------------
Sale of 1,586,000 shares of Common
Stock under employee stock benefit plans - 16 12,577 - - -
Stock issued in connection with merger (236) - 236 - - -
Income tax benefit arising from
employee stock option plans - - 2,718 - - -
Net unrealized gain on securities upon
adoption of SFAS 115 - - - 64 - -
Net unrealized loss on securities - - - (74) - -
Accumulated translation adjustment - - - - 363 -
Net income - - - - - 27,070
- -------------------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1995 32 187 113,846 (10) (794) (11,599)
- -------------------------------------------------------------------------------------------------------------------------------
Sale of 1,314,000 shares of Common
Stock under employee stock benefit plans - 13 13,040 - - -
Conversion of convertible subordinated
debentures into 802,078 shares of
Common Stock, including accrued interest
and offering costs - 8 25,524 - - -
Stock issued in connection with merger (32) - 32 - - -
Income tax benefit arising from
employee stock option plans - - 12,972 - - -
Net unrealized loss on securities - - - (2) - -
Accumulated translation adjustment - - - - (137) -
Net income - - - - - 31,350
- -------------------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1996 $ - $ 208 $ 165,414 $ (12) $ (931) $ 19,751
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Network Equipment Technologies, Inc. ("N.E.T." or "the Company"), headquartered
in Redwood City, California, is a leading designer, developer, manufacturer and
supplier of multiservice backbone networks and associated services used by
enterprises and carriers worldwide.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the Company and
its wholly owned subsidiaries. Intercompany accounts and transactions have been
eliminated.
REVENUE RECOGNITION
The Company recognizes product revenue and accrues related warranty expense upon
shipment. At the time of sale, no material vendor or post contract support
obligations remain outstanding. Revenue from service contracts is recognized
ratably over the contract period. Revenue from other services, such as systems
integration, installation and training, is recognized when the service is
performed.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less at the time of acquisition.
TEMPORARY CASH INVESTMENTS
Temporary cash investments are primarily comprised of highly liquid investments
with original maturities of greater than three months at the time of
acquisition.
INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or market and
include material, labor and manufacturing overhead costs. Inventories at March
31 consisted of the following:
(Dollars in thousands) 1996 1995
- ----------------------------------------------------------------
Purchased components $ 14,381 $ 11,498
Work-in-process 15,533 17,175
Finished goods 1,791 3,641
- ----------------------------------------------------------------
$ 31,705 $ 32,314
- ----------------------------------------------------------------
- ----------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives of generally three to five
years. Leasehold improvements are amortized over the shorter of the respective
lease terms or estimated useful lives.
<PAGE>
SOFTWARE PRODUCTION COSTS
Capitalization of software production costs begins upon the establishment of
technological feasibility for the products, and amortization begins when the
products are available for release to customers. The Company assesses the
recoverability of capitalized software production costs in light of many
factors, including anticipated future revenues, estimated economic useful lives
and changes in software and hardware technologies. Capitalization of software
production costs amounted to $1.9 million, $2.0 million and $2.7 million in
fiscal 1996, 1995 and 1994, respectively. Software production costs are
amortized over the lives of the products, generally three years. Amortization
amounted to $2.4 million, $2.8 million and $3.3 million in fiscal 1996, 1995 and
1994, respectively. During fiscal 1996, the Company reduced fully amortized
software production costs by 19.4 million, which had no effect on net balances.
Accumulated amortization was $3.8 million and $20.8 million at March 31, 1996
and 1995, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency for the CompanyOs foreign subsidiaries is the local
currency. Assets and liabilities of foreign subsidiaries are translated into
dollars at the rates of exchange in effect at the end of the period. Revenues
and expenses are translated at the average exchange rate during the period.
