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 [NO FEE REQUIRED]
For the Fiscal Year Ended March 31, 1998
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)
Delaware 94-2904044
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6500 Paseo Padre Parkway
Fremont, California 94555
(510) 713-7300
(Address of principal executive offices,
including zip code, area code, and telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 Par Value New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
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. |X|
The aggregate market value of the voting stock held by non-affiliates of
the registrant on May 30, 1998 was $336,416,241.
The number of shares outstanding of the Common Stock, $0.01 par value, on
May 30, 1998 was 21,635,741.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant's Annual Report to Stockholders for the fiscal year ended
March 31, 1998 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 11, 1998 is
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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PART 1.
Item 1. Business
General
Network Equipment Technologies, Inc. ("N.E.T." or "the Company") was
incorporated in California in 1983 and reincorporated in Delaware in 1986.
N.E.T.'s initial public offering was in 1987 and its common stock is publicly
traded on the New York Stock Exchange under the symbol NWK. The Company employs
over 1,400 people globally and is now headquartered in Fremont, California,
having relocated in May 1998 to a new, custom-built campus. N.E.T. is a leading
designer, developer, manufacturer and supplier of wide-area networks ("WANs")
and associated services to carriers and other service providers, enterprises and
governments around the world. More than 1,500 N.E.T. customers have installed
over 20,000 N.E.T. switches in more than 70 countries worldwide.
The Company provides a range of solutions for mission-critical WAN
applications, primarily through sales of networking hardware and software,
complemented by expertise in systems integration, network design, installation,
implementation and ongoing service and support. N.E.T.'s products are based on a
range of technologies and standards used throughout the industry and provide
support such as switching, adaptation and aggregation for packet-, frame-, cell-
and circuit-based applications. They allow customers to integrate diverse
applications including voice, data, video, multimedia and imaging across single
network infrastructures. They provide efficient, cost effective and manageable
backbones for WANs, along with a range of access capabilities. They allow
carriers to provide a wide range of competitive service offerings such as native
frame relay and ATM services and enterprise customers to access those services
or build their own networks.
Forward-Looking Statements
All statements in this Form 10-K that are not historical are
forward-looking statements that involve risks and uncertainties including, but
not limited to, the risks and uncertainties discussed in this Form 10-K and in
the Company's other filings with the Securities and Exchange Commission or
available at the Company's worldwide Web site (http://www.net.com). Actual
results may differ materially from those projected.
Networking Industry
Despite recent setbacks in Asia, the world is experiencing significant
economic growth and prosperity. This growth is at local and national levels and
in the expansion of global economic trade and business activity. In response to
these economic drivers, and to the related increases in levels of business and
consumer demands, governments and other entities such as the World Trade
Organization are encouraging the rapid development of communications
infrastructure, primarily through deregulation and liberalization of markets.
Deregulation and Liberalization
In the United States, the telecommunications industry has moved from a
monopolistic, primarily voice-oriented environment in the early 1980s to largely
liberalized and competitive networking markets defined by wide ranges of
products, new services and solutions for the communications needs of businesses
and consumers.
In Europe, deregulation and resulting liberalization of the communications
markets started several years ago in the United Kingdom. In January 1998, the
voice segment of the developed European markets was also deregulated. This
latter development in particular is expected to be the catalyst for the
emergence of similar competitive trends to those experienced in the United
States. In other markets around the world, similar developments are under way
allowing increased competition and fueling market growth.
In most markets, deregulation and liberalization has tended to occur in
waves. Newer market segments such as mobile communications or Internet access
tend to be liberalized early in the cycle. Such segments are not already
dominated by an entrenched monopolistic carrier or they require significant new
infrastructure development and the
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liberalization process attracts the necessary capital investment. More
established or traditional market segments such as basic voice services have
historically tended to be highly regulated and dominated by monopolistic or
government-controlled carriers, usually PTTs. Political factors tend to be very
significant in the deregulation and liberalization process. Other trends
encouraging the ongoing liberalization process include the emergence of
alternative solutions such as those provided by international callback carriers
who deliver voice services based on an arbitrage of international calling tariff
differences between many countries.
The ongoing global deregulation and liberalization trends have contributed
to significant new market dynamics, considerably greater competition, a
proliferation of expanded services, increased customer choices and alternatives,
and a general decline in prices and an improvement in quality.
Voice, the Growth of Data Networking and Convergence with Telephony
In the United States, major new networks are being deployed by carriers at
the national, state and city level which, along with competition from cable
operators and wireless providers, is leading to an explosion in bandwidth
supply. Already inexpensive voice services will likely become even more so, and
new bandwidth is also becoming available for the growth of data and other
services. In the United States and other developed voice markets, the
deregulation trend mentioned above has resulted in significantly greater
competition, merger activity, carrier diversification, technological and service
innovation, and more. However, in many emerging country markets, much of the
investment in voice communications is still in the stages of providing basic
services to large proportions of the population or alternatives to basic
fixed-line services via mobile or other technologies.
International voice traffic has traditionally been an area of high cost to
consumers versus prices for local or long distance services. Liberalization has
lead to the emergence of carriers specializing in callback and international
voice resale and, along with increasingly available bandwidth, will likely lead
to a market with steadily declining - and, ultimately, leveling - prices.
In markets such as the United States, a major trend is the growth of data
networking and its anticipated convergence with voice networking, or telephony.
Data networking services have grown from a fraction of the overall
communications market to the point where, in the next few years, they are
generally expected to equal and then substantially exceed the telephony market
segment. Significant among the drivers of this growth are:
o the explosive global expansion and use of the Internet for commercial
and consumer purposes;
o the development of corporate intranets - the use of Internet Protocol
("IP")- based solutions for internal communications (for example,
employee-to-employee) within a particular business;
o the emerging areas of electronic commerce and its close relative, the
extranet - IP-based networks linking companies and their employees
with partners, vendors, other enterprises, franchisees and customers;
o the development of Virtual Private Networks ("VPNs") - a shared
network, with a portion of the network provided on a service basis to
a specific user or business;
o the emergence of new bandwidth intensive applications such as
multimedia, telemedicine and distance learning; and
o the further deployment of business applications built on the client
server and local area computing infrastructures developed in the last
decade or more.
For N.E.T., the emergence of VPNs is a logical extension of the solutions
and applications the Company has always provided. N.E.T.'s networking experience
helps carriers and enterprises migrate to this next generation of WANs, whether
using Asynchronous Transfer Mode ("ATM"), frame relay or IP technologies.
Convergence of traditionally separate voice, video and data environments is
another key trend and may occur at different levels throughout a network. In
WANs, convergence will be driven by emerging customer applications
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such as universal messaging (e-mail and voice mail integration), the development
of new revenue-generating services, business efficiencies such as cost and
management savings, and the merging of multiple traffic types across the same
network infrastructure.
Network Architectures and Characteristics
The Company competes primarily in the WAN market space. This segment
provides the infrastructure and capability to link local area networks ("LANs"),
campus networks, voice traffic, video and other applications to each other via
public carrier-provided transmission facilities. In WANs, the center, or core,
is the high-capacity backbone or transmission infrastructure developed and
maintained by a major carrier or network service provider. These are typically
high-speed, high-capacity links using ATM, SONET, or other technology and built
on switches characterized by high capacity, high reliability and other
considerations. Beyond and around the core is an edge layer which defines the
area at the boundary between a carrier or service provider and its enterprise
customer or other user. This is the area where significant value is added by
switches providing features to help manage traffic, service levels,
concentration, and with capabilities such as support of traffic from multiple
interfaces such as Frame Relay and native ATM. Products in this space may be
located in carrier facilities or deployed at customer premises. Around the edge
layer is an access layer characterized by products with high port densities and
correspondingly low price per port, by devices such as access concentrators and
by technology or service specific products such as ATM access devices. In
essence, these products allow the access to and from the WAN for the wide number
of users and traffic types.
Company Strategy
N.E.T. focuses its strategy and expertise on the edge and access layers,
and on providing products, services and solutions encompassing the range of
technologies used in these spaces. The Company targets three major vertical
markets or industries: (i) carriers or network service providers, (ii)
enterprises such as financial institutions, manufacturers, utilities and
retailers, and (iii) governmental agencies.
Carriers
Carriers are the entities providing communications services of various
kinds to the public, both consumers and enterprises. They range in size and
scope from major global and national corporations to small local telephone
companies. They may specialize in certain types of traffic or services, such as
cellular services or Internet service provisioning, or they may have developed
an integrated range of services or geographical coverage in an effort to provide
"one stop shopping" for clients.
N.E.T. provides a range of solutions designed to meet carrier requirements.
These solutions typically consist of hardware platforms and related software,
network management tools, expertise and support. N.E.T. customers in this
segment include global consortia, PTTs in markets such as China, major country
and regional carriers, International Simple Resellers ("ISRs"), callback
carriers, Internet Service Providers ("ISPs"), cellular and wireless carriers
and more. Applications that can be enabled by N.E.T. carrier solutions include
Digital Data Networks ("DDNs") providing basic data services in emerging markets
and the provisioning of voice compression and switching capabilities to ISRs.
Enterprises
Commercial enterprises face many challenges in networking. For example,
multinational corporate WANs present multiple problems. Networks are growing and
becoming more complex. Support and management of different platforms running
different applications is expensive and companies must maximize bandwidth use in
the infrastructure to operate at peak efficiency. And in increasingly complex
global environments, multinational enterprises face the continued challenge of
lack of availability of certain services in some markets, skilled employee
availability, and so on.
N.E.T.'s enterprise strategy is to provide an integrated range of solutions
and alternatives with which to address such challenges. In addition, the Company
offers solutions that allow the development of VPNs, the use of public
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networks in conjunction with private infrastructure, or the efficient
outsourcing of networks from an enterprise to a carrier.
Governments
N.E.T.'s strategy includes addressing the needs of government agencies with
a range of communications solutions. For example, military services around the
world require rapidly deployable, secure and reliable mobile communications
systems for success in a variety of operations. Personnel are often deployed at
a moment's notice to a remote location for combat operations, peacekeeping, or
humanitarian missions and must be able to communicate with other remotely
located resources, as well as with strategic communications networks that
support the command structure. For numerous emergency management agencies,
access to reliable mobile communications is vital.
N.E.T. Products and Solutions
The Company's products provide a range of solutions addressing the needs of
carriers, enterprises and governments in the WAN access and edge layers. These
systems offer superior applications availability with sophisticated bandwidth
and traffic management as well as connectivity, broadband transmission and
unified network management across the WAN. Historically, the great majority of
product revenue has been generated by the Company's IDNX(R) Multiservice
Bandwidt Managers. While future sales of IDNX products are expected to decrease,
the Company expects revenue growth to come from its Promina(TM) product line and
PanaVue(TM) network management systems. The major product groups in the
Company's range of solutions now include:
o multiservice access platforms providing solutions designed to optimize
use of ATM, frame relay, leased lines and other services, and
incorporate a range of integrated products for switching, LAN
internetworking, voice compression, ATM access and other options;
o broadband switches providing ATM- and SONET-based solutions targeted
at carriers for consolidation and management of multiservice traffic
across high-speed backbone networks;
o access and lower-end networking products providing cost-effective
connectivity from smaller locations with lighter traffic requirements;
and
o network management systems enhancing operator visibility into network
conditions and providing functions such as fault correlation and
diagnostics.
N.E.T.'s Promina product line is the Company's new ATM-centric family of
switches and access multiplexers in three major groups: the Promina 800 Series,
the Promina 2000 and the Promina 4000.
Introduced in 1997, the Promina 800 Series Multiservice Access Platform
provides integrated, single-platform access to ATM, frame relay, and leased line
services. For ATM services, it provides integration and support for traffic on
one user-to-network interface ("UNI"). Support is provided for a wide range of
applications including voice, video, data, fax, modem, LAN, Internet, ISDN and
frame relay traffic. It is also designed to be a very high availability
platform, with distributed intelligence for mission-critical availability and
rerouting. The Promina 800 Series is complemented and enhanced by a range of
products providing a "mix and match" range of capabilities depending on the
customers' specific requirements. For example:
o The PrimeVoice(TM) Plus Compression Module offers a significant
increase in call capacity on existing leased lines and supports
automatic detection, digitization, and transmission of Group III fax
and voiceband data ("VBD") modem calls.
o N.E.T.'s LAN/WAN Exchange(TM) ("LWX") Edge Router routes and bridges
LAN traffic over the WAN. The LWX incorporates Cisco IOS source code
and offers performance, availability and serviceability features for
remote access bridging and routing.
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o The PrimeVoice ISDN Switching Module supports switched ISDN services,
not only for voice networking, but also for videoconferencing and
LAN-to-LAN connectivity.
o The N.E.T. FrameXpress(TM) Switching Module enables provisioning of
standards-based frame relay services on the network by transporting
frames over private trunks or public frame relay services.
o The CellXpress(TM) ATM Module provides an efficient industry
standards-based solution with the operating advantag of ATM. The
CellXpress Module consolidates internodal trunk connections to a
carrier network at a single access point with resulting traffic
aggregation, reducing line costs by incorporating multiple access
lines into a single ATM UNI link.
o Data Port Modules offer optimum support for packet-, frame- and
circuit-based data traffic using industry-standard interfaces.
The Promina 2000 ATM Network Multiplexer adapts and aggregates legacy
traffic such as frame relay and Circuit Emulation Services onto an ATM backbone.
It provides statistical multiplexing and switching that helps reduce
transmission facility overhead.
The Promina 4000 ATM Switch is a carrier-edge switch designed for the
consolidation of multiservice traffic for reduced management expenses, superior
bandwidth utilization, support for a wide range of applications and quality of
service ("QoS") requirements and is engineered for very high availability. Its
SwiftCell(TM) Advanced Traffic Management provides fair access to network
resources while balancing use of those resources with service integrity. It
employs a scalable ATM network architecture through a "switch on a card"
approach. Configurations can be tailored to application requirements, avoiding
overprovisioning and allowing solutions to match requirements with a great
degree of precision and flexibility.
The N.E.T. PrimeSwitch(TM) 100 Series Multiprotocol Access System provides
low-cost access solutions for voice and data traffic, with the ability to use
ISDN or leased lines for cost-effective connectivity.
N.E.T.'s SONET Transmission Manager(TM) ("STM") is designed for intelligent
broadband networking. The STM platform value to bandwidth-intensive,
mission-critical applications in both carrier and enterprise environments.
