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, 1999
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, 1999 was $222,579,108.
The number of shares outstanding of the Common Stock, $0.01 par value, on
May 30, 1999 was 21,648,711.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant's Annual Report to Stockholders for the fiscal year ended
March 31, 1999 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 10, 1999 is
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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PART I
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 1,200 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 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
service providers to provide a wide range of competitive service offerings such
as native frame relay and Asynchronous Transfer Mode ("ATM") services and
enterprise customers to access those services or build their own networks.
The Company operates in one industry segment: the design, development,
manufacture and sale of multiservice WANs and associated services used by
enterprise service providers and government organizations worldwide. For further
information, please see Note Eleven in the "Notes to Consolidated Financial
Statements" in the Company's 1999 Annual Report ("Annual Report") filed as
Exhibit 13 to this Report, which information is incorporated herein by
reference.
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
The networking industry continues its rapid growth, particularly in North
America and Europe. In comparison to growth in these two regions, growth in
other markets, for example Asia, South America and Eastern Europe, has been
slowed by economic constraints. Industry growth is at both the local and
national levels as well as 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.
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Deregulation and Liberalization
In the United States (the "U.S."), 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 the 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 U.S. In other markets around the world, similar developments are under way
allowing increased competition and fueling market growth albeit not at the rate
seen in the U.S. and Europe.
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, if they require significant
new infrastructure development, the liberalization process attracts the
necessary capital investment. More established market segments such as basic
voice services, have historically tended to be highly regulated and dominated by
monopolistic or government-controlled service providers, usually Post Telephone
and Telegraph ("PTT") organizations. In these market segments, 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 service providers 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.
Growth of Networking and Convergence
In the U.S., major new networks are being deployed by established service
providers at the national, state and city level which, along with competition
from new service providers such as Internet service providers, competitive local
carriers, new long distance suppliers, 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 based on Internet Protocol
("IP") technology. In the U.S. and other developed voice markets, the
deregulation trend mentioned above has resulted in significantly greater
competition, merger activity, service provider diversification, technological
and service innovation, and more. However, in many emerging countries, 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 leased
services via mobile or other technologies.
International traffic has traditionally been an area of high cost to
consumers versus prices for local or long distance services. Liberalization has
led to the emergence of service providers 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 U.S., a major trend is the growth of data networking
and its anticipated convergence with established voice networking. Convergence
brings together voice, data and video onto a single network using IP. Data
networking services have grown from a fraction of the overall communications
market to the point where they are generally expected to equal and then
substantially exceed the voice 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 IP-based solutions
for internal communications (for example, employee-to-employee) within
a particular business;
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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 single
network that can be apportioned securely between different companies;
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 so.
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 service providers and enterprises migrate to this next generation of WANs,
principally based upon IP overlaid on a packet network fabric such as ATM.
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 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
service provider transmission facilities or services. In WANs, the center, or
core, is the high-capacity backbone or transmission infrastructure developed and
maintained by a network service provider. This is typically based on high-speed,
high-capacity links built on switches characterized by high capacity, high
reliability and other considerations. Beyond and around the core is an edge
layer that defines the area at the boundary between a service provider and its
media used to connect to enterprise customers or other user access. These two
access areas on the service provider and enterprise edge offer product
opportunities that help to manage traffic, service levels, concentration, and
the support of traffic from multiple interfaces. Products in this space may be
located at the service provider or deployed at the enterprise. 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. These
products allow access from the enterprise core to the service provider edge.
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) service providers, (ii) enterprises such as financial
institutions, manufacturers, utilities and retailers, and (iii) governmental
agencies.
Service Providers
Service providers 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.
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N.E.T. provides a range of solutions designed to meet service provider
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 service providers, International Simple
Resellers ("ISRs"), callback service providers, Internet Service Providers
("ISPs"), cellular and wireless service providers, and more. Applications that
can be enabled by N.E.T. service provider 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. 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
and skilled employee availability.
N.E.T.'s enterprise strategy is to provide an integrated range of solutions
and alternatives with which to address such challenges.
Governments
N.E.T.'s strategy includes addressing the needs of government agencies with
a range of reliable 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
service providers, 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. The major
product groups in the Company's range of solutions now include:
o multiservice access platforms providing solutions designed to optimize
use of packet-based networks such as frame relay, IP or ATM leased
lines and other services, and incorporate a range of integrated
products for switching, LAN internetworking, voice compression and
other options;
o broadband switches providing high bandwidth solutions targeted at
service providers 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; and
o network management systems.
Historically, the great majority of product revenue has been generated by
the Company's IDNX(R) Multiservice Bandwidth Managers. In fiscal years 1997,
1998 and 1999, IDNX accounted for 87%, 79% and 16% of product revenue,
respectively. As of April 30, 1999, the IDNX products have been replaced by
N.E.T.'s Promina(R) product line and PanaVue(TM) network management systems.
N.E.T.'s Promina product line consists of access multiplexers in three major
groups: the Promina 800 Series Multiservice Access Platform, the Promina 2000
and the Promina 4000
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ATM switches. The Promina 800 series was not available for shipment until fiscal
year 1998. Since then, in fiscal years 1998 and 1999, the Promina 800 series
accounted for 10% and 72% of product revenue, respectively.
Introduced in 1997, the Promina 800 Series Multiservice Access Platform
provides integrated, single-platform access to ATM, frame relay, and leased line
services. Support is provided for a wide range of applications including voice,
video, data, fax, modem, LAN, IP, ISDN and frame relay traffic. It is also
designed to be a high availability platform, with distributed intelligence for
mission-critical applications. The Promina 800 series is complemented and
enhanced by a range of optional 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 and supports toll quality voice compression.
o The LAN/WAN Exchange(TM) ("LWX") Edge Router routes and bridges LAN
traffic over the WAN. The LWX incorporates Cisco(R) IOS source code
and offers performance, availability and serviceability features for
remote access internetworking.
o The PrimeVoice ISDN Switching Module supports switched ISDN services.
o The FrameXpress(TM) Switching Module enables provisioning of or access
to standards-based frame relay services.
o The CellXpress(TM) ATM Module provides an efficient industry
standards-based solution with the operating advantages of ATM. The
CellXpress Module consolidates internodal trunk connections to a
service provider network at a single access point with resulting
traffic aggregation.
o Data Port Modules offer optimum support for packet- 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.
The Promina 4000 ATM Switch is a service provider-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 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.
The SONET(TM) Transmission Manager ("STM") is designed for intelligent
broadband networking. The STM platform adds 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 which is 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
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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
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, technology and
third-party licenses will affect future product and service offerings. Moreover,
the Company believes that operating results will depend on successful
development and introduction of new products and enhancements to existing
products and service offerings. There can be no assurance that the Company will
succeed in these efforts. Customers may not accept new or enhanced existing
products and services in quantities and at prices 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 in this document, 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 products offered by the Company and the complexity
and mixed vendor nature of equipment used in WANs, it is possible that these
development efforts may not be successful or that customers may not accept the
products or services developed. 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.