Gains and losses from foreign currency translation are included in a separate
account in stockholders' equity in the Consolidated Balance Sheets. Foreign
currency transaction gains or losses are included in the Consolidated Statements
of Operations. The Company enters into foreign exchange contracts to hedge
certain intercompany balances and balance sheet exposures against future
movements in foreign exchange rates. Gains and losses on the foreign exchange
contracts are included in other income and expense, which offset foreign
exchange gains or losses from revaluation of foreign currency-denominated
intercompany balances and balance sheet exposure items. At March 31, 1996, the
Company had outstanding foreign exchange contracts of $5.0 million. The
contracts require the Company to exchange foreign currencies for U.S. dollars
and generally mature in one month.
EARNINGS PER SHARE
Net income (loss) per share has been computed based upon the weighted average
number of common and common equivalent shares outstanding. For primary earnings
per share, common equivalent shares consist of the incremental shares issuable
upon the assumed exercise of dilutive stock options. For fully diluted earnings
per share, common equivalent shares also include, if dilutive, the effect of
incremental shares issuable upon the conversion of the 7 1/4% convertible
subordinated debentures, and net income is adjusted for the interest expense
(net of income taxes) related to the debentures.
SIGNIFICANT RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Such
management estimates include the allowance for doubtful accounts receivable, the
valuation of inventory, the valuation allowance on deferred tax assets and
certain reserves and accruals. Actual results could differ from those
estimates.
The Company sells its products primarily to large organizations in diversified
industries worldwide. Credit risk is further mitigated by the Company's credit
evaluation process and the reasonably short collection terms. The Company does
not require collateral or other security to
<PAGE>
support accounts receivable. While the Company does maintain allowances for
potential credit losses, actual bad debt losses have not been material or
outside of management's expectations.
The Company participates in a very dynamic high technology telecommunications
industry and believes that changes in any of the following areas could have a
material adverse effect on the Company's future financial position or results of
operations: advances and trends in new technologies; competitive pressures in
the form of new products or price reductions on current products; changes in
product mix; changes in the overall demand for products and services offered by
the Company; changes in certain strategic partnerships or customer
relationships; litigation or claims against the Company based on securities,
intellectual property, patent, product, regulatory or other factors; risks
associated with changes in domestic and international economic and/or political
conditions or regulations; availability of necessary components; and the
Company's ability to attract and retain employees necessary to support its
growth.
RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This standard defines a fair value method of
accounting for stock-based employee compensation plans. Under this method,
compensation cost is measured based on the fair value of the stock award when
granted and is recognized as an expense over the service period. This standard
will be effective for the Company beginning in fiscal 1997 and requires
measurement of awards made throughout fiscal 1996. The Company will adopt the
disclosure-only alternative, and, accordingly, SFAS 123 will have no impact on
the Company's results of operations or financial position.
NOTE 2: TEMPORARY CASH INVESTMENTS
The Company classifies its temporary cash investments as available-for-sale
securities. The carrying value of such securities is adjusted to fair market
value, with unrealized gains and losses, net of deferred taxes, being excluded
from earnings and reported as a separate component of stockholders' equity.
Temporary cash investments at March 31 consisted of the following:
<TABLE>
<CAPTION>
1996
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate notes and bonds $ 36,495 $ 17 $ 35 $ 36,477
Commercial paper and banker's
acceptances 2,986 - 1 2,985
Certificates of deposit 6,000 - 1 5,999
Foreign debt issues 11,430 6 8 11,428
U.S. government and municipalities 3,000 3 - 3,003
-----------------------------------------------
$ 59,911 $ 26 $ 45 $ 59,892
-----------------------------------------------
-----------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate notes and bonds $ 22,839 $ 40 $ 40 $ 22,839
Commercial paper and banker's
acceptances 9,208 5 10 9,203
Certificates of deposit 8,008 - 14 7,994
Foreign debt issues 5,588 6 2 5,592
U.S. government and municipalities 5,107 11 12 5,106
Equity securities 2,000 - - 2,000
- ------------------------------------------------------------------------------------
$ 52,750 $ 62 $ 78 $ 52,734
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
At March 31, 1996, all available-for-sale securities mature within thirteen
months. Any gains or losses on sales of securities are computed on a specific
identification basis. There were no realized gains or losses from the sale of
securities in fiscal years 1996, 1995 and 1994.