The growth and scale of today's networks, the convergence trend discussed
above, and the presence of equipment from multiple vendors within the same
network combine to increase complexity and the requirements for network
management. To address these evolving needs, N.E.T. offers the PanaVue
Management Platform. Its open design, based on industry standards, provides
scalability. The platform's user interface lowers the cost of network ownership
by reducing training time, improving access and streamlining operations
throughout the network. The platform supports the main family of N.E.T. products
and, additionally, the platform's Advanced Fault Management System ("AFMS")
provides unified fault management plus integrated service and network management
for devices in the network including those from other vendors. It delivers
Web-based network management enabling access to real-time network information
from any computer with a Web browser and the proper security clearance.
New Product Introduction
Given the dynamic characteristics of its markets, N.E.T. must continue to
develop and enhance its product lines to add value and meet the needs of those
strategic markets as they evolve, through internal development, the acquisition
of technology, or association with entities whose technologies or product
offerings complement its own. The Company has entered into a number of
agreements relating to the development, license or purchase of technology to
extend the reach and functionality of the Company's product lines, and will
continue to do so as deemed appropriate by management.
Many products designed and manufactured by N.E.T. contain components or
intellectual property obtained from third parties. The Company's ability to
maintain and enhance the value of its intellectual property and technology and
third party licenses and relationships will affect future product and service
offerings. Moreover, the
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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 and margins that are consistent with
the Company's expectations. Changes in the Company's distribution, product and
technology relationships with a number of entities could have a material impact
on competitive and other factors described herein, including the Company's
operating results.
The timely commercial availability of all of the Company's products and
services and their acceptance by customers are crucial to the future success of
the Company. The Company has invested and will continue to invest in designing
and delivering products that will function effectively well into the next
century. The Company expects these investments to be successful but, given the
nature and complexity of the N.E.T. and third party products and software
offered by the Company and the complexity and mixed vendor nature of equipment
used in WANs, there can be no assurance that these development efforts will be
successful or that customer acceptance of products or services will be achieved
or maintained. Substantial delays in availability or acceptance of the Company's
products and services would materially and adversely affect the Company's
operating results and financial condition.
Marketing, Distribution and Customers
As discussed above, the Company focuses primarily on information- and
communications-intensive organizations in the carrier and other service
provider, enterprise and governmental vertical markets. These customers may be
local, national, multinational or global in their operations, either as
suppliers of services or as end-users. Although originally focused on the United
States, N.E.T.'s presence in markets in Europe, Asia, Latin America and other
regions has increased substantially over the years.
In the United States and the United Kingdom, N.E.T. employs a highly
skilled sales and support organization which develops close direct relationships
with customers. These relationships may include pre-sales activities such as
network design and consultation, sale of products and solutions, post-sales
support of the installed base and other value-added services. In addition, the
Company has developed a substantial network of distributors, systems
integrators, value-added resellers and others to represent and support the
N.E.T. product line in other vertical or geographical markets. These
relationships are supported by N.E.T. subsidiaries and offices around the world
and staffed by skilled N.E.T. employees who provide expertise, marketing
support, network design and other assistance.
N.E.T.'s field sales and support structure is organized into three business
units handling North America (the United States and Canada), EMEA (Europe,
Middle East and Africa) and APLA (Asia Pacific/Latin America) that are
responsible for all vertical market customer and partner relationships within
those regions. These units are in turn supported by regional and corporate
marketing, sales support, technical training and other resources.
International sales represented 37%, 35% and 27% of the Company's revenue
in fiscal 1998, 1997 and 1996, respectively. Government ownership or control of
the telecommunications industries and regulatory standards in some foreign
countries could be a substantial barrier to the introduction of wide-area
communications products for use in private or hybrid networks in such countries.
Financial information regarding foreign operations and export sales is discussed
in Note Ten in the "Notes to Consolidated Financial Statements" in the Company's
1998 Annual Report to Stockholders ("Annual Report") filed as Exhibit 13 to this
report.
In December 1989, the Company entered into a systems integration and
distribution agreement with Ericsson Business Networks AB of Sweden
("Ericsson"). Under this agreement, as amended, and additional agreements with
certain Ericsson subsidiaries, Ericsson has the non-exclusive right to purchase,
resell, distribute and license various of the Company's products. Ericsson is
responsible for providing service and support for the N.E.T. products it
markets. Starting in 1993, N.E.T. has entered into a number of distribution and
technology agreements with subsidiaries of Datacraft Ltd., an Australian
corporation, including Datacraft Asia Ltd. and Datacraft Technologies Pty. Ltd.
Datacraft Asia Ltd. accounts for a significant proportion of the Company's
distribution sales in mainland China. During the Company's fiscal 1998,
Dimension Data Holdings Limited ("Dimension Data"), a South African information
technology group, acquired Datacraft Ltd. and, with it, control of the various
subsidiaries. The Company does not anticipate material changes in its operating
results as a result of this acquisition. The Company renewed and extended its
agreement with Datacraft Asia Ltd. during its fiscal 1998 and recently signed an
agreement with Dimension Data for distribution of the Company's products in
Africa. The Company did not renew
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its master agreement with International Business Machines Corporation ("IBM") in
fiscal 1998. However, the Company's products continue to be sold through
distribution agreements with various IBM subsidiaries and operations in
individual countries.
As discussed above, the Company targets the carrier and service provider
vertical markets as a key element of its strategy. A number of these carriers
also act as distribution channels for the Company's products to enterprises and
other carriers worldwide. These relationships include joint marketing, systems
integration, resale and other agreements with carriers such as Concert,
GlobalOne, MCI, Bell Atlantic Network Integration, US West, SouthWestern Bell,
Unisource Business Networks, Tele Danmark and Hanwha Corporation.
Sales to Significant Customers
N.E.T.'s wholly-owned subsidiary, N.E.T. Federal, Inc., which is part of
the Company's North America business unit, markets the Company's products to
United States government entities both directly and through collaborative
government contracting and subcontracting arrangements. It has entered into
several contracts under which it provides its products and services to various
government agencies (the "Government Contracts"). The Government Contracts
encompass varying periods, but most may be terminated by such government
agencies at their convenience or at annual intervals. Sales to the U.S.
government and its agencies amounted to 33%, 29% and 34% of revenue for fiscal
years 1998, 1997 and 1996, respectively. These amounts include sales, which
amounted to 29%, 27% and 30% of revenue for fiscal years 1998, 1997 and 1996,
respectively, under contracts with the Department of Defense ("DoD") under which
various government agencies can order products, installation and service from
the Company. Discontinuance of orders from, or disqualification of the Company
by, the DoD or other significant federal customers would materially affect the
Company's operating results and financial condition. Apart from the U.S.
government and its agencies, no other single customer account was responsible
for ten percent or more of revenue during fiscal 1998, 1997 or 1996.
Historically, the Company has experienced customer ordering patterns that
have resulted in the majority of the Company's revenues in each quarter coming
from orders received and shipped in that quarter, including a large portion of
orders received and filled in the last month of the quarter. For further
information, please refer to "Business Environment and Risk Factors" in
"Management's Discussion and Analysis" on pages 20 through 23 of the Company's
1998 Annual Report.
Customer Service and Support
The markets, customers and complex challenges of the networking industry
described earlier require not only hardware- and software-based solutions, but
also significant support, service and other value-added assistance in the
development, operation and expansion of the related networks. Since its
inception, N.E.T. has viewed customer service and support as a key element of
its overall strategy and competitive differentiator, and a critical component of
its long-term relationships with customers.
The Company's SourcePoint(TM) Services offerings provide a wide range of
service and support options to end users and distributors of N.E.T. products.
These offerings include product installation, a choice of different hardware and
software maintenance programs, upgrades, repairs, technical assistance and
training. In addition to these and other traditional support activities,
including field service and the Company's investments in Technical Assistance
Centers ("TACs"), the Company continues to introduce new programs and tools to
enhance its value add and customer satisfaction in this area. For example, the
Company has introduced an Electronic Support Center. This is a Web-based service
offering first-line troubleshooting information for major N.E.T. product lines.
Technical information provided includes Troubleshooting Guides, Hints and Tips,
Cabling Diagrams, Frequently Asked Questions and other product-specific details.
A Web-based interface with N.E.T.'s TAC is also available using a new Online
Case Management tool. Online Case Management enables clients to open trouble
cases, query case status and add Notes to existing cases. Clients can also use
OnLine Case Management to track case status from opening to closing, all via
their local Web browser.
The Company continues to invest in its TAC operations, adding tools and
capabilities to enhance its support role. TAC support is fee-based under
contracts or on a time basis. The TACs are staffed 24 hours a day and are
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available on a year-round basis. TAC engineers provide assistance over the
telephone to their clients or partners or, when authorized, by accessing
customers' networks directly. TAC engineers have access to facilities to
replicate customer problems and test solutions prior to implementation.
The Company provides educational services to partners and end-users at a
number of facilities in the United States, Latin America, and Europe, and
through its partners and via traveling facilities in other locations. N.E.T.'s
educational services can be customized to meet the unique requirements of its
customers.
N.E.T. has also developed expertise in systems integration and services
provided globally as N.E.T. SourcePoint Professional Services. These high value
services include helping customers optimize their investments, the outsourcing
of selected operations functions to N.E.T., or provision of additional expertise
on a project basis. N.E.T.'s Professional Services can be utilized throughout
the various phases in the network life cycle from planning to design through
implementation.
In the case of the Company's international and multinational customers,
services are provided by either N.E.T. or by its integrated network of
authorized partners trained and supported by N.E.T.'s headquarters, TAC and
field operations.
A significant amount of the Company's revenues and profits are generated by
its service and support offerings. There can be no assurance that customer
acceptance of such current and future offerings will be maintained or achieved.
Competition, product reliability, remote diagnostic and repair capabilities,
sales through distribution partners and other factors may impact service and
support revenues and profitability.
Research and Development
The Company believes that product and technology leadership are critical to
long-term success in the highly dynamic markets in which it competes.
Furthermore, it believes that the Company's future operating results will depend
on its ability to continue to enhance its Promina and PanaVue product lines as
well as to develop and bring to market on a timely basis new products and
services that meet market and customer requirements. N.E.T. therefore
continually monitors markets, its customers' businesses and technology
developments in order to develop solutions that proactively address customer
needs, and engages in research and development ("R&D") to develop new products
and enhancements to existing products and services as technology and the
Company's performance permits. The Company's R&D spending totaled $43.4 million,
$41.0 million and $36.0 million for the fiscal years ended 1998, 1997 and 1996,
respectively.
The Company's development efforts are focused on its strategic market
segments and the key technologies involved in providing solutions for these
markets. Product development priorities include those intended to enable N.E.T.
to occupy a prominent position in the ATM WAN solutions market; to enhance the
carrier-compatibility of certain products; and to introduce product enhancements
which meet the evolving requirements of specific markets and distribution
channels. While most development activity is undertaken in-house, the Company
uses external development organizations to complement its own resources and
shorten time to market for resulting products and enhancements. The scalable and
modular architecture employed by the Company for its main product families
allows not only greater efficiency in the development and delivery of new
products and enhancements, but also benefits customers who can "mix-and-match"
modules according to their networking needs and use the same modules within
different switch chassis.
For additional discussion of the Company's R&D expenditures in fiscal 1998,
1997 and 1996, see "Management's Discussion and Analysis" on pages 16 through 23
of the Company's 1998 Annual Report. The Company plans to continue funding R&D
efforts at levels necessary to advance product programs and expects R&D spending
to increase in fiscal 1999, while decreasing as a percentage of planned revenue.
Manufacturing
The N.E.T. manufacturing process consists of the production of mechanical
and electrical subassemblies as well as custom system assembly and test. N.E.T.
uses custom fabricated printed circuit boards and subassemblies, standard and
custom integrated circuits, and power supplies and mechanical hardware purchased
from outside
8
<PAGE>
suppliers. The Company's products also include components, assemblies and
subassemblies that are currently available from single sources and, in some
cases, are in short supply. Testing and manufacturing of products designed by
N.E.T. have generally been outsourced to third parties. Final assembly, quality
control and testing is generally performed at the Company's manufacturing
facilities, now located in Fremont, California. Availability limitations,
performance of outside vendors, quality control issues, price increases, or
business interruptions could materially impact the Company's financial
performance.
N.E.T. products are manufactured from components and assemblies designed to
meet the Company's quality and reliability requirements. The Company also
resells certain complementary products that are manufactured by outside vendors.
The Company relies to a significant degree on such third parties for quality
control and support of their products and for order fulfillment. To date, N.E.T.
has not experienced any significant delays in the delivery of material or
products from either subcontractors or vendors, but availability limitations
could adversely affect operating results. The Company's products include
components, assemblies and subassemblies that are currently available from
single sources and, in some cases, are in short supply. Although N.E.T. believes
alternative sources or substitutes for most of such single-sourced items are
available or, in most cases, could be developed, if necessary, any delay or
difficulties in developing such alternatives or substitutes could result in
shipment delays and could adversely affect operating results.
The Company has entered into software escrow arrangements and has granted
to certain customers manufacturing rights that are exercisable by the customer
in limited circumstances, such as upon material default by the Company of its
obligations under its agreement with such customers.
The Company seeks to maintain inventory in quantities sufficient to ship
product quickly (normally within 15 to 60 days) after receipt of order. It
schedules some production and supply of products based on internal sales
forecasts. Many of N.E.T.'s customer agreements provide that delivery dates may
be rescheduled or orders canceled, although in certain circumstances a charge
may be assessed upon rescheduling or cancellation. Because of these and other
factors, there are risks of excess or inadequate inventory that could materially
impact expenses, revenue and, to a greater degree, net earnings.
Quality
The Company has a Total Quality Management process and is focused on
continually enhancing the quality of products and services delivered to
customers worldwide. This includes activities to improve the quality of supplied
components, subassemblies and internal Company processes. The Company's quality
system, which includes its business processes and procedures worldwide, is
certified to ISO 9000 international standards. N.E.T. is also certified to ISO
9001, which covers quality standards for design and development, production,
installation and servicing. In addition, N.E.T. has received TickIT
certification for complying with quality standards for software development.