Restructuring
In March 1999, the Company instituted a worldwide restructuring plan to
align its operations with its new line of business operating model discussed in
the "Marketing, Distribution and Customers" section below and to bring expenses
in line with projected revenue. The Company closed several offices and reduced
its work force by approximately 10%. The goal of the restructuring was to make
N.E.T. a more competitive company. There can be no guarantee, however, that the
restructuring will have the desired positive long term effect. For further
information, please refer to the "Business Environment and Risk Factors" in the
"Management's Discussion and Analysis" and Note Four in the "Notes to
Consolidated Financial Statements" in the Company's 1999 Annual Report to
Stockholders ("Annual Report"), filed as Exhibit 13 to this Report, which
information is incorporated herein by reference.
Marketing, Distribution and Customers
As discussed above, the Company focuses primarily on information- and
communications-intensive organizations in the 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 U.S., N.E.T.'s presence in
markets in Europe, Asia, Latin America and other regions has increased
substantially over the years. Growth in Asia, Latin America and Eastern Europe
markets has been stymied, however, due to the economic difficulties experienced
in these regions.
In the U.S. and Europe, N.E.T. employs a highly skilled sales and support
organization that 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.
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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 was recently reorganized into
five lines of business based upon N.E.T.'s four major market segments: Emerging
Global Carriers ("EGC"), Global Network Service Providers ("GNSP"), Governments
(federal, state, local), Enterprise and Services. Each line of business is
responsible for all vertical market customer and partner relationships worldwide
within that line of business. These lines of business are in turn supported by
regional and corporate marketing, sales support, technical training and other
resources.
International sales represented 32%, 37% and 35% of the Company's revenue
in fiscal 1999, 1998 and 1997, 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 the Company's
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 Eleven in the "Notes to Consolidated Financial Statements"
in the Annual Report, which information is incorporated herein by reference.
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 distribution agreement with
Datacraft Asia Ltd. and its subsidiaries which was renewed in fiscal 1998.
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 Asia Ltd. along with several of its
affiliates. The Company has not experienced and does not anticipate material
changes in its operating results as a result of this acquisition. The Company
recently signed an agreement with Dimension Data for distribution of the
Company's products in Africa. The Company also has an agreement with Datacraft
Technologies Pty. Ltd., a former affiliate of Datacraft Asia Ltd., to resell a
jointly developed INTU product. The Company did not renew 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 service provider vertical
markets as a key element of its strategy. A number of these service providers
also act as distribution channels for the Company's products to enterprises and
other service providers worldwide. These relationships include joint marketing,
systems integration, resale and other agreements with service providers such as
Concert, GlobalOne, MCI WorldCom, Bell Atlantic, US West, Bell South, Unisource
Business Networks, Tele Danmark and Hanwha Corporation. The terms of agreements
with these service providers require their periodic renegotiation and renewal.
While failure to renew any one of these service provider agreements likely would
not materially impact the Company, failure to renew a significant number of
these agreements on terms and conditions favorable to the Company could have a
material impact on N.E.T.'s financial condition and results of operations.
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
U.S. 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 37%, 33% and 29% of revenue for fiscal
years 1999, 1998 and 1997, respectively. These amounts include sales, which
amounted to 24%, 29% and 27% of N.E.T. revenue for fiscal years 1999, 1998 and
1997, 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
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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 the Company's revenue during fiscal 1999, 1998 or 1997.
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 the "Business Environment and Risk Factors" in
"Management's Discussion and Analysis" on pages 13 through 20 of the Annual
Report, which information is incorporated herein by reference.
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, a 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 customers 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 value 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 an 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 has also recently introduced Managed Network
Services wherein N.E.T., for a fee, provides the resources and support
capability required to manage customer networks on an ongoing basis.
TAC support is fee-based under contracts or on a time basis. The TACs are
staffed 24 hours a day and are available on a year-round basis. TAC engineers
provide assistance to N.E.T. customers or resellers over the telephone 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 continues to invest in its TAC operations, adding
tools and capabilities to enhance its support role.
The Company provides educational services to its resellers and customers at
a number of facilities in the U.S., Latin America and Europe. Through its
resellers and via traveling facilities in other locations, N.E.T.'s educational
services can be customized to meet the unique requirements of its customers.
The Company 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 network
investments, outsourcing selected network operations to N.E.T., or providing
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 service agents trained and supported by N.E.T.'s headquarters, TACs
and field operations.
A significant amount of the Company's revenues and profits are generated by
its service and support offerings. In fiscal 1999, 1998 and 1997, service and
support offerings accounted for 40%, 35% and 34% of N.E.T. revenue,
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respectively. The Company cannot guarantee that customer acceptance of current
and future offerings will be maintained or achieved. Competition, product
reliability, remote diagnostic and repair capabilities, sales through
distribution and other factors may impact service and support revenues and
profitability.
Research and Development
The Company believes that product and technology leadership is 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. continually monitors
markets, its customers' businesses and technology developments in order to
develop solutions that proactively address customer needs. As a result of its
monitoring efforts, N.E.T. engages in research and development ("R&D") of new
products and enhancements to existing products and services as technology and
the Company's performance permits. The Company's R&D spending totaled $45.8
million, $43.4 million and $41.0 million for the fiscal years ended 1999, 1998
and 1997, 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 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 1999,
1998 and 1997, see "Management's Discussion and Analysis" on pages 10 through 20
of the Annual Report which is incorporated herein by reference. The Company
plans to continue funding R&D efforts at levels necessary to advance product
programs.
Manufacturing
The N.E.T. manufacturing process consists of the production of mechanical
and electrical subassemblies as well as custom system assembly and testing.
N.E.T. purchases various components from outside suppliers including, but not
limited to, custom fabricated printed circuit boards and subassemblies, standard
and custom integrated circuits, power supplies and mechanical hardware. 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. 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. Testing and manufacturing of products designed by N.E.T. have generally
been outsourced to third parties. Final assembly, quality control and testing
are generally performed at the Company's manufacturing facility 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, 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 limits on availability could
adversely affect operating results.
9
<PAGE>
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 has been working to make its internal systems Year 2000
compliant by January 1, 2000. In addition, the Company has assessed the Year
2000 compliance of its products and has been in the process of informing
customers and resellers accordingly. Finally, N.E.T. has assessed its
obligations to customers and resellers for products purchased and is working on
steps to reduce any potential liability for Year 2000 product failures.
Nevertheless, if certain internal systems, Company products and third-party
products are not Year 2000 compliant, or if customers do not upgrade their
equipment to become Year 2000 compliant, the Company could experience a material
negative impact on its business, financial position and results of operations.