NOTE 3: SIGNIFICANT CUSTOMERS
Sales to the U.S. government and its agencies amounted to 34%, 28% and 28% of
revenue for fiscal years 1996, 1995 and 1994, respectively. These amounts
include sales, which amounted to 30%, 19% and 20% of revenue for fiscal years
1996, 1995 and 1994, respectively, under a contract with the Department of
Defense under which various government agencies can order products, installation
and service from the Company. The Company had one other customer that accounted
for 11% of sales in fiscal 1994 and no other customer accounted for more than
10% in fiscal 1996 and 1995.
NOTE 4: SEGMENT INFORMATION
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1996
Sales to unaffiliated customers $ 286,842 $ 52,057 $ - $ 338,899
Sales to foreign affiliates 21,409 4,316 (25,725) -
---------------------------------------------------------
Total revenue $ 308,251 $ 56,373 $ (25,725) $ 338,899
---------------------------------------------------------
---------------------------------------------------------
Operating income $ 43,607 $ 2,560 $ 1,241 $ 47,408
---------------------------------------------------------
---------------------------------------------------------
Identifiable assets at year end $ 283,453 $ 27,801 $ (29,297) $ 281,957
---------------------------------------------------------
---------------------------------------------------------
YEAR ENDED MARCH 31, 1995
Sales to unaffiliated customers $ 236,535 $ 47,501 $ - $ 284,036
Sales to foreign affiliates 24,409 3,624 (28,033) -
---------------------------------------------------------
Total revenue $ 260,944 $ 51,125 $ (28,033) $ 284,036
---------------------------------------------------------
---------------------------------------------------------
Operating income $ 23,601 $ 2,938 $ (569) $ 25,970
---------------------------------------------------------
---------------------------------------------------------
Identifiable assets at year end $ 235,910 $ 32,146 $ (36,010) $ 232,046
---------------------------------------------------------
---------------------------------------------------------
YEAR ENDED MARCH 31, 1994
Sales to unaffiliated customers $ 207,482 $ 30,190 $ - $ 237,672
Sales to foreign affiliates 17,848 3,775 (21,623) -
---------------------------------------------------------
Total revenue $ 225,330 $ 33,965 $ (21,623) $ 237,672
---------------------------------------------------------
---------------------------------------------------------
Operating income (loss) $ 2,563 $ (3,648) $ (1,196) $ (2,281)
---------------------------------------------------------
---------------------------------------------------------
Identifiable assets at year end $ 193,804 $ 22,805 $ (29,594) $ 187,015
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
<PAGE>
Sales to foreign affiliates represent products which are transferred on a basis
intended to approximate arms-length prices as negotiated by unrelated entities.
Domestic sales to unaffiliated customers include $39.9 million, $32.3 million
and $22.0 million of export sales in fiscal years 1996, 1995 and 1994,
respectively.
NOTE 5: ACCRUED LIABILITIES
Accrued liabilities at March 31 were as follows:
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------
Accrued compensation $ 18,585 $ 19,512
Unearned income 6,082 7,272
Other 17,775 16,660
- -----------------------------------------------------------------
$ 42,442 $ 43,444
- -----------------------------------------------------------------
- -----------------------------------------------------------------
NOTE 6: FINANCING ARRANGEMENTS
The Company maintains an unsecured $10.0 million line of credit. Borrowings
under this committed facility are available through May 1997 and bear interest
at the bank's base rate (which approximates prime). The terms of the agreement
require that the Company maintain certain financial covenants including a
minimum of $25.0 million in cash and short term highly liquid investments, net
of any bank borrowings, no quarterly operating or net losses greater than 10% of
tangible net worth and no operating or net losses in any two consecutive
quarters of the fiscal year. The Company was in compliance with these covenants
at March 31, 1996. There were no outstanding borrowings under the line of credit
agreement at March 31, 1996.