The Company established a Year 2000 compliance team in early 1997 to
identify and take reasonable steps to minimize the effect of Year 2000 issues
that may impact the Company's products and business operations. The Company
developed its N.E.T. Products Year 2000 Compliance Program, which is posted on
the Company's Web site. This Compliance Program provides N.E.T. customers and
partners with information on the Year 2000 compliance status of N.E.T. products
and identifies solutions for achieving network system and application compliance
prior to the year 2000. In addition, the Year 2000 compliance team has been, and
is, evaluating Year 2000 issues relating to the Company's internal systems and
third-party capabilities upon which the Company relies in conducting its
business, including financial systems, manufacturing applications, customer
service and support, desktop applications and infrastructure such as networks,
telecommunications products, banking and financial services, service providers
and security systems. Although the Company has not yet determined whether all of
the foregoing systems and applications are fully Year 2000 compliant, based upon
the information currently available, the Company believes that the costs
associated with the Year 2000 issue, and the consequences of incomplete or
untimely resolution of the Year 2000 issue, will not have a material adverse
effect on its business, operating results or financial condition.
9
<PAGE>
Competition
The communications industry in general, including the specific segments
within which N.E.T. competes, is intensely competitive and is characterized by
advances in technology that frequently result in the introduction of new
products and services with improved performance characteristics. Recently, the
industry has experienced consolidation resulting in a significant increase in
the size and capabilities of many entities that compete with N.E.T. The Company
believes that the principal competitive factors in its target markets are
experience, product capabilities, standards compliance, technical services and
support, quality, technical and other reliability, vendor reputation, stability
and long-term prospects, distribution capabilities and value propositions.
The Company believes that it currently competes favorably with respect to
many of these factors. However, many of the Company's current and potential
competitors have greater name recognition, a larger installed base of networking
products, more extensive engineering, manufacturing, marketing, distribution and
support capabilities in addition to greater financial, technological and
personnel resources. Actual or perceived failure to keep pace with technological
advances or other competitive factors would adversely affect the Company's
competitive position and could adversely affect N.E.T.'s future revenue levels
and operating results.
In the Company's selected markets it competes with other WAN communications
equipment vendors. These include products and services from vendors such as
Ascend Communications, Cisco Systems, General DataComm Industries, Lucent
Technologies, Newbridge Networks Corporation and Northern Telecom ("Nortel").
Consolidation in the networking industry continues to accelerate through
strategic alliances, mergers and acquisitions and joint technology and marketing
agreements. Continued or successful consolidation could result in stronger
competitors and may adversely affect the Company's competitive position and
operations. In addition, new vendors continually emerge as competitors in the
Company's selected markets. N.E.T.'s enterprise WAN solutions also compete with
certain public carrier network services and service providers. Many of these
competitors enjoy substantially greater marketing resources and customer
recognition than the Company.
The Company's agreements with Ericsson and the Datacraft Ltd. companies do
not prohibit manufacturing, marketing or servicing products that compete
directly with N.E.T.'s products. N.E.T.'s operating results could be adversely
affected if these or other companies announced the availability of, or
successfully introduced, such products or services.
As discussed below under "Government Regulation", in the United States, the
Telecommunications Act of 1996 (the "1996 Legislation") removed restrictions
that had been imposed on Regional Bell Operating Companies ("RBOCs") by the AT&T
divestiture decree thus allowing them, under certain conditions, to manufacture
telecommunications equipment or customer premises equipment. Competition from
carriers that decide to manufacture such equipment, with their far greater
resources and large customer bases, or from other competitors as discussed
above, could cause a severe reduction in selling prices or volumes for
multiservice platforms and other communications products or services, which
would have a material adverse affect on the Company's operating results and
financial condition.
Government Regulation
As discussed above, the telecommunications industry is regulated by
governments and other agencies around the world. Government regulatory policies
are likely to continue to have a major impact on N.E.T.'s business by affecting
the availability of voice and data communications services and equipment, the
prices and terms of carriers' competitive offerings and the ability of companies
directly to manufacture and market equipment and services that compete with
N.E.T.'s offerings.
The 1996 Legislation enacted in February of that year, was the first major
change in U.S. telecommunications law since the Communications Act of 1934. This
far-reaching legislation will influence the U.S. telecommunications industry in
many ways. Certain changes could have a direct impact on N.E.T.'s business. For
example, the 1996 Legislation removed restrictions on RBOC activities such that,
under certain conditions, the RBOCs may be permitted to manufacture
telecommunications equipment or customer premises equipment. If any RBOCs
manufacture or form alliances with other manufacturers to develop such
equipment, N.E.T. could be materially and adversely affected by direct
competition with the RBOCs.
10
<PAGE>
In addition, N.E.T. customers usually are carriers or use carrier network
services, the rates and terms of which are subject to varying degrees of public
utility-type government regulation. For example, in the U.S., decisions at the
federal and state level have, in some instances, provided certain carriers with
increased flexibility in structuring and pricing their services. Similar impact
of regulation or deregulation may occur in other N.E.T. markets, such as in
Europe, as mentioned earlier. Changes in the rates or terms of carrier-provided
service offerings may adversely affect the demand for, or limit the usability
of, network products and services including those provided by N.E.T. to
carriers, enterprises and other customers.
The Federal Communications Commission ("FCC") in the U.S. and some foreign
governments require that N.E.T.'s products comply with certain rules and
regulations, including technical rules designed to prevent harm to the telephone
network and avoid interference with radio-based communications. The Company
believes it complies with, or is exempt from, all applicable rules and
regulations with respect to the sale of its existing products in the United
States and in certain foreign countries. Failure to comply with FCC or similar
governmental requirements may result in the disconnection of installed equipment
from common carrier-provided circuits. Any delays in complying with FCC or
foreign requirements with respect to products could delay their introduction or
affect the Company's ability to produce and market its products. Sales to the
U.S. government are subject to compliance with applicable regulations (e.g.,
Federal Acquisition Regulations).
Proprietary Rights and Licenses
N.E.T. has obtained patents in the United States and other countries on
inventions relating to its products and has applied for others. While possession
of patents, copyrights and trade secrets could affect the ability of companies
to introduce products competitive with the Company's products, N.E.T. believes
that its success does not depend primarily on the ownership of intellectual
property rights, but on its innovative skills, technical competence and
marketing abilities, and, accordingly, that patents, copyrights and trade
secrets will not constitute an assurance of N.E.T.'s future success. N.E.T. is
aware that the laws of some other countries do not protect proprietary rights to
the same extent as the laws of the United States.
Because of the existence of a large number of third-party patents in the
telecommunications field and the rapid rate of issuance of new patents, some of
the Company's products, or the use thereof, could infringe on third-party
patents. If any such infringement exists, the Company believes that, based upon
historical industry practice, it or its customers should be able to obtain any
necessary licenses or rights under such patents on terms which would not be
materially adverse to the Company. However, there can be no assurance in the
future that actual or alleged infringement will not materially affect the
Company's operating results or financial condition.
The Company regards elements of its software and engineering as proprietary
and relies upon non-disclosure obligations, copyright laws and software
licensing agreements for protection. Despite these restrictions, it is possible
that competitors may obtain information that N.E.T. regards as proprietary. Some
of the technology incorporated in certain of the Company's products is licensed
from third parties. In the event of termination or expiration of the licensing
agreements for such technology, the Company's ability to market those products
could be adversely affected, which in turn could materially affect the Company's
operating results and financial condition.
Employees
As of March 31, 1998, the Company had 1,408 employees. None of the
Company's domestic employees are represented by a collective bargaining
agreement. Certain of the Company's employees outside the United States are
governed by national collective bargaining or similar agreements. The Company
has never experienced any work stoppage. The Company believes that its employee
relations are good.
Item 2. Properties
N.E.T. currently leases approximately 290,000 square feet of office, R&D,
and manufacturing space in a modern industrial park in Fremont, California under
a new 12-year lease agreement for three buildings, with an exclusive option to
lease another 200,000 square feet of space. The custom-built Fremont facility
includes two buildings configured for office space and R&D, and one designed for
manufacturing and support functions. N.E.T.
11
<PAGE>
and its subsidiaries also lease sales and service offices at other locations in
the United States, China, France, Germany, Mexico, Norway, Singapore, Uruguay,
the United Kingdom and other countries. The Company has recently vacated
approximately 287,000 square feet of space in Redwood City, California under a
lease agreement expiring in October 1998. The Company believes that its current
and planned facilities are, in all material respects, suitable and adequate for
its anticipated needs.
Item 3. Legal Proceedings
The Company is not aware of any material legal proceedings pending or
threatened against it at this time.
Item 4. Submission of Matters to a Vote of Security Holders
On March 10, 1998, the Company held a Special Meeting of Stockholders. At
this meeting, the stockholders voted to approve and adopt the Network Equipment
Technologies, Inc. 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan")
and to authorize issuance of up to 600,000 shares of the Company's Common Stock
under the 1998 Purchase Plan as follows: 14,862,474 votes in favor, 3,956,032
votes against, and 104,926 votes abstaining.
Executive Officers of the Registrant
The Executive Officers (or "Corporate Officers") of the Company and their
ages at June 1, 1998, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Roger A. Barney 58 Vice President, Human Resources and Corporate Services
James B. De Golia 48 Vice President, General Counsel and Assistant Corporate Secretary
Samuel H. Ezekiel 54 Senior Vice President, Marketing
Joseph J. Francesconi 55 President, Chief Executive Officer and Director
Craig M. Gentner 51 Senior Vice President, Chief Financial Officer and Corporate Secretary
David P. Owen 57 Vice President, Strategy and Technology
Raymond E. Peverell 50 Senior Vice President, Sales and Support
G. Michael Schumacher 59 Senior Vice President, Product Operations
Charles S. Shiverick 54 Vice President, Information Services and Reengineering
</TABLE>
Roger A. Barney joined the Company in October 1987 as Vice President of
Human Resources, and in 1992, became Vice President of Human Resources and
Corporate Services. Prior to joining the Company, Mr. Barney held numerous
management positions, including Director of Human Resources for Verbatim
Corporation. He also founded his own management consulting business, which he
ran from 1983 to 1987.
James B. De Golia joined the Company in December 1988 and has served as its
General Counsel and Assistant Secretary since 1991. From 1982 to 1988, Mr. De
Golia served as Corporate Counsel to a number of high technology and federal
divisions and subsidiaries of Xerox Corporation. Prior to joining Xerox, he
practiced law with the San Francisco office of Thelen, Marrin, Johnson &
Bridges.
Samuel H. Ezekiel joined the Company in June 1996 as Vice President of
Marketing and in April 1997, he was appointed Senior Vice President of
Marketing. From 1991 until joining N.E.T., Mr. Ezekiel was Vice President of
12
<PAGE>
Acquisitions & Alliances at Amdahl Corporation and from 1980 to 1991, he served
as Vice President and General Manager of the Communications Products Division.
Prior to that, he held a number of sales management, marketing, and business
development positions with companies such as British Telecom, Sperry Univac,
Computer Communications, Inc. and IBM/Rolm.
Joseph J. Francesconi has served as a Director and as President and Chief
Executive Officer since joining the Company in March 1994. He has recently been
elected as a Director of Caere Corporation, a public company. From 1977 until he
joined the Company, Mr. Francesconi served in a number of management capacities
at Amdahl Corporation, a leading mainframe manufacturer, most recently as
Executive Vice President. Prior to joining Amdahl Corporation, Mr. Francesconi
spent 12 years with IBM Corporation.
Craig M. Gentner joined the Company in July 1989 as Vice President,
Finance. In July 1990, Mr. Gentner was appointed Vice President, Chief Financial
Officer and Corporate Secretary, and in May of 1992, he was appointed Senior
Vice President. From 1985 to 1989, Mr. Gentner was employed by Xidex, a
manufacturer of computer peripheral products, most recently as Senior Vice
President and Chief Financial Officer.
David P. Owen joined the Company in April 1990 as Director, Strategy and
Marketing. In 1992, he became Vice President of Corporate Marketing, and in
1994, he became Vice President of Corporate Development and Strategy. More
recently, in 1997, Mr. Owen became Vice President, Strategy and Technology.
Prior to joining the Company, Mr. Owen was Director of Product Marketing at
StrataCom. In 1983, he founded the fast packet development organization at
Packet Technologies, StrataCom's predecessor company. Mr. Owen spent 15 years at
Control Data in a variety of product strategy, architecture and software
development positions.
Raymond E. Peverell joined the Company in 1993 as Senior Vice President of
Worldwide Sales, and in 1996, became Senior Vice President of Sales and Support.
From 1983 to 1992, Mr. Peverell was employed by Tandem Computers, Inc. holding
various positions, his last being Vice President, Strategic Partnership
Development. Prior to 1983, Mr. Peverell held several positions over a 12 year
span with Burroughs Corporation.
G. Michael Schumacher joined the Company in January 1995 as Senior Vice
President of Engineering and Operations, and in 1996, became Senior Vice
President of Product Operations. Prior to joining the Company, Mr. Schumacher
was Vice President and General Manager of the UNIX Systems Division of Unisys
Corporation from 1993 to 1994. He also served at Mentor Graphics as General
Manager of front-end CAE Tools from 1991 to 1993, and at Solbourne Computers as
the Vice President of Engineering from 1989 through 1990.
Charles S. Shiverick, Vice President of Information Services and
Reengineering, joined the Company in 1989. Mr. Shiverick has held various senior
management positions including Senior Director of Corporate Quality and Vice
President of Operations. Prior to 1989, Mr. Shiverick spent 22 years at IBM
Corporation in a variety of management positions.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The section captioned "Common Stock Dividends and Price Range" of the
Registrant's 1998 Annual Report is incorporated herein by reference and included
in this filing as Exhibit 13. At March 31, 1998, there were 723 stockholders of
record of the Company.
Item 6. Selected Financial Data
The section captioned "Five Year Financial Summary" of the Registrant's
1998 Annual Report is incorporated herein by reference and included in this
filing as Exhibit 13.
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The section captioned "Management's Discussion and Analysis" of the
Registrant's 1998 Annual Report is incorporated herein by reference and included
in this filing as Exhibit 13.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is not required to provide disclosures regarding market risk in
this Annual Report on Form 10-K as its market capitalization is less than $2.5
billion. Such disclosures will be provided in the Company's Annual Report on
Form 10-K for the year ending March 31, 1999.
Item 8. Financial Statements and Supplementary Data
The sections captioned "Quarterly Financial Data" and "Consolidated
Financial Statements" together with the Notes thereto and the "Independent
Auditors' Report" thereon of the Registrant's 1998 Annual Report are
incorporated herein by reference and included in this filing as Exhibit 13.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Certain information required by Part III is omitted from this Form 10-K
because the Company will file its definitive proxy statement (the "Proxy
Statement") pursuant to Regulation 14A within 120 days after the end of its
fiscal year covered by this Report, and certain information included in the
Proxy Statement is incorporated by reference into this Part III.