For further discussion, please refer to the Year 2000 discussion in the
"Business Environment and Risk Factors" in "Management's Discussion and
Analysis" on pages 15 through 19 of the Annual Report, which discussion is
incorporated herein by reference.
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 companies 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
10
<PAGE>
vendors continually emerge as competitors in the Company's selected markets.
Many of these competitors enjoy substantially greater marketing resources and
customer recognition than the Company.
The Company's agreements with Ericsson and Datacraft Technologies do not
prohibit them from 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 U.S., 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
service providers that decide to manufacture such equipment, with their 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. This type
of competition could 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 service providers' 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 has influenced and will continue to 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.
In addition, N.E.T. customers usually are service providers or use service
provider 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 service providers 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 service provider-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 service providers, enterprises and other customers.
The Federal Communications Commission ("FCC") in the U.S. and similar
agencies in many 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 U.S. and in certain foreign countries. Failure to comply with
FCC or similar governmental requirements may result in the disconnection of
installed equipment from common service provider-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 U.S. 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
11
<PAGE>
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 U.S.
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 of these products, 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 that would
not be materially adverse to the Company. It is possible, however, that in the
future, actual or alleged infringement could 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, 1999, the Company had 1,237 employees. None of the
Company's domestic employees are represented by a collective bargaining
agreement. National collective bargaining or similar agreements govern certain
of the Company's employees outside the U.S. The Company has never experienced
any work stoppage and 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 12-year lease agreement beginning April 1, 1998 for three buildings. 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. and
its subsidiaries also lease sales and service offices at other locations in the
U.S., China, France, Germany, Mexico, Singapore, Uruguay, the United Kingdom and
other countries. In June 1998, the Company vacated approximately 287,000 square
feet of space in Redwood City, California under a lease agreement that expired
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
Not applicable.
12
<PAGE>
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters
Note Eight in the "Notes to Consolidated Financial Statements" on pages 30
through 32 and the section captioned "Stock Information" on page 37 of the
Company's Annual Report are incorporated herein by reference and included in
this filing as Exhibit 13. At March 31, 1999, there were 636 stockholders of
record of the Company.
Item 6. Selected Financial Data
The section captioned "Five Year Financial Summary" on page 9 of the
Company's Annual Report is incorporated herein by reference and included in this
filing as Exhibit 13.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The section captioned "Management's Discussion and Analysis" of the
Company's Annual Report is incorporated herein by reference and included in this
filing as Exhibit 13.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Disclosures regarding market risk in the section captioned "Quantitative
and Qualitative Disclosures" contained in the "Management's Discussion and
Analysis" on pages 19 and 20 of the Company's Annual Report are incorporated
herein by reference and included in this filing as Exhibit 13.
Item 8. Financial Statements and Supplementary Data
The sections captioned "Quarterly Financial Data" and "Consolidated
Financial Statements" together with the Notes to these sections and the
"Independent Auditors' Report" of the Company's 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.
13
<PAGE>
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 Company
The information with respect to Directors is incorporated by reference from
the section captioned "Election of Directors" in the Proxy Statement.
Executive Officers of the Company
The Executive Officers (or "Corporate Officers") of the Company and their
ages at June 1, 1999, are as follows:
Name Age Position
---- --- --------
Roger A. Barney 59 Senior Vice President, Corporate
Services and Assistant Corporate
Secretary
Robert P. Bowe 51 Acting Chief Financial Officer
David P. Owen 58 Vice President, Strategy and
Technology
Raymond E. Peverell 51 Senior Vice President,
International
G. Michael Schumacher 60 Senior Vice President, Product
Operations
Charles S. Shiverick 55 Vice President, Information
Services and Process Management
Robert T. Warstler 56 Senior Vice President, North
America
Hubert A.J. Whyte 48 President and Chief Executive
Officer
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. More recently, in January, Mr. Barney became Senior Vice
President of Corporate Services and Assistant Corporate Secretary. 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.
Robert P. Bowe joined the Company in 1993 as Corporate Controller, and in
1999 was named Acting Chief Financial Officer. Prior to joining the Company, Mr.
Bowe served in various senior financial positions in companies located in the
Santa Clara Valley. Some of these companies include Software Publishing, Cooper
Vision, California Microwave and Arthur Young and Company.
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
14
<PAGE>
development organization at Packet Technologies, StrataCom's predecessor
company. Prior to that, 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.
More recently, in January, Mr. Peverell became Senior Vice President,
International. 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 joined the Company in 1989. Earlier this year he
became Vice President of Information Services and Process Management. Mr.
Shiverick has held various other senior management positions with the Company,
including Senior Director of Corporate Quality, Vice President of Operations and
Vice President of Information Services and Reengineering. Prior to 1989, Mr.
Shiverick spent 22 years at IBM Corporation in a variety of management
positions.
Robert T. Warstler joined the Company in 1997 as Vice President of North
America, and in 1999 became Senior Vice President, North America. From 1992 to
1997, Mr. Warstler was employed by Hitachi Data Systems as Vice President and
General Manager. Prior to 1992, Mr. Warstler held several sales and marketing
positions with U.S. West, Northern Telecom, AT&T, IBM and General Motors.
Hubert A.J. Whyte joined the Company on June 1, 1999 as President and Chief
Executive Officer. From 1994 until he joined the Company, Mr. Whyte served as
President and CEO of Advanced Computer Communications ("ACC"). Prior to joining
ACC, Mr. Whyte served as Vice President and General Manager of the Access
Products unit of Newbridge Networks Corporation. Earlier in his career, Mr.
Whyte gained industry experience with British Telecom, Ericsson, Shell Oil,
Business Intelligence Services, Mitel and Siemens.
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" in the Proxy Statement.
Item 11. Executive and Director Compensation
Information regarding compensation of the Company's Directors and Executive
Officers is contained in the sections captioned "Election of Directors: Board
Committees, Meetings, and Remuneration" and "Executive Compensation and Related
Information" in the Proxy Statement, which sections are incorporated herein by
reference.
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" in the Proxy Statement is
incorporated herein by reference.
15
<PAGE>
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" in the Proxy Statement and "Executive
Compensation and Related Information" in the Proxy Statement is incorporated
herein by reference.
16
<PAGE>
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 22 of the Annual Report on
Form 10-K.
(2) Financial Statement Schedule - See "Index to Financial Statements
and Financial Statement Schedule" at page 22 of the Annual Report
on Form 10-K.
(3) Exhibits - See "Exhibit Index" at page 18 of this Form 10-K.
(b) The Company filed no reports on Form 8-K during the fourth quarter of
the fiscal year ended March 31, 1999.
17
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Note
- ------- ----------- ----
3.1 Registrant's Restated Certificate of Incorporation, as
amended. 1
3.2 Registrant's Bylaws, as amended. 1
4.1 Indenture dated as of May 15, 1989 between Registrant and 2
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 Participating 4
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 Sobrato 5
Interests III and Network Equipment Technologies, Inc. dated
April 9, 1997.