NOTE 7: LEASE COMMITMENTS
The Company leases its facilities under operating leases. The minimum future
lease commitments under these leases as of March 31, 1996, were as follows:
(Dollars in thousands)
- ----------------------------------------------------------------
1997 $ 7,005
1998 6,337
1999 4,110
2000 1,681
2001 1,243
After 2001 3,380
- ----------------------------------------------------------------
$23,756
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Rental expense under operating leases was $7.2 million, $6.4 million and $6.9
million for fiscal years 1996, 1995 and 1994, respectively.
NOTE 8: CONVERTIBLE SUBORDINATED DEBENTURES
In May 1989, the Company issued $75.0 million of 7 1/4% convertible subordinated
debentures due May 15, 2014, in an underwritten public offering, with net
proceeds of $72.8 million. In September 1990, the Company repurchased
debentures in the face amount of $6.4 million. Each debenture is convertible at
the option of the holder into Common Stock at $31.50 per share and is redeemable
at the option of the Company at prices that decline from 102.175% of face value
on May 15, 1996, to 100% of face value on May 15, 1999. The debentures are
entitled to a sinking fund beginning May 15, 2000, of $3.8 million annually,
calculated to retire 70% of the
<PAGE>
debentures prior to maturity. Such required sinking fund payments will be
reduced by any redemption or conversion of debentures prior to the date of the
sinking fund payment.
In the third quarter of fiscal 1996, the Company completed a partial call of its
outstanding 7 1/4% convertible subordinated debentures, reducing long-term debt
by $35.1 million to $33.5 million. To redeem the debentures, $10.1 million in
cash was used, $.3 million of which represents the premium paid in excess of
principal. An additional $25.3 million of principal was converted into 802,078
shares of Common Stock at a conversion price of $31.50 per share.
NOTE 9: CAPITAL STOCK
The Company's Board of Directors has approved a plan to protect stockholders'
rights in the event of a proposed takeover of the Company. Under the plan, as
amended in June 1990, a preferred share purchase right ("Right") is attached to
each share of Common Stock. The Rights are exercisable only after a person or
group acquires beneficial ownership of 15% or more of the Company's Common Stock
or commences a tender or exchange offer that would result in 20% or more of
Common Stock ownership. Each Right initially entitles stockholders to buy one
one-hundredth of a share of a new series of participating Preferred Stock at an
exercise price of $120. If the Company is acquired in a merger or other
transaction with a person or group, or sells 50% or more of its assets or
earning power to such a person or group, each Right not owned by such acquiring
person will entitle its holder to obtain on exercise of the Right a number of
the acquiring company's common shares having a market value at the time of twice
the Right's then-current exercise price. If a person or group acquires 15% or
more of the Company's outstanding Common Stock, each Right will entitle its
holder to obtain on exercise of the Right a number of shares of Common Stock (or
equivalent) having a market value of twice the Right's then-current exercise
price. After a person or group has acquired 15% of the outstanding shares of
Common Stock but before their acquisition of 50% or more of the Common Stock,
the Board of Directors may exchange one share of Common Stock or equivalent
fractions of Preferred Stock for each Right. The Company can redeem the Rights
at $.01 per Right at any time until the tenth day following the acquisition by a
person or group of 15% of the Company's Common Stock. The Rights are also
redeemable thereafter in certain circumstances. The Rights expire on August 24,
1999, unless earlier redeemed or exchanged.
As of March 31, 1996, the Company had reserved shares of its Common Stock for
the following purposes:
Reserved
- -----------------------------------------------------------------
Stock option plans:
Outstanding (at $5.25 to $40.50 per share) 2,634,688
Available for grant 1,964,171
Convertible subordinated debentures 1,064,317
Employee Stock Purchase Plan 441,069
- -----------------------------------------------------------------
Under the Employee Stock Purchase Plan, the Company's employees, subject to
certain restrictions, may purchase shares of Common Stock at a price equal to at
least 85% of the fair market value.