Item 10. Directors and Executive Officers of the Registrant
The information with respect to Directors is incorporated by reference from
the section captioned "Election of Directors" at pages 2 and 3 of the Proxy
Statement.
The information regarding Executive Officers is set forth in Item 4 of Part
I of this Form 10-K.
The information required by Item 405 of Regulation S-K is incorporated by
reference from the section captioned "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" at page 13 of the Proxy Statement.
Item 11. Executive and Director Compensation
The Proxy Statement contains information regarding compensation of the
Company's Directors and Executive Officers contained in the sections captioned
"Election of Directors: Board Committees, Meetings, and Remuneration" at pages 5
and 6 of the Proxy Statement and "Executive Compensation and Related
Information" at pages 7 to 10 of the Proxy Statement, which pages are
incorporated herein by reference.
14
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management from the section captioned "Stock Ownership of Five Percent
Stockholders, Directors, and Corporate Officers" at pages 4 and 5 of the Proxy
Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding transactions with the Company's Directors and
Executive Officers from the sections captioned "Election of Directors: Board
Committees, Meetings, and Remuneration" at pages 5 and 6 of the Proxy Statement
and "Executive Compensation and Related Information" at pages 7 to 10 of the
Proxy Statement is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements - See "Index to Financial Statements and
Financial Statement Schedule" at page 20 of this Report.
(2) Financial Statement Schedules - See "Index to Financial
Statements and Financial Statement Schedule" at page 20 of this
Report.
(3) Exhibits - See "Exhibit Index" at page 16 of this Report.
(b) The Registrant filed no reports on Form 8-K during the fourth quarter
of the fiscal year ended March 31, 1998.
15
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Note
3.1 Registrant's Restated Certificate of Incorporation, as 1
amended.
3.2 Registrant's Bylaws, as amended. 1
4.1 Indenture dated as of May 15, 1989 between Registrant 2
and Morgan Guaranty Trust Company of New York.
4.2 Rights Agreement dated as of August 15, 1989 between 3
Registrant and The First National Bank of Boston, as
amended.
4.3 Certificate of Designations of Series A Junior 4
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).
10.1 Headquarters Facilities Lease Agreements between 5
Sobrato Interests III and Network Equipment
Technologies, Inc. dated April 9, 1997.
10.2 Seaport Centre Phase Three Industrial Net Lease 5
Agreement dated August 12, 1987 between Registrant and
Lincoln Property N.C., Inc.
10.7 Officer Employment and Continuation Agreement between
Registrant and Joseph J. Francesconi.*
10.8 Officer Employment and Continuation Agreement between
Registrant and Raymond E. Peverell.*
10.9 Officer Employment and Continuation Agreement between
Registrant and G. Michael Schumacher.*
10.10 Officer Employment and Continuation Agreement between
Registrant and Craig M. Gentner.*
10.11 Officer Employment and Continuation Agreement between
Registrant and Samuel H. Ezekiel.*
10.12 Employment Agreement between Registrant and Walter J. 6
Gill.*
10.13 Form of Officer Employment and Continuation Agreement 6
as signed by all other Executive Officers and
Registrant.*
10.14 Form of Director Indemnification Agreement as signed by 6
all Directors of the Company.
10.15 Form of Officer Indemnification Agreement as signed by 6
all Executive Officers of the Company.*
16
<PAGE>
Corporate Director Compensation Deferral Election 6
Program and 1996 Deferral Form.
Corporate Officer Compensation Deferral Election 6
Program and 1996 Deferral Form.*
Corporate Officers Long-Term Variable Compensation 6
Program.*
13 Portions of 1998 Annual Report to Stockholders.
21.1 Subsidiaries of Registrant as of June 24, 1998.
23.1 Independent Auditors' Consent.
27 Financial Data Schedule.
99.1 Registrant's 1983 Stock Option Plan, as amended.* 7
99.2 Registrant's 1988 Restricted Stock Award Plan.* 8
99.3 Rules of Registrant's 1988 U.K. Stock Option Scheme.* 9
99.4 Registrant's 1989 U.K. Stock Option Plan.* 8
99.5 Registrant's 1990 Employee Stock Purchase Plan, as 10
amended.*
99.6 Registrant's 1993 Stock Option Plan, as amended 11
(Exhibit 99.3).*
99.7 Registrant's 1997 Stock Option Program, as amended 11
(Exhibit 99.2).*
99.8 Registrant's 1998 Employee Stock Purchase Plan (Exhibit 11
99.1).
- --------
* A management contract or compensatory plan required to be filed as an
Exhibit to Form 10-K.
17
<PAGE>
NOTES
(1) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Form 10-Q (Commission File No. 0-15323) for the fiscal quarter
ended December 24, 1995, originally filed with the Securities and Exchange
Commission on February 7, 1996.
(2) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Form 8 Amendment No. 1 to Annual Report on Form 10-K
(Commission File No. 0-15323) for the fiscal year ended March 31, 1989,
filed with the Securities and Exchange Commission on July 25, 1989.
(3) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1990, filed with the Securities and
Exchange Commission on June 29, 1990.
(4) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Registration Statement on Form S-8 (Nos. 33-33013 and
33-33063), filed with the Securities and Exchange Commission on January 19,
1990.
(5) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Registration Statement on Form 10-K (Commission File No.
0-15323) for the fiscal year ended March 31, 1997, originally filed with
the Securities and Exchange Commission on June 23, 1997.
(6) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1996, filed with the Securities and
Exchange Commission on June 21, 1996.
(7) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1993, filed with the Securities and
Exchange Commission on June 25, 1993.
(8) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1991, filed with the Securities and
Exchange Commission on June 28, 1991.
(9) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1989, originally filed with the Securities
and Exchange Commission on May 1, 1989.
(10) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Registration Statement on Form S-8 (No. 33-68860), filed with
the Securities and Exchange Commission on September 15, 1993.
(11) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Registration Statement on Form S-8 (No. 333-49837), filed with
the Securities and Exchange Commission on April 10, 1998.
18
<PAGE>
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 24, 1998 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.
Signature Title Date
- --------- ----- ----
/s/ DIXON R. DOLL
- ------------------------- Director June 24, 1998
Dixon R. Doll
/s/ JAMES K. DUTTON
- ------------------------- Director June 24, 1998
James K. Dutton
/s/ JOSEPH J. FRANCESCONI
- ------------------------- President, Chief Executive June 24, 1998
Joseph J. Francesconi Officer and Director
(Principal Executive Officer)
/s/ CRAIG M. GENTNER
- ------------------------- Senior Vice President, Chief June 24, 1998
Craig M. Gentner Financial Officer and Corporate
Secretary (Principal Financial
Officer and Principal Accounting
Officer)
/s/ WALTER J. GILL
- ------------------------- Director June 24, 1998
Walter J. Gill
/s/ GEORGE M. SCALISE
- ------------------------- Director June 24, 1998
George M. Scalise
/s/ HANS A. WOLF
- ------------------------- Chairman of the Board June 24, 1998
Hans A. Wolf
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
- --------------------
Page in 1998 Annual Report*
---------------------------
Consolidated Balance Sheets as of March 31, 1998 24
and 1997
Consolidated Statements of Income for the years 25
ended March 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years 26
ended March 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for 27
the years ended March 31, 1998, 1997 and 1996 28
Notes to Consolidated Financial Statements 41
Independent Auditors' Report
- ----------
* Incorporated herein by reference and included in this filing as Exhibit 13.
FINANCIAL STATEMENT SCHEDULE
- ----------------------------
Page in 1998 Form 10-K
----------------------
Independent Auditors' Report 21
Schedule II - Valuation and Qualifying Accounts 22
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the Consolidated Financial
Statements or notes thereto.
Separate financial statements of the Registrant are omitted because the
Registrant is primarily an operating company and all subsidiaries included in
the Consolidated Financial Statements filed, in the aggregate, do not have a
minority equity interest and/or long-term indebtedness to any person outside the
consolidated group in an amount which together exceeds 5% of total consolidated
assets at March 31, 1998.
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Network Equipment Technologies, Inc.:
We have audited the consolidated financial statements of Network Equipment
Technologies, Inc. and subsidiaries as of March 31, 1998 and 1997, and for each
of the three years in the period ended March 31, 1998, and have issued our
report thereon dated April 15, 1998; such financial statements and report are
included in your 1998 Annual Report to Stockholders and are incorporated herein
by reference. Our audits also included the financial statement schedule of
Network Equipment Technologies, Inc. listed in the accompanying index to
financial statements and financial statement schedule. The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
April 15, 1998
21
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
SCHEDULE II
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance
beginning costs and to other Deduction/ at end
Description of period expenses accounts write off of period
- ----------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
For the year ended March 31, 1996:
Accounts receivable
allowances $2,514 -- $4,615 (1) $(2,596) $4,533
For the year ended March 31, 1997:
Accounts receivable
allowances $4,533 -- $1,237 (1) $(1,860) $3,910
For the year ended March 31, 1998:
Accounts receivable
allowances $3,910 -- $2,082 (1) $(2,066) $3,926
</TABLE>
- ----------
(1) Amount represents additions to accounts receivable allowances which were
charged primarily to revenue.
CEO EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and Joseph J. Francesconi
("Officer"), in partial consideration for his continuing officer and employment
relationship and to encourage continued employment in the event of a potential
Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. two years of Officer's base salary ("salary continuance"),
b. two years of Officer's variable compensation (computed using the
mid-point of the applicable range and the company "meets plan"),
c. Officer level medical, dental, life and disability insurance during
the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock awards
during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he is terminated without cause, job location is changed more than 50
miles, his compensation is materially reduced or responsibilities are
substantially altered or reduced (without express consent of the employee) by
the Company, or by any successor to the Company in conjunction with or within
one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change of
Control, then vesting of outstanding stock options and restricted stock held by
Officer shall accelerate at the time of such Termination. All vested options
shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the Company's
release and non-competition agreement at the time of any such Termination of
Employment.
Agreed this 14th day of April, 1998.
NETWORK EQUIPMENT -------------------------
TECHNOLOGIES, INC. JOSEPH J. FRANCESCONI
By: Roger A. Barney /s/ Joseph J. Francesconi
--------------------------- -------------------------
(Signature)
Title: V.P. HR & Corp. Services
------------------------
April 14, 1998 N.E.T. Confidential
OFFICER EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and the undersigned
("Officer"), in partial consideration for their continuing officer and
employment relationship and to encourage continued employment in the event of a
potential Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. one year of Officer's base salary ("salary continuance"),
b. one year of Officer's variable compensation (computed using the
mid-point of the applicable range and the company "meets plan"),
c. Officer level medical, dental, life and disability insurance during
the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock awards
during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he or she is terminated without cause, job location is changed more than
50 miles, his or her compensation is materially reduced or responsibilities are
substantially altered or reduced (without express consent of the employee) by
the Company, or by any successor to the Company in conjunction with or within
one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change of
Control, then vesting of outstanding stock options and restricted stock held by
Officer shall accelerate at the time of such Termination. All vested options
shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the Company's
release and non-competition agreement at the time of any such Termination of
Employment.
Agreed this 30 day of October, 1995.
NETWORK EQUIPMENT Raymond E. Peverell
TECHNOLOGIES, INC. -----------------------
(Print Name of Officer)
By: /s/ Joseph J. Francesconi /s/ R.E. Peverell
------------------------- -----------------
(Signature)
Title: President & CEO
---------------------
October 26, 1995 N.E.T. Confidential
OFFICER EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and the undersigned
("Officer"), in partial consideration for their continuing officer and
employment relationship and to encourage continued employment in the event of a
potential Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. one year of Officer's base salary ("salary continuance"),
b. one year of Officer's variable compensation (computed using the
mid-point of the applicable range and the company "meets plan"),
c. Officer level medical, dental, life and disability insurance during
the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock awards
during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he or she is terminated without cause, job location is changed more than
50 miles, his or her compensation is materially reduced or responsibilities are
substantially altered or reduced (without express consent of the employee) by
the Company, or by any successor to the Company in conjunction with or within
one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change of
Control, then vesting of outstanding stock options and restricted stock held by
Officer shall accelerate at the time of such Termination. All vested options
shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the Company's
release and non-competition agreement at the time of any such Termination of
Employment.
Agreed this 27 day of October, 1995.
NETWORK EQUIPMENT Gerald M. Schumacher
TECHNOLOGIES, INC. -----------------------
(Print Name of Officer)
By: /s/ Joseph J. Francesconi /s/ G.M. Schumacher
------------------------- -------------------
(Signature)
Title: President & CEO
---------------------
October 26, 1995 N.E.T. Confidential
CFO EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and Craig M. Gentner
("Officer"), in partial consideration for his continuing officer and employment
relationship and to encourage continued employment in the event of a potential
Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. eighteen months of Officer's base salary ("salary continuance"),
b. eighteen months of Officer's variable compensation (computed using the
mid-point of the applicable range and the company "meets plan"),
c. Officer level medical, dental, life and disability insurance during
the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock awards
during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he is terminated without cause, job location is changed more than 50
miles, his compensation is materially reduced or responsibilities are
substantially altered or reduced (without express consent of the employee) by
the Company, or by any successor to the Company in conjunction with or within
one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change of
Control, then vesting of outstanding stock options and restricted stock held by
Officer shall accelerate at the time of such Termination. All vested options
shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the Company's
release and non-competition agreement at the time of any such Termination of
Employment.
Agreed this 14th day of April, 1998.
NETWORK EQUIPMENT -------------------------
TECHNOLOGIES, INC. CRAIG M. GENTNER
By: Roger A. Barney /s/ Craig M. Gentner
--------------------------- -------------------------
(Signature)
Title: V.P. HR & Corp. Services
------------------------
April 14, 1998 N.E.T. Confidential
OFFICER EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and the undersigned
("Officer"), in partial consideration for their continuing officer and
employment relationship and to encourage continued employment in the event of a
potential Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. one year of Officer's base salary ("salary continuance"),
b. one year of Officer's variable compensation (computed using the
mid-point of the applicable range and the company "meets plan"),
c. Officer level medical, dental, life and disability insurance during
the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock awards
during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he or she is terminated without cause, job location is changed more than
50 miles, his or her compensation is materially reduced or responsibilities are
substantially altered or reduced (without express consent of the employee) by
the Company, or by any successor to the Company in conjunction with or within
one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change of
Control, then vesting of outstanding stock options and restricted stock held by
Officer shall accelerate at the time of such Termination. All vested options
shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the Company's
release and non-competition agreement at the time of any such Termination of
Employment.