10.2 Officer Employment and Continuation Agreement between
Registrant and Joseph J. Francesconi.*
10.3 Officer Employment and Continuation Agreement between
Registrant and G. Michael Schumacher.*
10.4 Officer Employment and Continuation Agreement between
Registrant and Raymond E. Peverell.*
10.5 Officer Employment and Continuation Agreement between
Registrant and Robert T. Warstler.*
10.6 Officer Employment and Continuation Agreement between
Registrant and Roger A. Barney.*
10.7 Officer Employment and Continuation Agreement between
Registrant and Samuel H. Ezekiel.*
10.8 Officer Employment and Continuation Agreement between
Registrant and Hubert A. Whyte.*
10.9 General Release of All Claims, Covenant Not to Sue, and
Confidentiality Agreement between Registrant and Joseph J.
Francesconi.*
10.10 General Release of All Claims, Covenant Not to Sue, and
Confidentiality Agreement between Registrant and Samuel H.
Ezekiel.*
10.11 Employment Agreement between Registrant and Walter J. Gill.* 6
18
<PAGE>
10.12 Form of Officer Employment and Continuation Agreement as 6
signed by all other Executive Officers and Registrant.*
10.13 Form of Director Indemnification Agreement as signed by all 6
Directors of the Company.
10.14 Form of Officer Indemnification Agreement as signed by all 6
Executive Officers of the Company.*
10.15 Corporate Director Compensation Deferral Election Program 6
and 1996 Deferral Form.
10.16 Corporate Officer Compensation Deferral Election Program and 6
1996 Deferral Form.*
10.17 Corporate Officers Long-Term Variable Compensation Program.* 6
13 Portions of 1999 Annual Report to Stockholders.
21.1 Subsidiaries of Registrant as of June 29, 1999.
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 amended.* 10
99.6 Registrant's 1993 Stock Option Plan, as amended (Exhibit 11
99.3).*
99.7 Registrant's 1997 Stock Option Program, as amended (Exhibit 11
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.
19
<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.
20
<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 29, 1999 By: /s/ Hubert A.J. Whyte
----------------------------------------
Hubert A.J. Whyte
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/ Robert P. Bowe Acting Chief Financial Officer June 29, 1999
- --------------------- (Principal Financial Officer and
Robert P. Bowe Principal Accounting Officer)
/s/ Dixon R. Doll Director June 29, 1999
- ---------------------
Dixon R. Doll
/s/ James K. Dutton Director June 29, 1999
- ---------------------
James K. Dutton
/s/ Walter J. Gill Director June 29, 1999
- ---------------------
Walter J. Gill
/s/ George M. Scalise Director June 29, 1999
- ---------------------
George M. Scalise
/s/ Hubert A.J. Whyte President, Chief Executive June 29, 1999
- --------------------- Officer and Director
Hubert A.J. Whyte (Principal Executive Officer)
/s/ Hans A. Wolf Chairman of the Board June 29, 1999
- ---------------------
Hans A. Wolf
21
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page in 1999 Annual Report*
---------------------------
<S> <C>
Consolidated Balance Sheets as of March 31, 1999 and 1998 21
Consolidated Statements of Operations for the years ended
March 31, 1999, 1998 and 1997 22
Consolidated Statements of Comprehensive Income (Loss) for
the years ended March 31, 1999, 1998 and 1997 22
Consolidated Statements of Cash Flows for the years ended
March 31, 1999, 1998 and 1997 23
Consolidated Statements of Stockholders' Equity for the years
ended March 31, 1999, 1998 and 1997 24
Notes to Consolidated Financial Statements 25
Independent Auditors' Report 36
</TABLE>
- ----------
* Incorporated herein by reference and included in this filing as Exhibit 13.
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page in 1999 Form 10-K
----------------------
<S> <C>
Independent Auditors' Report 23
Schedule II - Valuation and Qualifying Accounts 24
</TABLE>
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, 1999.
22
<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, 1999 and 1998, and for each
of the three years in the period ended March 31, 1999, and have issued our
report thereon dated April 19, 1999 (May 24, 1999 as to Note Fourteen), such
financial statements and report are included in your 1999 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 19, 1999
23
<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, 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
For the year ended
March 31, 1999:
Accounts receivable
allowances $3,926 -- $4,679 (1) $(5,230) $3,375
</TABLE>
- ----------
(1) Amount represents additions to accounts receivable allowances which were
charged primarily to revenue.
24
EXHIBIT 10.2
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
EXHIBIT 10.3
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
EXHIBIT 10.4
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
EXHIBIT 10.5
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 February, 1999.
NETWORK EQUIPMENT Robert T. Warstler
TECHNOLOGIES, INC. -------------------------------
(Print Name of Officer)
By: /s/ Roger A. Barney /s/ Robert T. Warstler
---------------------------- -------------------------------
Roger A. Barney (Signature)
Title: Sr. VP, Corporate Services
October 26, 1995 N.E.T. Confidential
EXHIBIT 10.6
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 27th day of October, 1995.
NETWORK EQUIPMENT Roger A. Barney
TECHNOLOGIES, INC. ------------------------------
(Print Name of Officer)
By: /s/ Joseph J. Francesconi /s/ Roger A. Barney
------------------------- ------------------------------
(Signature)
Title: President & CEO
October 26, 1995 N.E.T. Confidential
EXHIBIT 10.7
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
EXHIBIT 10.8
CEO EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and Hubert Anthony Whyte
("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 during the period of salary
continuance, except as provided in 3 below.
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 during the first year of employment, then vesting of one-third of
the outstanding stock options held by Officer shall accelerate at the time
of such Termination. In the event of a Termination of Employment in
conjunction with a Change of Control after the first year of employment,
then vesting of all outstanding stock options 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 1st day of June, 1999.
NETWORK EQUIPMENT TECHNOLOGIES, INC.
By: /s/ Roger A. Barney /s/ Hubert Anthony Whyte
------------------------- --------------------------
Roger A. Barney (Signature)
Title: Sr. VP Corporate Services
June 1, 1999 N.E.T. Confidential
EXHIBIT 10.9
GENERAL RELEASE OF ALL CLAIMS,
COVENANT NOT TO SUE
AND CONFIDENTIALITY OF AGREEMENT
I, Joseph J. Francesconi, on behalf of myself, my representatives, heirs,
executors, administrators, successors, and assigns, (hereinafter collectively
referred to as "I/me"), and NETWORK EQUIPMENT TECHNOLOGIES, INC., its affiliated
and subsidiary entities, and the officers, directors, agents, employees,
attorneys, successors, and assigns of all of them (hereinafter collectively
referred to as "N.E.T."), agree as follows:
1. I am currently employed by N.E.T. as its President and CEO.
2. N.E.T. and I wish to preserve the good will that exists between us while
settling all disputes that may exist between us and avoiding further
controversies.