Under the Restricted Stock Award Plan, the Company may issue up to 750,000
shares of Common Stock to key employees at $.01 per share. Shares awarded under
the Plan carry certain restrictions on transferability, which lapse over the
vesting period (generally two to four years). As of March 31, 1996, 230,500
shares at $.01 per share have been awarded and issued under the Plan. As of
March 31, 1996, the Company had the right to repurchase 60,500 shares from
certain officers at the original purchase price. Such right expires ratably
<PAGE>
over the respective vesting periods. Related compensation expense totaled $368
thousand, $10 thousand and $391 thousand for the years ended March 31, 1996,
1995 and 1994, respectively.
The Company has authorized 5,000,000 shares of $.01 par value Preferred Stock.
This stock, if issued, will carry liquidation preferences and other rights, as
determined by the Board of Directors. As of March 31, 1996, no preferred shares
were outstanding.
NOTE 10: EMPLOYEE STOCK OPTION PLANS
Under the Company's stock option plans, options generally become exercisable
ratably over a four year period and expire after seven to ten years. Options
may be granted to officers, key employees, directors and independent contractors
to purchase Common Stock at a price not less than 100% of fair market value at
the date of grant.
Activity in the Company's option plans is summarized below:
Shares Option Prices
- ------------------------------------------------------------------------------
Options outstanding at March 31, 1993 3,644,506
Granted 1,579,450 $ 6.00 - $10.63
Exercised (364,468) 6.75 - 11.00
Canceled (684,753) 5.75 - 26.50
---------
Options outstanding at March 31, 1994 4,174,735
Granted 654,862 7.50 - 27.38
Exercised (1,352,107) 5.25 - 16.25
Canceled (465,028) 5.75 - 26.33
---------
Options outstanding at March 31, 1995 3,012,462
Granted 996,066 21.50 - 40.50
Exercised (1,114,819) 4.00 - 29.88
Canceled (259,021) 6.63 - 40.50
---------
Options outstanding at March 31, 1996 2,634,688 $ 5.25 - $40.50
--------- ----------------
--------- ----------------
- ------------------------------------------------------------------------------
On March 31, 1996, options for 1,080,002 shares were exercisable at prices
ranging from $5.25 to $27.38 per share.
NOTE 11: INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, which prescribes an asset and liability method of
income tax accounting.
Income (loss) before income taxes and the provision (benefit) for income taxes
consist of the following:
<PAGE>
(Dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------------------
Income (loss) before income taxes:
Domestic $ 46,674 $ 20,563 $ (2,333)
Foreign 1,557 2,747 (3,991)
- -------------------------------------------------------------------------
$ 48,231 $ 23,310 $ (6,324)
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Provision (benefit) for income taxes:
Current:
Federal $ 16,595 $ 6,140 $ -
State 2,216 - -
Foreign - - -
- -------------------------------------------------------------------------
18,811 6,140 -
- -------------------------------------------------------------------------
Deferred:
Federal (1,643) (8,227) -
State (287) (1,673) -
Foreign - - -
- -------------------------------------------------------------------------
(1,930) (9,900) -
- -------------------------------------------------------------------------
$ 16,881 $ (3,760) $ -
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
The provision (benefit) for income taxes reconciles to the amount
computed by applying the statutory U.S. federal rate of 35% to
income (loss) before income taxes as follows:
(Dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------
Statutory federal tax provision (benefit) $ 16,881 $ 8,159 $ (2,150)
State taxes net of federal income tax benefit 1,929 1,399 (126)
Change in valuation allowance (3,504) (14,341) 1,671
Other 1,575 1,023 605
- -----------------------------------------------------------------------------
Provision (benefit) for income taxes $ 16,881 $ (3,760) $ -
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Deferred tax assets (liabilities) are comprised of the following
at March 31:
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------------
Reserves not currently deductible for tax purposes $ 7,866 $ 8,670
Depreciation 942 2,403
Loss carryforwards 1,159 1,664
Credit carryforwards 6,431 5,458
- -------------------------------------------------------------------------
Gross deferred tax assets 16,398 18,195
Gross deferred tax liabilities--
Capitalized software production costs (3,409) (3,632)
Valuation allowance (1,159) (4,663)
- -------------------------------------------------------------------------
Net deferred tax assets $ 11,830 $ 9,900
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
The valuation allowance decreased $3.5 million in fiscal 1996 due to the
realization of the benefit of certain tax loss and credit carryforwards. A
valuation allowance of $1.2 million remains at March 31, 1996, and is
attributable to foreign loss carryforwards. The net change in the total
valuation allowance for the year ended March 31, 1995, was a decrease of $15.8
million. Of this amount, $5.9 million resulted from the realization of tax
benefits of temporary differences and loss carryforwards which reversed during
the year ended March 31, 1995. The remaining $9.9 million decrease resulted
from the Company's reevaluation during the fourth quarter of fiscal 1995 that
was more likely than not that it would generate taxable income sufficient to
realize a portion of the tax benefit associated with future deductible temporary
differences and related loss and credit carryforwards prior to their expiration.