Agreed this 3rd day of June, 1996.
NETWORK EQUIPMENT Samuel Ezekiel
TECHNOLOGIES, INC. -------------------------
(Print Name of Officer)
By: /s/ Joseph J. Francesconi /s/ Samuel Ezekiel
------------------------- ------------------
(Signature)
Title: President & CEO
----------------------
October 26, 1995 N.E.T. Confidential
To Our Shareholders
Letter
<PAGE>
============ ----------------
LETTER TO OUR 11.
----------------
SHAREHOLDERS
============ ----------------
In my letter to you last year I noted that our challenge was to deliver and
support the new products that we announced in FY97 to make faster growth for
N.E.T. a reality. In FY98 we accepted this challenge and began installing the
products that are steering our company into new market areas.
Our Promina 800 Series has been shipping for three quarters, with revenue
growing significantly each quarter. We are both deploying new networks and
upgrading our customer base. The Promina 800 Series is Year 2000 compliant,
provides access to carrier ATM services, and is our multiservice access platform
to migrate enterprise networks to virtual private network services.
Our PrimeVoice compression products are achieving success with many
international voice carriers. We are able to offer highly compressed
toll-quality voice while transporting the fax and modem data common on
international circuits. Our PrimeSwitch(TM) module complements our
voice-compression capabilities and allows us to offer a unique portfolio of
voice products that is the most comprehensive in the industry. Voice
applications on the Promina 800 Series are expected to be increasingly important
to our revenue stream in FY99 and beyond.
<PAGE>
============ ----------------
12. LETTER TO OUR
----------------
SHAREHOLDERS
============ ----------------
We extended our packet products with a new switching engine and new versions of
our frame relay and routing software. Our packet products allow us to address
the migration of data traffic to frame relay and Internet Protocols as an
integral part of the multiservice capabilities of our Promina 800 Series.
Our Promina 4000 multiservice ATM edge switch is in field trials and will soon
be available for customer shipment. We are confident that this new platform
raises the bar with its advanced traffic management capabilities. It allows
carriers to differentiate their service offerings with quality of service
guarantees while at the same time offering a cost-effective, high-utilization
platform for a variety of services.
The past two years have encompassed a major business transition for our company.
Our development organization has delivered a new product portfolio with very
high initial quality. We are "revenue ready" on the Promina product line and are
moving on with our development plans to add both features and capabilities as
well as new platforms. Today, our products address the requirements of
substantially larger and potentially more profitable markets than was possible
before this transition began.
I am proud that we accomplished these changes while maintaining profitability
and significantly improving every aspect of our balance sheet. However, the
transition did affect our overall performance. In FY98 we suffered a decline in
the revenue from our IDNX(R) product line that more than offset the growth of
revenue from our new products. Conse-
<PAGE>
============ ----------------
LETTER TO OUR 13.
----------------
SHAREHOLDERS
============ ----------------
quently, top-line revenue declined from $324 million to $309 million
year-over-year, resulting in earnings of $14 million or a fully diluted 65(cent)
per share for FY98. One big plus was that we ended the year with a record
bookings quarter, driven by demand for our new products, and our cash reserves
increased to $161 million. We are financially strong and well-positioned to take
advantage of the new market opportunities created by our Promina products.
Finally, we've moved our headquarters. We had been in our Redwood City,
California location for ten years. After examining both our requirements and our
options, we chose to relocate to a new, custom-built campus in Fremont, just
across the San Francisco Bay from our previous location. This state-of-the-art
facility offers an extremely attractive work environment, access to world-class
talent, and room to grow with our business.
We've embarked on a new year with a revitalized product line and a broader set
of market opportunities. In a way, our new home provides a metaphor for the
change we've created, symbolizing both a summary of our accomplishments and the
beginning of a new era for N.E.T.
Sincerely,
/s/ JOSEPH J. FRANCESCONI
- --------------------------------------------------------------------------------
Joseph J. Francesconi
President and Chief Executive Officer
<PAGE>
============ ----------------
FINANCIAL REVIEW
============ ----------------
FINANCIAL REVIEW
QUARTERLY FINANCIAL DATA 15.
FIVE YEAR FINANCIAL SUMMARY 15.
MANAGEMENT'S DISCUSSION AND ANALYSIS 16.
CONSOLIDATED BALANCE SHEETS 24.
CONSOLIDATED STATEMENTS OF INCOME 25.
CONSOLIDATED STATEMENTS OF CASH FLOWS 26.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 27.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28.
INDEPENDENT AUDITORS' REPORT 41.
COMMON STOCK DIVIDENDS AND PRICE RANGE 42.
CORPORATE DIRECTORY AND INFORMATION 43.
<PAGE>
============ ----------------
QUARTERLY FINANCIAL 15.
----------------
DATA (UNAUDITED)
============ ----------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal Quarter 1998
Revenue $79,973 $77,847 $71,956 $78,945
Gross margin 42,475 42,018 37,364 41,079
Net income 5,655 5,759 2,477 459
Diluted earnings per share .26 .26 .11 .02
Fiscal Quarter 1997
Revenue $76,469 $78,398 $83,302 $86,269
Gross margin 39,373 37,825 41,728 43,369
Net income 4,478 5,589 6,620 7,305
Diluted earnings per share .21 .26 .31 .34
</TABLE>
Results for the fourth quarter of fiscal 1998 include a charge of $3.3 million,
or $0.10 per share, related to the relocation of the Company's facilities. See
the Facility Relocation Costs section in Note 1 in the Notes to Consolidated
Financial Statements and in the Management's Discussion and Analysis.
============ ----------------
FIVE YEAR FINANCIAL
----------------
SUMMARY
============ ----------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $308,721 $324,438 $338,899 $284,036 $237,672
Net income (loss) 14,350 23,992 31,350 27,070 (6,324)
Diluted earnings (loss)
per share .65 1.11 1.50 1.39 (.38)
7 1/4% convertible
subordinated debentures 25,821 25,821 33,526 68,625 68,625
Total assets 334,557 301,653 281,957 232,046 187,015
</TABLE>
<PAGE>
============ ----------------
16. 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 further within Business
Environment and Risk Factors 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; industry consolidation; 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 services; and other factors identified herein.
RESULTS OF OPERATIONS
The following table depicts data derived from the Consolidated Statements of
Income expressed as a percentage of revenue for each of the three years in the
period ended March 31.
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Product revenue 64.8% 66.2% 66.7%
Service and other revenue 35.2 33.8 33.3
----- ----- -----
Total revenue 100.0 100.0 100.0
----- ----- -----
Product gross margin 60.8 58.2 59.9
Service and other revenue gross margin 38.0 33.9 31.6
----- ----- -----
Total gross margin 52.8 50.0 50.5
----- ----- -----
Sales and marketing 28.3 23.8 22.2
Research and development 14.1 12.7 10.8
General and administrative 3.8 3.5 3.5
Facility relocation costs 1.1 0.0 0.0
----- ----- -----
Total operating expenses 47.3 40.0 36.5
----- ----- -----
Income from operations 5.5 10.0 14.0
Interest income 2.2 1.9 1.8
Interest expense (0.6) (0.7) (1.4)
Other (0.3) (0.2) (0.2)
----- ----- -----
Income before income taxes 6.8 11.0 14.2
Income tax provision 2.2 3.8 4.9
Extraordinary gain 0.0 0.2 0.0
----- ----- -----
Net income 4.6% 7.4% 9.3%
----- ----- -----
</TABLE>
<PAGE>
============ ----------------
MANAGEMENT'S DISCUSSION 17.
----------------
AND ANALYSIS
============ ----------------
COMPARISON OF 1998 AND 1997
Revenue Total revenue in fiscal 1998 decreased $15.7 million, or 4.8% from
fiscal 1997. Product revenue and service and other revenue decreased $14.7
million and $1.0 million, respectively, for the year. The 6.8% decrease in
product revenue was principally due to a 28.6% decline in sales in the North
America channel caused by new product transition issues in the first half of the
fiscal year. In the fourth quarter of fiscal 1998, total product sales of the
Company's new Promina product line were 27.0% of product sales. Total product
sales in the N.E.T. Federal channel, which includes U.S. government sales and
sales to U.S. government contractors, increased 10.9% in fiscal 1998. Strong
fourth quarter product sales in the Asia Pacific/Latin America channel,
principally in China, contributed to a 5.3% increase for the year. Product sales
in Europe were down 4.3% in the year and offset the increase in the Asia
Pacific/Latin America channel. International product sales were 48.1% of total
product sales in fiscal 1998.
Service and other revenue decreased 1.0% from the prior year. A $2.8 million
decrease in systems integration services in support of product sales to the U.S.
government offset the growth in revenue of $1.8 million generated from both
traditional and expanded service offerings.
Overall, revenue in the N.E.T. Federal channel increased 2.3% over last year and
increased as a percentage of total revenue from 31.2% in fiscal 1997 to 33.6% in
fiscal 1998. Total international revenue increased 1.3% over last year, and in
fiscal 1998, it represented 37.3% of the Company's total revenue as compared to
35.0% in fiscal 1997.
Management expects revenue to increase in fiscal 1999 based largely upon the
acceptance of the Company's new products as well as the Company's entry into
new, larger markets.
Gross Margin Total gross margin as a percentage of total revenue increased to
52.8% in fiscal 1998 from 50.0% in fiscal 1997. Product gross margin increased
to 60.8% in fiscal 1998 from 58.2% in fiscal 1997. This increase primarily
resulted from a more favorable product mix, most notably in the shift to newer
products with higher gross margins. Product margins also increased in part due
to favorable manufacturing variances as a result of manufacturing efficiencies
and cost reductions.
The gross margin for service and other revenue increased to 38.0% in fiscal 1998
from 33.9% in fiscal 1997. The increase is primarily the result of cost
reductions and consolidation of the Company's service operations.
Management expects total gross margin in fiscal 1999 to remain fairly constant.
Operating Expenses Operating expenses increased $15.9 million in fiscal 1998 and
increased as a percentage of total revenue to 47.3% in fiscal 1998 from 40.0% in
fiscal 1997. Operating expenses include a $3.3 million charge related to the
relocation of the Company's facilities. Excluding this charge, operating
expenses would have increased $12.6 million and increased as a percentage
<PAGE>
============ ----------------
18. MANAGEMENT'S DISCUSSION
----------------
AND ANALYSIS
============ ----------------
of total revenue to 46.2%. Management expects operating expenses in fiscal 1999
to continue to increase to support planned growth, while decreasing as a
percentage of total revenue.
Sales and marketing expense increased $9.9 million in fiscal 1998 due to the
addition of personnel to support continued expansion of the sales and marketing
infrastructure. The increase in spending also resulted from increased trade
show, advertising and travel expenses in conjunction with new product launches.
As a percentage of total revenue, sales and marketing expense increased to 28.3%
in fiscal 1998 from 23.8% in fiscal 1997, primarily due to the increased
expenses and lower sales volume. Management expects sales and marketing expense
to increase in fiscal 1999 to support continued expansion of the field sales
infrastructure, while decreasing as a percentage of planned revenue.
Research and development expense increased $2.4 million in fiscal 1998 due to
employment and capital equipment increases to support product development. As a
result of this increased spending, research and development expense also
increased as a percentage of total revenue to 14.1% in fiscal 1998 from 12.7% in
fiscal 1997. In fiscal 1998, $3.2 million of software costs were capitalized as
compared to $2.8 million in fiscal 1997 as more projects reached technological
feasibility in line with planned new product introductions in fiscal 1998 and
1999. Management plans to continue funding research and development efforts at
levels necessary to advance product programs and expects research and
development spending to increase in fiscal 1999, while decreasing as a
percentage of planned revenue.
General and administrative expense increased $0.3 million year-over-year, and
increased to 3.8% of total revenue as compared to 3.5% in fiscal 1997.
Management expects general and administrative expense to increase in fiscal
1999, while decreasing slightly as a percentage of planned revenue.
In the fourth quarter of fiscal 1998, the Company recorded a $3.3 million charge
related to the relocation of the Company's facilities to Fremont, California,
approximately 12 miles from its previous site in Redwood City. This charge is
composed primarily of the remaining lease commitment on the Redwood City
facility for the period when the facility will be vacant. The $3.3 million
charge had an impact of $0.10 on diluted earnings per share. In the first
quarter of fiscal 1999, the Company expects to incur moving expenses of
approximately $1.0 million.
Non-operating Items Interest income in fiscal 1998 increased from fiscal 1997
due to higher cash balances, offset partially by lower rates resulting from
investment in tax-free securities. Interest expense, primarily related to the
7 1/4% convertible subordinated debentures, decreased slightly as a result of
repurchases of the Company's convertible debentures during fiscal 1997.
For the fiscal year ended March 31, 1998, the Company recorded income tax
expense of $6.8 million as compared to $12.5 million for fiscal 1997, at an
effective rate of 32% and 35% for fiscal 1998 and fiscal 1997, respectively. See
Note 8 to the Consolidated Financial Statements.
<PAGE>
============ ----------------
MANAGEMENT'S DISCUSSION 19.
----------------
AND ANALYSIS
============ ----------------
COMPARISON OF 1997 AND 1996
Revenue Total revenue in fiscal 1997 decreased $14.5 million, or 4.3% from
fiscal 1996. Product revenue and service and other revenue decreased $11.2
million and $3.3 million, respectively, for the year. The 5.0% decrease in
product revenue was principally due to a decline in domestic product sales.
Total product sales in the N.E.T. Federal channel, which includes U.S.
government sales and sales to U.S. government contractors, decreased 25.3% in
fiscal 1997. This decrease in U.S. government product revenue was primarily due
to the substantial completion in fiscal 1996 of the deployment of a Department
of Defense worldwide network. Increased international product sales
substantially offset the domestic decline, growing 25.3% over the prior year to
45.0% of product revenue. This increase in international product sales was
primarily attributable to the Company's expansion of its international sales and
marketing infrastructure coupled with the economic growth experienced in these
regions. Both factors significantly impacted the Company's Asia Pacific/Latin
America channel, which grew product sales 54.5% year-over-year.