3. N.E.T. and I mutually agree to sever our employer/employee relationship
effective on March 31, 1999, or the date a successor to my position is
named (which shall be no later than May 31, 1999), whichever comes later,
("termination date").
4. In consideration for this agreement, N.E.T. agrees to furnish the
following:
a. Continuation of my salary at the gross rate of $400,000.00 per annum,
for a period of up to three years from the termination date.
b. During the third year following the termination date, I may receive
salary continuation at the gross rate of $400,000.00 per annum, less
any salary I am earning from work. Any payments pursuant to this
subparagraph is money in addition to anything I would already be
entitled and is consideration for my agreement to this separation
agreement and release. Should I secure employment at any time during
the third year after the termination date, I shall immediately inform
the Sr. Vice President of Corporate Services of N.E.T.
c. All salary continuation discussed in paragraph a above will be paid
pro rata on a bi-weekly basis, in accordance with regular payroll
practices, less all applicable payroll deductions as required by law.
Unless I direct otherwise in writing, checks will be either direct
deposited or mailed to me at the following address: 1319 San Mateo
Drive, Menlo Park, CA 94025.
d. I shall be eligible to receive a Variable Compensation Payment for
fiscal year 99 only, if any Variable Compensation is granted to other
eligible N.E.T. officers. The Variable Compensation payment to me, if
any, shall be calculated in a manner that is consistent with payments
made to other N.E.T. officers, and such payment, if any, shall be made
to me at the same time that similar payments are made to the other
N.E.T. officers.
e. Continuation of medical, dental, life and disability insurance during
the period of salary continuation, up to a maximum of three years.
Notification under COBRA will be issued on the termination date.
<PAGE>
EXHIBIT 10.9
f. Immediate payment on the termination date of deferred, Long Term
Variable Compensation bonus from fiscal years 1996 ($100,000), 1997
($41,250), and 1998 ($110,000), for a gross total of $251,250.00, plus
any Long Term Variable Compensation bonus to which I would be entitled
during fiscal year 1999. The deferred Long Term Variable Compensation
payment to me, if any, shall be calculated in a manner that is
consistent with any deferred Long Term Variable Compensation bonus
awarded to other N.E.T. officers.
g. Continuation of my automobile allowance of up to $500.00 per month and
my tax planning allowance of up to $2,500.00, per annum during the
period of salary continuation, up to a maximum of three years from the
termination date.
h. Immediate vesting on the termination date of all shares of
non-qualified stock options and all shares of restricted stock
options, plus any 1999 grant of stock optionsfor which I am eligible
pursuant to the N.E.T. Stock Option Agreement. These options may be
exercised during their remaining term.
i. Any accrued vacation as of the termination date will be paid out to me
by the termination date. Vacation will cease accruing on the
termination date.
j. Reasonable steps will be taken by N.E.T. to assure that my telephone
extension will remain active to voice mail until the date salary
continuation ends. I agree to promptly advise N.E.T. in the event that
this voice mail benefit is no longer needed by me.
k. I agree the consideration I will receive in this paragraph 4 is in
addition to anything to which I would already be entitled and is
consideration for my agreement to this separation agreement and
release.
5. For and in consideration of the obligations of N.E.T. incurred in Section 4
of this General Release of All Claims, Covenant Not To Sue And
Confidentiality Agreement (hereinafter Release), I hereby completely
release and forever discharge N.E.T. from all claims, rights, demands,
actions, obligations, liabilities, debts, causes of action if any and every
kind, nature and character whatsoever, known or unknown, which I may now
have or have ever had against N.E.T. (hereinafter, all claims), including
without limitation all claims arising from or in any way connected with my
employment by N.E.T. or the termination of that employment, whether based
in tort or contract (express or implied), or on any federal, state or local
law, statute, or regulation, and all claims I may have filed or caused to
be filed in any court of law before any state or federal administrative
agency before the execution of this Release.
6. I understand and agree that in consideration of the foregoing I am waiving
any rights I may have had, now have, or in the future may have to pursue
any and all remedies available to me under any employment-related cause of
action against N.E.T., including without limitation, claims of wrongful
discharge, emotional distress, defamation, breach of contract, breach of
the covenant of good faith and fair dealing, vacation pay after the
resignation date, violation of the provisions of the California Labor Code,
the California Fair Employment and
<PAGE>
EXHIBIT 10.9
Housing Act, any claims under federal or California statutory or decisional
law pertaining to wrongful discharge, discrimination, retaliation, or
breach of public policy, any claims arising under Title VII of the Civil
Rights Act of 1964, as amended, the California Constitution, the Equal Pay
Act of 1963, the Age Discrimination in Employment Act of 1967 as amended
("ADEA"), the Civil Rights Act of 1866, the Employee Retirement Income
Security Act, and any other laws and regulations relating to employment. In
order to assure that this waiver of rights under the ADEA is effective, I
hereby acknowledge and agree that I may have, and have had, at least 21
days after receipt of this Release within which to review, consider and
discuss this Release with an attorney of my choosing and to decide whether
or not to execute this Release. I understand that I have seven (7) days
after execution of this Release within which to revoke this Release by
providing to the Sr. Vice President of Corporate Services of N.E.T. a
signed, written statement revoking this Release. Finally, I understand and
agree that this Release shall not become effective and that I shall not be
entitled to any consideration hereunder (even if already received) until
such seven (7) day period has expired without any revocation.
7. I understand and agree that this is a full and final release covering all
known, unknown and unanticipated injuries, debts, claims, or damages to me
which have arisen or may have arisen in connection with my employment with
N.E.T., as well as those injuries, debts, claims or damages not now known
or disclosed which may arise from my employment, as specifically described
above. I understand that Section 1542 of the California Civil Code,
provides as follows:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor.
The provisions of Section 1542 of the California Civil Code and any
analogous state or federal law, if any way applicable, are hereby waived by
me. I specifically affirm my intention to release not only those claims I
know but also those claims against N.E.T. that I may not know about.
8. I agree that I will not initiate or cause to be initiated against N.E.T.
any compliance review, suit, action, investigation, or proceeding of any
kind, or participate in same, individually or as a representative or member
of a class, whether federal, state, or local, pertaining in any way to any
matter herein released, unless I am required to do so by law. I further
agree that I have no right to future employment with N.E.T. and that N.E.T.
will have no obligation to re-employ me at any time in the future.
9. I will maintain both the fact and terms of this Release and any
consideration that I receive in strict confidence, and will not disclose
the fact of this Release or any of its terms, including the fact or amount
of any payment to any other person or entity (other than my spouse, my
attorney and accountant in this matter solely for use in providing counsel
and advice to me in this matter) for any reason, at any time, without the
prior written consent of N.E.T., unless required by law. N.E.T. agrees to
maintain the fact and terms of this Release, and payments under this
Release in confidence, except for those agents, employees and
<PAGE>
EXHIBIT 10.9
representatives of N.E.T. will be relieved of any obligation to make future
payments to me under this agreement; that I will refund one-half of all
sums previously paid to me hereunder and that N.E.T. will be entitled,
without limitation, to pursue legal and equitable remedies for such
violation.