The net
<PAGE>
reduction in the valuation allowance for fiscal 1995 differs from that recorded
as a reduction to income tax expense by an amount attributable to the tax
benefit associated with deductible employee stock option compensation.
As of March 31, 1996, the Company has available federal research tax credit
carryforwards of $2.8 million, expiring in 2006 through 2011, alternative
minimum tax credit carryforwards of $2.3 million available indefinitely and
state tax credit carryforwards of $1.3 million. Foreign tax loss carryforwards
of $3.3 million are available for use in reducing future taxable income in
certain foreign jurisdictions.
The Company's federal income tax returns for certain prior years are under
examination by the Internal Revenue Service ("IRS"). Certain adjustments
previously proposed by the IRS which related substantially to the timing (years)
of tax deductions have been resolved in the Company's favor. In the opinion of
management, any adjustments that may result from the ultimate resolution of any
remaining matters will not have a material effect on the Company's financial
condition or results of operations.
NOTE 12: EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) tax-deferred savings plan, whereby eligible
employees may contribute a percentage of their eligible compensation (presently
from 1% to 17% to a maximum of approximately $9 thousand per year). Company
contributions are discretionary and were $1.0 million, $846 thousand and $750
thousand for fiscal 1996, 1995 and 1994, respectively.
NOTE 13: FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE
The estimated fair values of the Company's financial instruments at March 31
were as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
Carrying Estimated Carrying Estimated
(Dollars in thousands) Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 52,319 $ 52,319 $ 33,886 $ 33,886
Temporary cash investments $ 59,892 $ 59,892 $ 52,734 $ 52,734
Liabilities
Foreign exchange contracts $ 4,969 $ 4,924 $ 13,052 $ 13,399
Convertible subordinated debentures $ 33,526 $ 36,669 $ 68,625 $ 60,304
- ----------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used in estimating the fair values of
financial instruments:
Cash and cash equivalents--the carrying amounts reported in the balance sheets
for cash and cash equivalents approximate their estimated fair values.
Temporary cash investments, foreign exchange contracts and convertible
subordinated debentures--fair values are based on quoted market prices.
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF NETWORK EQUIPMENT TECHNOLOGIES,
INC.
We have audited the accompanying consolidated balance sheets of Network
Equipment Technologies, Inc. and subsidiaries as of March 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended March 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Network Equipment Technologies,
Inc. and subsidiaries at March 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1996 in conformity with generally accepted accounting principles.
(signature)
DELOITTE & TOUCHE LLP
San Jose, California
April 15, 1996
<PAGE>
COMMON STOCK DIVIDENDS AND PRICE RANGE
DIVIDENDS
The Company has not paid cash dividends on its Common Stock, and it presently
intends to continue this policy for the foreseeable future in order to retain
earnings for the development of the Company's business.