Service and other revenue decreased 2.9% from the prior year. This decrease was
attributable to a 17.6% decrease in systems integration services in support of
product sales to the U.S. government, partially offset by growth in revenue
generated from both traditional and expanded service offerings.
Overall, revenue in the N.E.T. Federal channel decreased 17.9% over fiscal 1996
and decreased as a percentage of total revenue from 36.4% in fiscal 1996 to
31.2% in fiscal 1997. Total international revenue increased 23.6% over the prior
year, and in fiscal 1997, it represented 35.0% of the Company's total revenue as
compared to 27.1% in fiscal 1996.
Gross Margin Total gross margin as a percentage of total revenue decreased to
50.0% in fiscal 1997 from 50.5% in fiscal 1996. Product gross margin decreased
to 58.2% in fiscal 1997 from 59.9% in fiscal 1996. This decrease primarily
resulted from a less favorable sales channel mix, most notably in the shift from
domestic to international product sales, which typically have lower margins due
to a significantly higher percentage sold through distributors. Product margins
also decreased in part due to a shift in product mix toward lower gross margin
products.
The gross margin for service and other revenue increased to 33.9% in fiscal 1997
from 31.6% in fiscal 1996 as a result of a decreased percentage of systems
integration services provided under a U.S. government contract. In addition, the
gross margin on these systems integration services increased to 19.8% in fiscal
1997 from 14.8% in fiscal 1996 due to changes in the mix of OEM products and
services provided.
Operating Expenses Operating expenses increased $6.2 million in fiscal 1997 and
increased as a percentage of total revenue to 40.0% in fiscal 1997 from 36.5% in
fiscal 1996.
<PAGE>
============ ----------------
20. MANAGEMENT'S DISCUSSION
----------------
AND ANALYSIS
============ ----------------
Sales and marketing expense increased $2.0 million in fiscal 1997 due to the
addition of personnel to support continued expansion of the sales and marketing
infrastructure, increased travel expenses and increased advertising and
promotional expenses, offset partially by decreased sales commissions. As a
percentage of total revenue, sales and marketing expense increased to 23.8% in
fiscal 1997 from 22.2% in fiscal 1996, primarily due to the lower sales volume.
Research and development expense increased $4.6 million in fiscal 1997 due to an
increase in direct project funding, primarily salary-related expenses, and
purchases of direct materials and hardware and software tools to support product
development. As a result of this increased spending, research and development
expense also increased as a percentage of total revenue to 12.7% in fiscal 1997
from 10.8% in fiscal 1996. In fiscal 1997, $2.8 million of software costs were
capitalized as compared to $1.9 million in fiscal 1996 as more projects reached
technological feasibility in line with planned new product introductions in
fiscal 1997 and 1998.
General and administrative expense decreased $0.4 million year-over-year and
remained flat as a percentage of total revenue at 3.5%.
Non-operating Items Interest income in fiscal 1997 increased slightly from
fiscal 1996 due to higher cash balances, offset partially by lower rates
resulting from investment in tax-free securities. Interest expense, primarily
related to the 7 1/4% convertible subordinated debentures, decreased by over 50%
to $2.3 million for fiscal 1997 as a result of the prior year partial call and
current year repurchases of the Company's convertible debentures. Other expense
remained flat from the prior year at $.5 million.
For the fiscal year ended March 31, 1997, the Company recorded income tax
expense of $12.5 million as compared to $16.9 million for fiscal 1996, at an
effective rate of 35% for both years. See Note 8 to the Consolidated Financial
Statements.
The results for fiscal 1997 included an extraordinary gain of $0.7 million, or
three cents on diluted earnings per share, arising from the repurchase of $7.7
million of convertible subordinated debentures. See Note 6 to the Consolidated
Financial Statements.
BUSINESS ENVIRONMENT AND RISK FACTORS
All statements in this Annual Report that are not historical are forward-looking
statements that involve risks and uncertainties including, but not limited to,
the risks and uncertainties detailed in the Company's filings with the
Securities and Exchange Commission. Actual results may differ materially from
those projected.
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
<PAGE>
============ ----------------
MANAGEMENT'S DISCUSSION 21.
----------------
AND ANALYSIS
============ ----------------
changes, the Company does not believe that backlog is indicative of future
revenue levels. In addition, because a large portion of the Company's orders
historically have been received and filled in the last month of the quarter,
forecasting sales during a quarter is difficult, and there is a significant risk
of excessive or inadequate inventory if orders do not match forecast.
Furthermore, if large orders do not close when forecasted or if near-term demand
weakens for the products the Company has available to ship, the Company's
operating results for that or subsequent quarters would be adversely affected.
Economic volatility in Asia and Latin America and other parts of the world may
have a significant impact on future performance.
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 planned revenue, 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 orders 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. The Company's Promina and PanaVue products are
targeted at markets that include, and are much broader than, the Company's
traditional Multiservice Bandwidth Manager customers. The Company's ability to
maintain profitability and to achieve revenue growth is dependent on
successfully managing this product transition by migrating existing key
customers to the new products and successfully gaining sales volume from new
customers in the expanded markets. 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 and 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 of products designed by N.E.T. have generally been
outsourced to third parties. Final test and assembly is generally performed at
the Company's Fremont, California, facility. Pursuant to several types of
agreements, the Company also integrates into its products and resells technology
and products designed or manufactured by third parties, and the Company relies
to a significant degree on such third parties for quality control and support of
their products and for order
<PAGE>
============ ----------------
22. MANAGEMENT'S DISCUSSION
----------------
AND ANALYSIS
============ ----------------
fulfillment. Such technology and products are generally available to end users
from sources other than the Company, and are generally sold or licensed by the
Company at gross margins that are lower than products designed and manufactured
by the Company. There can be no assurance that these third-party manufacturers
will perform as expected or that the Company's gross margins on these products
will not be lowered further. Product 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, including
industry consolidation, 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 issues or 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.
The Company established a Year 2000 compliance team in early 1997 to identify
and take reasonable steps to minimize the effect of Year 2000 issues that may
impact the Company's products and business operations. The Company developed its
N.E.T. Products Year 2000 Compliance Program, which is posted on the Company's
Web site (www.net.com). This Compliance Program provides N.E.T. customers and
partners with information on the Year 2000 compliance status of N.E.T. products
and identifies solutions for achieving network system and application compliance
prior to the year 2000. In addition, the Year 2000 compliance team has been and
is evaluating Year 2000 issues relating to the Company's internal systems and
third-party capabilities upon which the Company relies in conducting its
business, including financial systems, manufacturing applications, customer
service and support, desktop applications and infrastructure such as networks,
telecommunications products, banking and financial services, service providers
and security systems. Although the Company has not yet determined whether all of
the foregoing systems and applications are fully Year 2000 compliant, based upon
the information currently available, the Company believes that the costs
associated with the Year 2000 issue, and the consequences of incomplete or
untimely resolution of the Year 2000 issue, will not have a material adverse
effect on its business, operating results or financial condition.
<PAGE>
============ ----------------
MANAGEMENT'S DISCUSSION 23.
----------------
AND ANALYSIS
============ ----------------
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.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had cash, cash equivalents and temporary cash
investments of $161.5 million, as compared to $138.7 million at the end of
fiscal 1997. Cash provided by operations was $53.7 million in fiscal 1998, a
$5.6 million increase over the prior year. This increase was principally due to
a significant decrease in accounts receivable and a large increase in accrued
liabilities, partially offset by a smaller decrease in inventories and lower net
income.
Net cash used for investing activities in fiscal 1998 consisted primarily of
purchases of property and equipment of $30.3 million and additions to software
production costs of $3.2 million. Additionally, net purchases of temporary cash
investments of $2.2 million were made as increased cash generated in the year
was invested.
Net cash provided by financing activities in fiscal 1998 was composed of $4.5
million from the issuance of Common Stock related to the employee stock benefit
plans.
As of March 31, 1998, the Company had available an unsecured $10.0 million line
of credit. Borrowings under this committed borrowing facility are available
through May 1999 and bear interest at the bank's base rate (which approximates
prime). At March 31, 1998, there were no outstanding borrowings under this
facility.
In April 1997, the Company announced a 12-year operating lease agreement
pursuant to which construction began on a new corporate headquarters facility in
Fremont, California. In conjunction with the project management and design and
construction of the new facility, the Company incurred $11.6 million, net of
landlord contributions, in fiscal 1998, most of which has been capitalized. The
Company estimates that approximately $13.0 million will be spent related to this
new facility in the first half of fiscal 1999. Approximately $1.0 million of
this amount is related to the physical move and is expected to be expensed in
the first quarter of fiscal 1999. The Company's old headquarters' lease expires
in October 1998.
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 1999.
<PAGE>
============ ----------------
24. CONSOLIDATED BALANCE
----------------
SHEETS
============ ----------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
MARCH 31, 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 59,512 $ 39,141
Temporary cash investments 101,990 99,581
Accounts receivable, net of allowances of $3,926 in 1998
and $3,910 in 1997 71,714 82,986
Inventories 19,713 22,662
Deferred income taxes 9,836 7,418
Prepaid expenses and other assets 7,254 6,679
-------- --------
Total current assets 270,019 258,467
-------- --------
Property and equipment:
Machinery and equipment 105,128 96,011
Furniture and fixtures 2,881 6,508
Leasehold improvements 2,803 11,885
Construction in progress 14,104 318
-------- --------
124,916 114,722
Less accumulated depreciation and amortization (82,259) (84,713)
-------- --------
Property and equipment, net 42,657 30,009
Software production costs, net 5,491 4,616
Other assets 16,390 8,561
-------- --------
$334,557 $301,653
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $21,890 $23,758
Accrued liabilities 48,239 39,174
-------- --------
Total current liabilities 70,129 62,932
-------- --------
Deferred income taxes 1,954 --
7 1/4% convertible subordinated debentures 25,821 25,821
Stockholders' equity:
Preferred Stock, $.01 par value
Authorized: 5,000,000 shares
Outstanding: none -- --
Common Stock, $.01 par value
Authorized: 50,000,000 shares
Outstanding: 21,454,000 shares in 1998 and 21,049,000
shares in 1997 215 210
Additional paid-in capital 176,452 172,038
Treasury stock (1,430) (2,545)
Net unrealized gain (loss) on available-for-sale securities 3,759 (56)
Cumulative translation adjustment (436) (490)
Retained earnings 58,093 43,743
-------- --------
Total stockholders' equity 236,653 212,900
-------- --------
$334,557 $301,653
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
============ ----------------
CONSOLIDATED STATEMENTS 25.
----------------
OF INCOME
============ ----------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Product revenue $200,199 $214,862 $226,070
Service and other revenue 108,522 109,576 112,829
-------- -------- --------
Total revenue 308,721 324,438 338,899
-------- -------- --------
Cost of sales:
Cost of product revenue 78,468 89,746 90,588
Cost of service and other revenue 67,317 72,397 77,150
-------- -------- --------
Total cost of sales 145,785 162,143 167,738
-------- -------- --------
Gross Margin 162,936 162,295 171,161
-------- -------- --------
Operating expenses:
Sales and marketing 87,248 77,382 75,432
Research and development 43,442 41,054 36,437
General and administrative 11,815 11,494 11,884
Facility relocation costs 3,289 -- --
-------- -------- --------
Total operating expenses 145,794 129,930 123,753
-------- -------- --------
Income from operations 17,142 32,365 47,408
Interest income 6,726 6,284 6,044
Interest expense (1,968) (2,310) (4,713)
Other (797) (522) (508)
-------- -------- --------
Income before income taxes 21,103 35,817 48,231
Income tax provision 6,753 12,515 16,881
-------- -------- --------
Income before extraordinary gain 14,350 23,302 31,350
Extraordinary gain on repurchase of debentures -- 690 --
-------- -------- --------
Net income $ 14,350 $ 23,992 $ 31,350
-------- -------- --------
Basic earnings per share:
Income before extraordinary gain $ .68 $ 1.12 $ 1.58
-------- -------- --------
Net income $ .68 $ 1.15 $ 1.58
-------- -------- --------
Diluted earnings per share:
Income before extraordinary gain $ .65 $ 1.08 $ 1.50
-------- -------- --------
Net income $ .65 $ 1.11 $ 1.50
-------- -------- --------
Shares used in per share computation:
Basic 21,246 20,888 19,825
-------- -------- --------
Diluted 22,034 21,637 20,877
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
============ ----------------
26. CONSOLIDATED STATEMENTS
----------------
OF CASH FLOWS
============ ----------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
YEARS ENDED MARCH 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents at beginning of year $ 39,141 $ 52,319 $ 33,886
--------- --------- ---------
Net cash flows from operating activities:
Net income 14,350 23,992 31,350
Adjustments required to reconcile net income
to cash provided by operations:
Extraordinary credit--gain on repurchase
of debentures -- (690) --
Facility relocation costs 3,289 -- --
Depreciation and amortization 19,206 17,429 15,481
Restricted stock compensation 401 379 368
Deferred income taxes (2,418) 4,412 (1,930)
Changes in assets and liabilities:
Accounts receivable 11,128 (5,816) (20,839)
Inventories 2,953 9,156 506
Prepaid expenses and other assets (594) (927) (1,185)
Accounts payable (1,841) 2,158 3,356
Accrued liabilities 7,193 (2,005) 13,099
--------- --------- ---------
Net cash provided by operations 53,667 48,088 40,206
--------- --------- ---------
Cash flows from investing activities:
Purchases of temporary cash investments (84,526) (159,095) (85,960)
Proceeds from maturities of temporary
cash investments 82,304 119,362 78,800
Purchases of property and equipment (30,322) (13,910) (17,165)
Additions to software production costs (3,160) (2,792) (1,875)
Other (2,217) (316) 955
--------- --------- ---------
Net cash used for investing activities (37,921) (56,751) (25,245)
--------- --------- ---------
Cash flows from financing activities:
Sale of Common Stock 4,485 4,617 12,684
Repurchase of convertible subordinated
debentures -- (6,419) (10,117)
Purchase of Common Stock -- (2,722) --
--------- --------- ---------
Net cash provided by (used for)
financing activities 4,485 (4,524) 2,567
--------- --------- ---------
Effect of exchange rate changes on cash 140 9 905
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents 20,371 (13,178) 18,433
--------- --------- ---------
Cash and cash equivalents at end of year $ 59,512 $ 39,141 $ 52,319
--------- --------- ---------
Other cash flow information:
Cash paid during the year for:
Interest $ 1,932 $ 2,477 $ 4,136
Income taxes $ 5,989 $ 4,050 $ 5,496
Non-cash investing and financing activities:
Net unrealized gain (loss) on
available-for-sale securities $ 3,815 $ (44) $ (2)
Income tax benefit arising from employee
stock option plans $ 648 $ 1,807 $ 12,972
Conversion of convertible subordinated
debentures into Common Stock
(including accrued interest and debenture
offering costs) $ -- $ -- $ 25,532
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
============ --------------------
CONSOLIDATED STATEMENTS OF 27.