10. I represent and warrant that I do not have in my possession, and that I
have not failed to return to N.E.T. (a) any records, documents, data,
specifications, drawings, blueprints, reproductions, sketches, notes,
reports, proposals, or copies of the foregoing, or other documents or
material, or (b) any equipment or other property belonging to N.E.T. or any
of its subsidiaries or employees except the following, which I am keeping
as part of the consideration under this agreement:
PC, N.E.T. asset no. 022959, serial no. 9827BYQ3D694
Monitor, serial no. 7163736
Printer, serial no. 567BLB818W
PowerMac 7200/90, N.E.T. asset no. 019676, serial no. FC602C4355F
Apple Monitor serial no. 515161VH1XX
Nokia 6160 cell phone, serial no. 23513816024
11. I represent and warrant that I have complied with and will continue to
comply with all terms of the N.E.T. Employee Proprietary or Confidential
Information and Inventors Agreement signed by me (a copy of which is
attached hereto and incorporated herein by this reference), including,
without limitation, refraining from soliciting N.E.T. employees; reporting
to N.E.T. any inventions (as defined therein) conceived or made by me; and
preserving as confidential all trade secrets, confidential information,
knowledge, data or other confidential information relating to products,
processes, know-how, designs, formulas, test data, customer lists, customer
information, employees, the abilities of employees or other confidential
subject matter pertaining to any business of N.E.T. or any of its clients,
customers, licensees or affiliates.
12. I understand and agree that the furnishing of the consideration for this
Release will not be deemed or construed at any time for any purpose as an
admission of liability or wrongdoing by N.E.T. Liability for any and all
claims is expressly denied by N.E.T. I further understand and agree that
each of the releases, waivers and other provisions of Sections 5 through 11
and the covenants contained in Section 15 are material inducements to
N.E.T. for entering into this Release and that, for the breach of any of
them N.E.T. will be entitled to pursue legal and equitable remedies,
including without limitation, the right to seek restitution and injunctive
relief.
13. This Release shall be deemed to have been entered into in the State of
California by residents of that state and shall be construed and enforced
in accordance with and governed by the laws of that state.
14. Should any part, term or provision of this Release be declared or
determined by any court to be illegal or invalid, the validity of the
remaining parts, terms, or provisions will not be affected thereby and said
illegal or invalid part, term, or provision will be deemed not to be a part
of this Release.
<PAGE>
EXHIBIT 10.9
15. N.E.T. and I will fully cooperate in any internal N.E.T. or external
investigations or litigation concerning or relating to N.E.T. and any of
N.E.T.'s or my activities during the time that I was employed by N.E.T.
N.E.T. and I will promptly advise the other of any formal or informal
requests for information or cooperation that may concern or relate to the
interests of the other in connection with any such investigation or
litigation.
16. During the period I am receiving salary continuation from N.E.T., unless I
receive written permission to do so, I will not become employed by nor be a
consultant to any person or company that I know or reasonably should have
known at the time of commencing such relationship competes directly with
products or services marketed by N.E.T. If I breach this agreement, in
addition to any other remedies N.E.T. may have, N.E.T.'s obligation to
provide me any salary continuation will cease immediately.
17. I acknowledge that I have been given at least 21 days to review the
foregoing Release to and to consult counsel of my own choice concerning the
waivers, releases and other provisions before signing this Release, that I
am fully aware of the contents of this Release and of its legal effect,
that the preceding paragraphs recite the sole consideration for this
Release, that all agreements and understandings between N.E.T. and me are
embodied and expressed herein, and that I enter into this Release freely,
without coercion, and based on my own judgment and not in reliance upon any
representations or promises made by N.E.T. or anyone, other than those
contained herein. Except as expressly provided herein, this Release shall
supersede and render null and void any and all prior agreements between the
parties. This Agreement specifically supersedes the provisions regarding
pay due at termination of employment contained in the CEO Employment
Continuation Agreement, signed April 14, 1998. This Release may not be
modified except in a writing signed by me and the Sr. Vice President of
Corporate Services of N.E.T.
18. Should I at any time contest the validity or enforceability of this
Release, I agree to immediately repay to N.E.T. any and all monies and
other consideration that have been provided to me by N.E.T. pursuant to
this Release.
Date: January 26, 1999 /s/ Joseph J. Francesconi
---------------------------
Joseph J. Francesconi
Network Equipment Technologies, Inc.
By: /s/ Roger A. Barney
--------------------------------
Its: Sr. VP Corporation Services
Date: January 26, 1999
EXHIBIT 10.10
GENERAL RELEASE OF ALL CLAIMS,
COVENANT NOT TO SUE
AND CONFIDENTIALITY AGREEMENT
I, Samuel Ezekiel, on behalf of myself, my representatives, heirs, executors,
administrators, successors, and assigns, (hereinafter collectively referred to
as "I/me"), and NETWORK EQUIPMENT TECHNOLOGIES, INC., its affiliated and
subsidiary entities, and the officers, directors, agents, employees, attorneys,
successors, and assigns of all of them (hereinafter collectively referred to as
"N.E.T."), agree as follows:
1. I am currently employed by N.E.T. as Sr. Vice President, Marketing in its
Fremont office.
2. The parties wish to preserve the good will that exists between them while
settling all disputes that may exist between them and avoiding further
controversies.
3. Continuation of my employment with N.E.T. is not in the best interest of
either party, and N.E.T. and I mutually agree to sever our employer/employee
relationship effective April 1, 1999 ("termination date").
4. N.E.T. will pay to me the sum of $17,500 per month commencing on the
termination date, and ending on March 31, 2000 ("ending date"). Installments
will be paid bi-weekly, less all applicable deductions. N.E.T. shall continue to
provide the following benefits: medical, dental, disability, and life insurances
until the ending date to the same extent as made available to regular employees
of N.E.T. Any accrued vacation as of the termination date will be paid out to me
by the termination date.
I shall be eligible to receive a Variable Compensation Payment for fiscal year
1999, if any Variable Compensation is granted to other eligible N.E.T. officers
and one year of Officer's Variable Compensation, if any is granted to other
eligible N.E.T. officers for fiscal year 2000 (computed using the mid-point of
the applicable range and the company "meets plan"). The Variable Compensation
payment to me, if any, shall be calculated in a manner that is consistent with
payments made to other N.E.T. officers, and such payment, if any, shall be made
to me at the same time that similar payments are made to the other N.E.T.
officers.
Immediate payment on the termination date of deferred, Long Term Variable
Compensation bonus from fiscal years 1997 ($33,750), and 1998 ($30,000), for a
gross total of $63,750.00, plus any Long Term Variable Compensation bonus to
which I would be entitled during fiscal year 1999. The deferred Long Term
Variable Compensation payment to me, if any, shall be calculated in a manner
that is consistent with any deferred Long Term Variable Compensation bonus
awarded to other N.E.T. officers.