MARKET PRICE
The Common Stock is traded on the New York Stock Exchange under the symbol NWK.
The following table sets forth, for the periods indicated, the range of high and
low sale prices.
Fiscal 1996 High Low
- ----------------------------------------------------------------
First quarter $25.25 $19.75
Second quarter 39.75 22.38
Third quarter 42.00 27.75
Fourth quarter 36.00 21.00
- ----------------------------------------------------------------
Fiscal 1995 High Low
- ----------------------------------------------------------------
First quarter $10.00 $ 7.38
Second quarter 14.88 8.25
Third quarter 24.00 12.50
Fourth quarter 27.88 22.38
- ----------------------------------------------------------------
In addition, the Company's 7 1/4% convertible subordinated debentures trade in
the over-the-counter market.
<PAGE>
CORPORATE DIRECTORY
CORPORATE OFFICERS
Joseph J. Francesconi
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Roger A. Barney
VICE PRESIDENT,
HUMAN RESOURCES AND CORPORATE SERVICES
Jerry L. Davis
VICE PRESIDENT, CLIENT SUPPORT
James B. De Golia
VICE PRESIDENT, GENERAL COUNSEL
AND ASSISTANT SECRETARY
Samuel H. Ezekiel
VICE PRESIDENT, MARKETING
J. Robert Forkish
VICE PRESIDENT AND CHIEF TECHNOLOGY OFFICER
Craig M. Gentner
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND CORPORATE SECRETARY
David P. Owen
VICE PRESIDENT,
CORPORATE DEVELOPMENT AND STRATEGY
Raymond E. Peverell
SENIOR VICE PRESIDENT, SALES AND SUPPORT
G. Michael Schumacher
SENIOR VICE PRESIDENT,
ENGINEERING AND OPERATIONS
Charles S. Shiverick
VICE PRESIDENT,
INFORMATION SERVICES AND REENGINEERING
DIRECTORS
John B. Arnold
CHAIRMAN OF THE BOARD, N.E.T.
Dixon R. Doll
INDEPENDENT VENTURE CAPITALIST,
CHAIRMAN OF THE DMW GROUP
James K. Dutton
DIRECTOR, CAERE CORPORATION AND
ECCS, INC.
<PAGE>
Joseph J. Francesconi
PRESIDENT AND CHIEF EXECUTIVE OFFICER, N.E.T.
Walter J. Gill
VICE PRESIDENT AND CHIEF TECHNOLOGY OFFICER (RETIRED), N.E.T.
Frank S. Vigilante
SENIOR VICE PRESIDENT (RETIRED), AT&T
Hans A. Wolf
VICE CHAIRMAN OF THE BOARD (RETIRED), SYNTEX CORPORATION
CORPORATE INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held at 10:00 a.m. on August 13,
1996, at the Company's headquarters in Redwood City, California.
INVESTOR RELATIONS
N.E.T. welcomes inquiries from its shareholders and other interested investors.
To receive the Company's Annual Report, Form 10-K, quarterly financial results
and other corporate information, please dial our hotline at 1-800-234-4-NET, or
write to Investor Relations at N.E.T., 800 Saginaw Drive, Redwood City, CA
94063, or visit our World Wide Web site.
N.E.T. ON THE INTERNET
N.E.T.'s home page on the World Wide Web contains background on the Company and
its products, financials, and other useful information. Our Web site is located
at http://www.net.com
TRANSFER AGENT
First National Bank of Boston
Boston, Massachusetts
INDEPENDENT AUDITORS
Deloitte & Touche LLP
San Jose, California
IDNX is a registered trademark, and N.E.T., the N.E.T. logo, and
STM are trademarks of Network Equipment Technologies, Inc.
- -C-1996 Network Equipment Technologies, Inc. All rights reserved.
<PAGE>
(Back Cover)
N.E.T. Logo
N.E.T., 800 Saginaw Drive, Redwood City, CA 94063 Tel 415.366.4400
Fax 415.366.5675