--------------------
STOCKHOLDERS' EQUITY
============ --------------------
<TABLE>
<CAPTION>
NET UNREALIZED
COMMON GAIN (LOSS) ON
STOCK ADDITIONAL AVAILABLE- CUMULATIVE RETAINED
TO BE COMMON PAID-IN TREASURY FOR-SALE TRANSLATION EARNINGS
(DOLLARS IN THOUSANDS) ISSUED STOCK CAPITAL STOCK SECURITIES ADJUSTMENT (DEFICIT)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1995 $ 32 $ 187 $114,445 $ (599) $ (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) -- --
Cumulative translation adjustment -- -- -- -- -- (137) --
Net income -- -- -- -- -- -- 31,350
------ -------- -------- -------- -------- -------- --------
Balances, March 31, 1996 -- 208 166,013 (599) (12) (931) 19,751
------ -------- -------- -------- -------- -------- --------
Sale of 303,000 shares of
Common Stock under employee
stock benefit plans -- 3 3,591 -- -- -- --
Purchase of 205,000 shares of
Common Stock -- (2) -- (2,720) -- -- --
Reissuance of 113,000 shares of
treasury stock under stock plans -- 1 627 774 -- -- --
Income tax benefit arising from
employee stock option plans -- -- 1,807 -- -- -- --
Net unrealized loss on securities -- -- -- -- (44) -- --
Cumulative translation adjustment -- -- -- -- -- 441 --
Net income -- -- -- -- -- -- 23,992
------ -------- -------- -------- -------- -------- --------
Balances, March 31, 1997 -- 210 172,038 (2,545) (56) (490) 43,743
------ -------- -------- -------- -------- -------- --------
Sale of 242,000 shares of
Common Stock under employee
stock benefit plans -- 3 2,815 -- -- -- --
Reissuance of 163,000 shares of
treasury stock under stock plans -- 2 951 1,115 -- -- --
Income tax benefit arising from
employee stock option plans -- -- 648 -- -- -- --
Net unrealized gain on securities -- -- -- -- 3,815 -- --
Cumulative translation adjustment -- -- -- -- -- 54 --
Net income -- -- -- -- -- -- 14,350
------ -------- -------- -------- -------- -------- --------
Balances, March 31, 1998 $ -- $ 215 $176,452 $ (1,430) $ 3,759 $ (436) $ 58,093
------ -------- -------- -------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
============ --------------------
28. NOTES TO CONSOLIDATED
--------------------
FINANCIAL STATEMENTS
============ --------------------
one
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business Network Equipment Technologies, Inc. ("N.E.T." or "the
Company"), headquartered in Fremont, California, is a leading designer,
developer, manufacturer and supplier of multiservice wide area networks and
associated services used by enterprises, government organizations 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 composed 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) 1998 1997
- --------------------------------------------------------------------------------
Purchased components $4,340 $ 6,710
Work-in-process 13,371 13,675
Finished goods 2,002 2,277
------- -------
$19,713 $22,662
======= =======
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.
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 $3.2 million, $2.8
million and $1.9 million in fiscal 1998, 1997 and 1996, respectively. Software
production costs are amortized over the lives of the products, generally three
years. Amortization amounted to $2.3 million, $2.3 million and $2.4 million in
fiscal 1998, 1997 and 1996, respectively. Accumulated amortization was $8.3
million and $6.0 million at March 31, 1998 and 1997, respectively.
<PAGE>
============ --------------------
NOTES TO CONSOLIDATED 29.
--------------------
FINANCIAL STATEMENTS
============ --------------------
Foreign Currency Translation The functional currency for the Company's 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 Income. 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, 1998, the Company had outstanding foreign exchange contracts
of $5.1 million. The contracts require the Company to exchange foreign
currencies for U.S. dollars and generally mature in one month.
Stock-Based Compensation The Company accounts for employee stock-based
compensation using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and, accordingly, does not generally recognize compensation cost in
connection with its stock option and purchase plans. A summary of the pro forma
effects to reported net income and earnings per share as if the Company had
elected to recognize compensation cost based on the fair value of the options
granted as prescribed by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123) has been disclosed in Note
7 to the Consolidated Financial Statements.
Earnings Per Share (EPS) Basic earnings per share has been computed based upon
the weighted average number of common shares outstanding for the periods
presented. For diluted earnings per share, shares used in the per share
computation include weighted average common and potentially dilutive shares
outstanding. Potentially dilutive shares consist of shares issuable upon the
assumed exercise of dilutive stock options. Basic and diluted EPS for the years
ended March 31 are calculated as follows (in thousands, except per share data):
1998 1997 1996
- --------------------------------------------------------------------------------
Basic EPS:
Income before extraordinary gain $14,350 $23,302 $31,350
Weighted average shares outstanding 21,246 20,888 19,825
Basic EPS $ .68 $ 1.12 $ 1.58
------- ------- -------
Diluted EPS:
Income before extraordinary gain $14,350 $23,302 $31,350
Weighted average shares outstanding 21,246 20,888 19,825
Dilutive effect of options 788 749 1,052
------- ------- -------
Total 22,034 21,637 20,877
Diluted EPS $ .65 $ 1.08 $ 1.50
------- ------- -------
<PAGE>
============ --------------------
30. NOTES TO CONSOLIDATED
--------------------
FINANCIAL STATEMENTS
============ --------------------
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 materially 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
typically does not require collateral or other security to support accounts
receivable. The Company maintains allowances for estimated credit losses.
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, results of
operations or cash flows: advances and trends in new technologies; competitive
pressures in the form of industry consolidation; 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 issues or factors; risks associated with changes in domestic
and international economic and/or political conditions or regulations;
availability of necessary components; performance of third-party suppliers and
vendors; Year 2000 compliance issues; and the Company's ability to attract and
retain employees necessary to support its growth.
Recently Issued Accounting Standards In June 1997, the Financial Accounting
Standards Board adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," which establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements; and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes annual and
interim reporting standards for a company's business segments and related
disclosures about its products, services, geographic areas, and major customers.
The Company has not yet identified its SFAS 131 reporting segments. Adoption of
these statements will not impact the Company's consolidated financial position,
results of operations or cash flows. Both statements are effective for the
Company beginning April 1, 1998, with earlier application permitted.
Facility Relocation Costs In April 1997, the Company entered into a 12-year
operating lease agreement for the construction of a new corporate headquarters
facility. The new headquarters is located in Fremont, California, which is
approximately 12 miles from its previous site in Redwood City. The new
facilities were built to the Company's specification and will serve as home to
its marketing, engineering, manufacturing and administrative staff. Related to
the project management and design and construction of this new facility, the
Company incurred $11.6 million, net of landlord contributions, in fiscal 1998,
most of which has been capitalized. The Company expects to complete the move to
its new headquarters in the first quarter of fiscal 1999. In the fourth quarter
of fiscal
<PAGE>
============ --------------------
NOTES TO CONSOLIDATED 31.
--------------------
FINANCIAL STATEMENTS
============ --------------------
1998, the Company recorded, in operating expense, a $3.3 million charge
primarily related to the remaining lease commitment on the Redwood City facility
for the period when the facility will be vacant. The Company estimates that
approximately $13.0 million will be spent related to this new facility in fiscal
1999, of which approximately $1.0 million will be related to the move and will
be expensed as incurred.
Reclassification Certain fiscal 1997 and 1996 amounts have been reclassified to
conform with fiscal 1998 presentation.
two
Temporary Cash and Other 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>
1998
----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and
municipalities $ 60,891 $141 $(10) $ 61,022
Corporate notes and bonds 20,354 43 (13) 20,384
Other debt securities 14,242 39 (9) 14,272
Foreign debt issues 6,314 1 (3) 6,312
-------- ---- ---- --------
$101,801 $224 $(35) $101,990
======== ==== ==== ========
<CAPTION>
1997
----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and
municipalities $ 50,671 $ 80 $(86) $ 50,665
Corporate notes and bonds 21,876 -- (35) 21,841
Other debt securities 13,996 5 (35) 13,966
Foreign debt issues 5,832 -- (14) 5,818
Commercial paper and
banker's acceptances 5,291 -- -- 5,291
Certificates of deposit 2,000 -- -- 2,000
-------- ---- ---- --------
$ 99,666 $ 85 $(170) $ 99,581
======== ==== ==== ========
</TABLE>
<PAGE>
============ --------------------
32. NOTES TO CONSOLIDATED
--------------------
FINANCIAL STATEMENTS
============ --------------------
At March 31, 1998, the Company held unregistered equity securities in a publicly
traded company which are subject to certain holding restrictions. The Company
may have piggyback registration rights for up to 33% of the shares as early as
September 1998, based upon certain events. Alternatively, demand registration
rights may be exercised at any time after August 1999. The equity securities are
recorded at an estimated fair market value of $7.6 million (cost of $2.0
million), and are classified in Other Assets in the Consolidated Balance Sheet.
At March 31, 1998, the estimated market value of available-for-sale securities
with maturities less than one year was $48.2 million, with maturities between
one year and five years was $49.7 million, and with maturities between five
years and ten years was $4.1 million. Any gains or losses on sales of securities
are computed on a specific identification basis. There were no material realized
gains or losses from the sale of securities in fiscal years 1998, 1997 and 1996.
three
ACCRUED LIABILITIES
Accrued liabilities at March 31 were as follows:
(DOLLARS IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
Accrued compensation $18,581 $16,211
Income taxes payable 10,021 4,855
Unearned income 6,442 6,464
Other 13,195 11,644
------- -------
$48,239 $39,174
======= =======
four
FINANCING ARRANGEMENTS
The Company maintains an unsecured $10.0 million line of credit. Borrowings
under this committed facility are available through May 1999 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, 1998. There were no outstanding borrowings under the line of credit
agreement at March 31, 1998.
<PAGE>
============ --------------------
NOTES TO CONSOLIDATED 33.
--------------------
FINANCIAL STATEMENTS
============ --------------------
five
LEASE COMMITMENTS
The Company leases its facilities under operating leases. The minimum future
lease commitments under these leases as of March 31, 1998, were as follows:
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
1999 $ 9,204
2000 7,268
2001 7,085
2002 6,743
2003 5,950
After 2003 38,565
-------
$74,815
=======
Rental expense under operating leases was $7.9 million, $7.7 million and $7.2
million for fiscal years 1998, 1997 and 1996, respectively. In April 1997, the
Company entered into a 12-year operating lease agreement for a new corporate
headquarters facility. The existing headquarters' lease expires in October 1998
and the Company expects to complete the move to the new facility in Fremont,
California, in the first quarter of fiscal 1999. Lease commitments under both
agreements have been included in the above amounts.
six
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. 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 100.73% of face value on May 15, 1998,
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 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 fiscal 1991, the Company repurchased debentures in the face amount of $6.4
million. In the third quarter of fiscal 1996, the Company completed a partial
call of its outstanding debentures, reducing debenture principal by an
additional $35.1 million, of which $9.8 million was redeemed and an additional
$25.3 million was converted into shares of Common Stock at a conversion price of
$31.50 per share.
In fiscal 1997, the Company repurchased debentures in the face amount of $7.7
million at a cost of $6.4 million, plus accrued interest. Accordingly, the
Company recorded a $690 thousand gain, net of taxes ($0.03 per diluted share),
as an extraordinary credit in the Consolidated Statement of Income.
<PAGE>
============ --------------------
NOTES TO CONSOLIDATED 34.
--------------------
FINANCIAL STATEMENTS
============ --------------------
seven
CAPITAL STOCK
Stockholders' Rights Plan 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 $0.01 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.
Preferred Stock 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, 1998, no
preferred shares were outstanding.
Reserved Stock As of March 31, 1998, the Company had reserved shares of its
Common Stock for the following purposes:
RESERVED
- ------------------------------------------------------------------------------
Stock option plans:
Outstanding (at $5.25 to $35.75 per share) 4,696,469
Available for grant 2,418,826
Convertible subordinated debentures 819,714
Employee Stock Purchase Plan 653,206
Employee Stock Purchase Plan 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 lower of the fair market
value of the Common Stock at the beginning of the
<PAGE>
============ --------------------
NOTES TO CONSOLIDATED 35.
--------------------
FINANCIAL STATEMENTS
============ --------------------
offering period or the end of each quarter. During fiscal 1998, 1997 and 1996,
163,000, 224,000 and 142,000 shares were issued under this Plan, at weighted
average prices of $12.64, $13.43 and $21.67 per share, respectively. During
fiscal 1998, a new Employee Stock Purchase Plan was approved which replaces the
existing Plan. The offering period under the new Plan begins May 1, 1998, and
provides for Common Stock purchases every four months under the same terms
previously in effect.
Stock Options and Restricted Stock The Company grants options to purchase shares
of its Common Stock and is authorized to award restricted shares of Common Stock
pursuant to the terms of its 1993 Stock Option Plan and 1997 Stock Option
Program and grants options to purchase shares of its Common Stock pursuant to
the terms of its 1989 U.K. Stock Option Plan (collectively "option plans").
Stock 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 the fair market value at the date of grant. No
restricted stock was awarded in fiscal 1998. Previously issued restricted stock
carries certain restrictions on transferability, which lapse over the vesting
period (generally two to four years). As of March 31, 1998, 239,500 restricted
shares at $.01 per share had been awarded and issued, and the Company had the
right to repurchase 30,250 shares from certain officers and employees at the
original purchase price. Such right expires ratably over the respective vesting
periods. Related compensation expense totaled $401 thousand, $379 thousand and
$368 thousand for the years ended March 31, 1998, 1997 and 1996, respectively.