My stock options and restricted stock will continue to vest through the ending
date. Any options vested by such date may be exercised up to three months after
the ending date, subject to the N.E.T. Stock Option Agreement concerning such
options.
N.E.T. Confidential
<PAGE>
Should I secure employment or enter full-time consulting or similar
relationships with one or more entities or persons (collectively "other
employment") during the period set forth above in the first paragraph of this
Section 4, I shall immediately inform the Sr. Vice President of Corporate
Services of N.E.T. and my entitlement to continuation of benefits and payments
provided under this Release shall terminate on the earlier of thirty (30) days
after commencement of such other employment or the above ending date.
5. For and in consideration of the obligations of N.E.T. incurred in Section 4
of this General Release Of All Claims, Covenant Not To Sue And Confidentiality
Agreement (hereinafter "Release"), I hereby completely release and forever
discharge N.E.T. from all claims, rights, demands, actions, obligations,
liabilities, debts and causes of action of any and every kind, nature and
character whatsoever, known or unknown, which I may now have or have ever had
against N.E.T. (hereinafter, "all claims"), including without limitation all
claims arising from or in any way connected with my employment by N.E.T. or the
termination of that employment, whether based in tort or contract (express or
implied), or on any federal, state, or local law, statute, or regulation, and
all claims I may have filed or caused to be filed in any court of law or before
any state or federal administrative agency before the execution of this Release.
6. I understand and agree that in consideration of the foregoing I am waiving
any rights I may have had, now have, or in the future may have to pursue any and
all remedies available to me under any employment-related cause of action
against N.E.T., including without limitation, claims of wrongful discharge,
emotional distress, defamation, breach of contract, breach of the covenant of
good faith and fair dealing, vacation pay after the resignation date, violation
of the provisions of the California Labor Code, the California Fair Employment
and Housing Act, and any claims under federal or California statutory or
decisional law pertaining to wrongful discharge, discrimination, retaliation, or
breach of public policy, any claims arising under Title VII of the Civil Rights
Act of 1964, as amended, the California Constitution, the Equal Pay Act of 1963,
the Age Discrimination in Employment Act of 1967 as amended ("ADEA"), the Civil
Rights Act of 1866, the Employee Retirement Income Security Act, and any other
laws and regulations relating to employment. In order to assure that this waiver
of rights under the ADEA is effective, I hereby acknowledge and agree that I may
have, and have had, at least 21 days after receipt of this Release within which
to review, consider and discuss this Release with an attorney of my choosing and
to decide whether or not to execute this Release. I understand that I have seven
(7) days after execution of this Release within which to revoke this Release by
providing to the Sr. Vice President of Corporate Services of N.E.T. a signed,
written statement revoking this Release. Finally, I understand and agree that
this Release shall not become effective and that I shall not be entitled to any
consideration hereunder (even if already received) until such seven (7) day
period has expired without any revocation.
7. I understand and agree that this is a full and final release covering all
known, unknown and unanticipated injuries, debts, claims, or damages to me which
have arisen or may have arisen in connection with my employment with N.E.T., as
well as those injuries, debts, claims or damages not now known or disclosed
which may arise from my employment, as specifically described above. I
understand that Section 1542 of the California Civil Code, provides as follows:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor.
N.E.T. Confidential -2-
<PAGE>
The provisions of Section 1542 of the California Civil Code and any analogous
state or federal law, if in any way applicable, are hereby waived by me. I
specifically affirm my intention to release not only those claims I know about
but also those claims against N.E.T. that I may not know about.
8. I agree that I will not initiate or cause to be initiated against N.E.T. any
compliance review, suit, action, investigation, or proceeding of any kind, or
participate in same, individually or as a representative or member of a class,
whether under any contract (express or implied) or otherwise, or under any law
or regulation, whether federal, state, or local, pertaining in any way to any
matter herein released, unless I am required to do so by law. I further agree
that I have no right to future employment with N.E.T. and that N.E.T. will have
no obligation to re-employ me at any time in the future.
9. I will maintain both the fact and terms of this Release and any consideration
that I receive in strict confidence, and will not disclose the fact of this
Release or any of its terms, including the fact or amount of any payment to any
other person or entity (other than my spouse, my attorney and accountant in this
matter solely for use in providing counsel and advice to me in this matter) for
any reason, at any time, without the prior written consent of N.E.T., unless
required by law. N.E.T. agrees to maintain the fact and terms of this Release,
and payments under this Release in confidence, except for those agents,
employees and representatives of N.E.T. with a need to know. I understand and
agree that this confidentiality provision is an essential and material term of
this Release and I agree that if I violate this provision, N.E.T. will be
relieved of any obligation to make future payments to me under this agreement;
that I will refund one-half of all sums previously paid to me hereunder and that
N.E.T. will be entitled, without limitation, to pursue legal and equitable
remedies for such violation.
10. I represent and warrant that I do not have in my possession, and that I have
not failed to return to N.E.T. (a) any records, documents, data, specifications,
drawings, blueprints, reproductions, sketches, notes, reports, proposals, or
copies of the foregoing, or other documents or material, or (b) any equipment or
other property belonging to N.E.T. or any of its subsidiaries or employees
except the following:
________________________________________________________________________________
___________________________________________________(write "None" if appropriate)
I will provide make, model, serial number and N.E.T. asset tag number for any
equipment described above within two (2) weeks of execution of this Release. The
above identified items shall be returned as follows:
________________________________________________________________________________
________________________________________________________________________________
11. I represent and warrant that I have complied with and will continue to
comply with all terms of the N.E.T. Employee Proprietary or Confidential
Information and Inventions Agreement signed by me, including, without
limitation, refraining from soliciting N.E.T. employees; reporting to N.E.T. any
inventions (as defined therein) conceived or made by me; and preserving as
confidential all trade secrets, confidential information, knowledge, data or
other confidential information relating to products, processes, know-how,
designs, formulas, test data, customer lists, customer information, employees,
the abilities of employees or other confidential subject matter pertaining to
any business of N.E.T. or any of its clients, customers, licensees or
affiliates.
N.E.T. Confidential -3-
<PAGE>
12. I understand and agree that the furnishing of the consideration for this
Release will not be deemed or construed at any time or for any purpose as an
admission of liability or wrongdoing by N.E.T. Liability for any and all claims
is expressly denied by N.E.T. I further understand and agree that the each of
the releases, waivers and other provisions of Sections 5 through 11 and the
covenants contained in Section 15 are material inducements to N.E.T. for
entering into this Release and that, for the breach of any of them N.E.T. will
be entitled to pursue legal and equitable remedies, including, without
limitation, the right to seek restitution and injunctive relief.