Activity in the Company's option plans is summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE SHARES
SHARES EXERCISE PRICE EXERCISABLE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at March 31, 1995 3,012,462 $ 9.25 1,628,899
--------- ------ ---------
Granted 996,066 26.19
Exercised (1,114,819) 8.63
Cancelled (259,021) 14.57
--------- ------ ---------
Options outstanding at March 31, 1996 2,634,688 15.39 1,080,002
--------- ------ ---------
Granted 3,514,470 18.15
Exercised (183,189) 8.88
Cancelled (2,388,722) 25.30
--------- ------ ---------
Options outstanding at March 31, 1997 3,577,247 12.00 1,149,338
--------- ------ ---------
Granted 1,835,059 13.87
Exercised (242,185) 9.55
Cancelled (473,652) 13.46
--------- ------ ---------
Options outstanding at March 31, 1998 4,696,469 $12.68 1,861,651
--------- ------ ---------
</TABLE>
<PAGE>
============ --------------------
36. NOTES TO CONSOLIDATED
--------------------
FINANCIAL STATEMENTS
============ --------------------
The following table summarizes information concerning options outstanding and
exercisable as of March 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL LIFE AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.25 - $10.63 1,027,607 4.89 $ 8.31 1,020,352 $ 8.31
$10.75 - $11.63 950,091 8.79 $11.62 10,021 $10.75
$12.13 - $12.38 1,444,208 8.22 $12.37 588,265 $12.36
$12.75 - $18.00 950,706 8.94 $15.65 163,472 $15.26
$18.44 - $35.75 323,857 8.67 $22.41 79,541 $29.21
- --------------- --------- ---- ------ --------- -------
$ 5.25 - $35.75 4,696,469 7.78 $12.68 1,861,651 $11.11
- --------------- --------- ---- ------ --------- -------
</TABLE>
During the second quarter of fiscal 1997, the Company approved a cancellation
and regrant program for outstanding options under the Company's stock option
plans. Under the program, holders of outstanding options with exercise prices in
excess of $12.38 per share were given the choice of retaining these options or
of obtaining in substitution repriced options for the same number of shares. The
repriced options are exercisable at a price of $12.38 per share, the fair market
value of the Common Stock on the regrant date. The repriced options have a
vesting schedule identical to the cancelled options, but beginning anew on the
date of regrant.
Stock-Based Compensation As discussed in Note 1, the Company continues to
account for its stock-based compensation using the intrinsic value method in
accordance with APB 25 and, accordingly, does not recognize compensation expense
for employee stock plans as they are granted at fair market value. However,
generally accepted accounting principles require disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
prescribed by SFAS 123. Under SFAS 123, the fair value of stock-based awards is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock-based awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. As the Company's employee stock-based
compensation plans have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, the Company believes that the
existing option valuation models do not necessarily provide a reliable measure
of the fair value of awards from those plans.
The fair value of the options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 1998, 1997 and 1996, respectively: risk-free rates of
6.1%, 6.3% and 6.1%; stock price volatility factors of 50%, 52% and 52%;
expected option lives of three months, six months and six months following
vesting; and no dividends during the expected term. The Company's calculations
are based on a multiple option
<PAGE>
============ --------------------
NOTES TO CONSOLIDATED 37.
--------------------
FINANCIAL STATEMENTS
============ --------------------
valuation approach and recognition of forfeitures as they occur. The weighted
average fair value of options granted during fiscal 1998, 1997 and 1996 was
approximately $5.08, $6.49 and $11.11, respectively. The fair value of the
employee purchase rights under the Employee Stock Purchase Plan was estimated
using the same model, but with the following weighted average assumptions for
fiscal 1998, 1997 and 1996, respectively: risk-free rate of 5.5%; stock price
volatility factor of 48%; and expected option life of six months. The weighted
average fair value of employee purchase rights granted in fiscal 1998, 1997 and
1996 was approximately $4.76, $6.16 and $8.73, respectively.
If the computed fair values of the fiscal 1998, 1997 and 1996 awards had been
amortized to expense, pro forma net income and earnings per share would have
been $8.0 million ($.36 per diluted share), $16.9 million ($.78 per diluted
share) and $26.7 million ($1.28 per diluted share) in fiscal 1998, 1997 and
1996, respectively. The impact of outstanding non-vested stock options granted
prior to fiscal 1996 has been excluded from the pro forma calculations; as such,
the pro forma adjustments above are not representative of such future
adjustments, which will include expense for more than three years of awards.
eight
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 before income taxes and the provision (benefit) for income taxes consists
of the following:
(DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
Income before income taxes:
Domestic $ 16,135 $ 31,360 $ 46,674
Foreign 4,968 4,457 1,557
-------- -------- --------
$ 21,103 $ 35,817 $ 48,231
======== ======== ========
Provision for income taxes:
Current:
Federal $ 6,310 $ 5,218 $ 16,595
State 1,760 1,238 2,216
Foreign 1,101 1,647 --
-------- -------- --------
9,171 8,103 18,811
-------- -------- --------
Deferred:
Federal (1,591) 4,070 (1,643)
State (827) 342 (287)
-------- -------- --------
(2,418) 4,412 (1,930)
-------- -------- --------
$ 6,753 $ 12,515 $ 16,881
======== ======== ========
<PAGE>
============ --------------------
38. NOTES TO CONSOLIDATED
--------------------
FINANCIAL STATEMENTS
============ --------------------
The provision for income taxes reconciles to the amount computed by applying the
statutory U.S. federal rate of 35% to income before income taxes as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax provision $7,386 $12,536 $16,881
State taxes net of federal income tax benefit 823 1,397 1,929
Change in valuation allowance (1,044) (115) (3,504)
Foreign sales corporation benefit (913) (1,440) --
Other 501 137 1,575
------ ------- -------
Provision for income taxes $6,753 $12,515 $16,881
====== ======= =======
</TABLE>
Deferred tax assets (liabilities) are composed of the following at March 31:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Reserves not currently deductible for tax purposes $ 8,079 $ 7,770
Depreciation (591) (280)
Credit carryforwards 6,240 3,500
Loss carryforwards -- 1,044
------- --------
Gross deferred tax assets 13,728 12,034
Gross deferred tax liabilities--
Capitalized software production costs (3,892) (3,572)
Unrealized gain on securities (1,954) --
Valuation allowance -- (1,044)
------- --------
Net deferred tax assets $ 7,882 $ 7,418
======= ========
</TABLE>
The net deferred tax assets shown above are presented in the Consolidated
Balance Sheet as current deferred tax assets of $9.8 million and noncurrent
deferred tax liabilities of $1.9 million.
The valuation allowance decreased $1.0 million in fiscal 1998 due to the
realization of the benefit of certain tax loss carryforwards. No valuation
allowance remains at March 31, 1998.
As of March 31, 1998, the Company has available federal tax credit carryforwards
of $1.0 million expiring in year 2011, and alternative minimum tax credit
carryforwards of $2.7 million available indefinitely. Also available at March
31, 1998, are state tax credit carryforwards of $2.5 million, also available
indefinitely.
nine
SIGNIFICANT CUSTOMERS
Sales to the U.S. government and its agencies amounted to 33%, 29% and 34% of
revenue for fiscal years 1998, 1997 and 1996, respectively. These amounts
include sales, which amounted to 29%, 27% and 30% of revenue for fiscal years
1998, 1997 and 1996, respectively, under contracts with the
<PAGE>
============ --------------------
NOTES TO CONSOLIDATED 39.
--------------------
FINANCIAL STATEMENTS
============ --------------------
Department of Defense under which various government agencies can order
products, installation and service from the Company. The Company had no other
customers that accounted for more than 10% of revenue during these same periods.
ten
SEGMENT INFORMATION
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended March 31, 1998
Sales to unaffiliated customers $244,762 $ 63,959 $ -- $308,721
Sales to foreign affiliates 32,754 4,063 (36,817) --
-------- -------- -------- --------
Total revenue $277,516 $ 68,022 $(36,817) $308,721
-------- -------- -------- --------
Operating income $ 11,561 $ 5,218 $ 363 $ 17,142
-------- -------- -------- --------
Identifiable assets at year end $328,509 $ 24,661 $(18,613) $334,557
-------- -------- -------- --------
Year Ended March 31, 1997
Sales to unaffiliated customers $265,109 $ 59,329 $ -- $324,438
Sales to foreign affiliates 28,294 4,764 (33,058) --
-------- -------- -------- --------
Total revenue $293,403 $ 64,093 $(33,058) $324,438
-------- -------- -------- --------
Operating income $ 27,616 $ 4,921 $ (172) $ 32,365
-------- -------- -------- --------
Identifiable assets at year end $299,686 $ 26,180 $(24,213) $301,653
-------- -------- -------- --------
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
-------- -------- -------- --------
</TABLE>
Sales to foreign affiliates represent products that are transferred on a basis
intended to approximate arms-length prices as negotiated by unrelated entities.
Domestic sales to unaffiliated customers include $51.0 million, $54.3 million
and $39.9 million of export sales in fiscal years 1998, 1997 and 1996,
respectively.
<PAGE>
============ --------------------
40. NOTES TO CONSOLIDATED
--------------------
FINANCIAL STATEMENTS
============ --------------------
eleven
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 $10,000 per year). Company contributions are
discretionary and were $961 thousand, $860 thousand and $1.0 million for fiscal
1998, 1997 and 1996, respectively.
twelve
FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE
The estimated fair values of the Company's financial instruments at March 31
were as follows:
1998 1997
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 59,512 $ 59,512 $ 39,141 $ 39,141
Temporary cash investments $101,990 $101,990 $ 99,581 $ 99,581
Equity securities $ 7,582 $ 7,582 $ -- $ --
Liabilities
Foreign exchange contracts $ 5,097 $ 4,984 $ 2,882 $ 2,898
Convertible subordinated
debentures $ 25,821 $ 24,530 $ 25,821 $ 22,464
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, equity securities, foreign exchange contracts and
convertible subordinated debentures--fair values are based on quoted market
prices.
<PAGE>
============ --------------------
INDEPENDENT AUDITORS' 41.
--------------------
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, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
April 15, 1998
<PAGE>
============ --------------------
42. 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
N.E.T.'s Common Stock is traded on the New York Stock Exchange under the symbol
NWK. The following table sets forth, for the quarterly periods indicated, the
high and low sale prices:
FISCAL 1998 HIGH LOW
- ------------------------------------------------------------------------------
First quarter $18.63 $11.25
Second quarter 22.38 17.13
Third quarter 20.19 12.75
Fourth quarter 16.88 11.63
FISCAL 1997 HIGH LOW
- ------------------------------------------------------------------------------
First quarter $31.63 $19.38
Second quarter 21.75 11.13
Third quarter 16.38 13.00
Fourth quarter 20.88 13.13
In addition, the Company's 7 1/4% convertible subordinated debentures trade in
the over-the-counter market.
<PAGE>
============ --------------------
43. CORPORATE DIRECTORY AND
--------------------
INFORMATION
============ --------------------
CORPORATE DIRECTORY CORPORATE INFORMATION
Corporate Officers Annual Meeting
Joseph J. Francesconi The annual meeting of
President and Chief Executive Officer stockholders will be held at
10:00 a.m. on August 11, 1998,
Roger A. Barney at the Company's headquarters in
Vice President, Fremont, California.
Human Resources and Corporate Services
Investor Relations
James B. De Golia
Vice President, General Counsel N.E.T. welcomes inquiries from
and Assistant Secretary its stockholders and other
interested investors. To receive
Samuel H. Ezekiel the Company's Annual Report,
Senior Vice President, Marketing Form 10-K, quarterly financial
results, and other corporate
Craig M. Gentner information, please dial our
Senior Vice President, Chief Financial hotline at 888.828.8080, or
Officer and Corporate Secretary write to Investor Relations at
N.E.T., 6500 Paseo Padre
David P. Owen Parkway, Fremont, CA 94555, or
Vice President, visit our World Wide Web site.
Strategy and Technology
N.E.T. on the Internet
Raymond E. Peverell
Senior Vice President, Sales and Support N.E.T.'s home page on the World
Wide Web contains background on
G. Michael Schumacher the Company and its products,
Senior Vice President, financials, and other useful
Product Operations information. Our Web site is
located at http://www.net.com.
Charles S. Shiverick
Vice President, Transfer Agent
Information Services and Reengineering
First National Bank of Boston
Directors Boston, Massachusetts
Dixon R. Doll Independent Auditors
Managing General Partner,
Doll Capital Management Deloitte & Touche LLP
San Jose, California
James K. Dutton
Director, Caere Corporation and ECCS,Inc.
IDNX and the N.E.T. logo are
Joseph J. Francesconi registered trademarks, and
President and Chief Executive Officer, N.E.T. FrameXpress, N.E.T., PanaVue,
PrimeSwitch, PrimeVoice,
Walter J. Gill Promina, SourcePoint, and
Vice President and Chief Technology SwiftCell are trademarks of
Officer (retired), N.E.T. Network Equipment Technologies,
Inc.
George M. Scalise
President, Semiconductor Industry Association All other trademarks are the
sole properties of their
Hans A. Wolf respective companies.
Chairman of the Board, N.E.T.
Vice Chairman of the Board (retired), (C)1998 Network Equipment
Syntex Corporation Technologies, Inc. All rights
reserved.
Printed in the U.S.A.
LIT122-1998-20K
<PAGE>
NET [LOGO]
6500 Paseo Padre Parkway
Fremont, CA
94555 U.S.A
tel 510.713.7300
fax 510.574.4000
EXHIBIT 21.1
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Wholly-Owned Subsidiaries of Registrant
as of June 24, 1998
<TABLE>
<S> <C>
N.E.T. APLA, Inc................................. (State of Incorporation: Delaware)
N.E.T. China, Inc................................ (State of Incorporation: Delaware)
N.E.T. Credit Corporation........................ (State of Incorporation: California)
N.E.T. Europe Ltd................................ (Incorporated Under the Laws of England)
N.E.T. Europe S.A................................ (Incorporated Under the Laws of France)
N.E.T. Federal, Inc.............................. (State of Incorporation: Delaware)
N.E.T. International, Inc........................ (Incorporated Under the Laws of Barbados)
N.E.T. Japan, Inc................................ (State of Incorporation: Delaware)
Network Equipment Technologies Europe GmbH....... (Incorporated Under the Laws of Germany)
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-33013, No. 33-33063, No. 33-65157, No. 33-68860 and No. 333-49837 on Forms
S-8 and Registration Statement No. 33-45815 on Form S-3 of Network Equipment
Technologies, Inc. of our reports dated April 15, 1998, appearing and
incorporated by reference in this Annual Report on Form 10-K of Network
Equipment Technologies, Inc. for the year ended March 31, 1998.
DELOITTE & TOUCHE LLP
San Jose, California
June 24, 1998