13. This Release shall be deemed to have been entered into in the State of
California by residents of that state and shall be construed and enforced in
accordance with and governed by the laws of that state.
14. Should any part, term, or provision of this Release be declared or
determined by any court to be illegal or invalid, the validity of the remaining
parts, terms, or provisions will not be affected thereby and said illegal or
invalid part, term, or provision will be deemed not to be a part of this
Release.
15. N.E.T. and I will fully cooperate in any internal N.E.T. or external
investigations or litigation concerning or relating to N.E.T. and any of
N.E.T.'s or my activities during the time that I was employed by or serving as a
consultant to N.E.T. N.E.T. and I will promptly advise the other of any formal
or informal requests for information or cooperation that may concern or relate
to the interests of the other in connection with any such investigation or
litigation. Without the written consent of N.E.T., prior to the ending date I
will not become employed by nor be a consultant to any person or company that I
know or reasonably should have known at the time of commencing such relationship
competes directly with products or services marketed by N.E.T.
16. I acknowledge that I have been given at least 21 days to review the
foregoing Release and to consult counsel of my own choice concerning the
waivers, releases and other provisions before signing this Release, that I am
fully aware of the contents of this Release and of its legal effect, that the
preceding paragraphs recite the sole consideration for this Release, that all
agreements and understandings between N.E.T. and me are embodied and expressed
herein, and that I enter into this Release freely, without coercion, and based
on my own judgment and not in reliance upon any representations or promises made
by N.E.T. or anyone, other than those contained herein. Except as expressly
provided herein, this Release shall supersede and render null and void any and
all prior agreements between the parties. This Release may not be modified
except in a writing signed by me and the Sr. Vice President of Corporate
Services of N.E.T.
17. Should I at any time contest the validity or enforceability of this Release,
I agree to immediately repay to N.E.T. any and all monies and other
consideration that have been provided to me by N.E.T. pursuant to this Release.
Date: February 10, 1999 /s/ Samuel Ezekiel
---------------------------
Samuel Ezekiel
Network Equipment Technologies, Inc.
By: /s/ Roger A. Barney
--------------------------------
Its: Sr. VP Corporation Services
Date: February 10, 1999
N.E.T. Confidential -4-
================================================================================
financial highlights
================================================================================
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HIGHLIGHTS FOR YEARS ENDED MARCH 31, 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $263,835 $308,721
Operating income (loss) (20,039) 17,142
Net income (loss) (6,959) 14,350
Diluted earnings (loss) per share (.32) .65
Working capital 177,088 199,890
Total assets 313,112 334,557
7 1/4% convertible subordinated debentures 24,706 25,821
Stockholders' equity $233,013 $236,653
Number of employees 1,289 1,408
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 HIGHLIGHTS BY QUARTER FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $71,426 $75,354 $65,914 $51,141
Net income (loss) 2,948 3,529 (735) (12,701)
Diluted earnings (loss) per share .13 .16 (.03) (.59)
</TABLE>
Results for the fourth quarter of fiscal 1999 include a charge of $4.7 million,
or $0.10 per diluted share, related to the Company's restructuring.
<PAGE>
================================================================================
quarterly financial data (unaudited)
================================================================================
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal Quarter 1999
Revenue $71,426 $75,354 $65,914 $51,141
Gross margin 37,947 39,558 34,010 18,680
Net income (loss) 2,948 3,529 (735) (12,701)
Diluted earnings (loss) per share .13 .16 (.03) (.59)
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
</TABLE>
Results for the fourth quarter of fiscal 1999 include a charge of $4.7 million,
or $0.10 per diluted share, related to the Company's restructuring. See Note
Four in the Notes to Consolidated Financial Statements and Management's
Discussion and Analysis.
Results for the fourth quarter of fiscal 1998 include a charge of $3.3 million,
or $0.10 per diluted share, related to the Company's facilities. See Note One in
the Notes to Consolidated Financial Statements and Management's Discussion and
Analysis.
<TABLE>
<CAPTION>
five year financial summary
- -----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $263,835 $308,721 $324,438 $338,899 $284,036
Net income (loss) (6,959) 14,350 23,992 31,350 27,070
Diluted earnings (loss) per share (.32) .65 1.11 1.50 1.39
7 1/4% convertible
subordinated debentures 24,706 25,821 25,821 33,526 68,625
Total assets 313,112 334,557 301,653 281,957 232,046
</TABLE>
<PAGE>
================================================================================
management's discussion and analysis
================================================================================
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the accompanying Notes. The percentages in the
following discussion differ from percentages calculated from the segmented
information disclosed in Note Eleven Segment Information in the Notes to
Consolidated Financial Statements. This difference results primarily from
intercompany eliminations. 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; changes in
product mix; changes in domestic and international economic and/or political
conditions; ability to develop and deliver new products; and other factors
identified herein.
RESULTS OF OPERATIONS
The following table depicts data derived from the Consolidated Statements of
Operations expressed as a percentage of revenue for each of the three years in
the period ended March 31.
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Product revenue 59.6% 64.8% 66.2%
Service and other revenue 40.4 35.2 33.8
- ----------------------------------------------------------------------------------------
Total revenue 100.0 100.0 100.0
- ----------------------------------------------------------------------------------------
Product gross margin 59.2 60.8 58.2
Service and other revenue gross margin 34.8 38.0 33.9
- ----------------------------------------------------------------------------------------
Total gross margin 49.3 52.8 50.0
- ----------------------------------------------------------------------------------------
Sales and marketing 33.0 28.3 23.8
Research and development 17.3 14.1 12.7
General and administrative 4.7 3.8 3.5
Facility relocation costs 0.1 1.1 0.0
Restructuring costs 1.8 0.0 0.0
- ----------------------------------------------------------------------------------------
Total operating expenses 56.9 47.3 40.0
- ----------------------------------------------------------------------------------------
Income (loss) from operations (7.6) 5.5 10.0
Interest income 2.5 2.2 1.9
Interest expense (0.8) (0.6) (0.7)
Other 0.3 (0.3) (0.2)
- ----------------------------------------------------------------------------------------
Income (loss) before income taxes (5.6) 6.8 11.0
Income tax provision (benefit) (2.9) 2.2 3.8
Extraordinary gain 0.1 0.0 0.2
- ----------------------------------------------------------------------------------------
Net income (loss) (2.6)% 4.6% 7.4%
- ----------------------------------------------------------------------------------------
</TABLE>
COMPARISON OF 1999 AND 1998
Revenue Total revenue in fiscal 1999 decreased $44.9 million, or 14.5%, from
fiscal 1998. Product revenue and service and other revenue decreased $43.1
million and $1.8 million, respectively, for the year. The Company was impacted
by a number of factors during the current fiscal year, which resulted in lower
product shipments and an overall decrease in product revenue of 21.5% as
compared to the prior fiscal year. Such factors included the Asian economic
crisis, which adversely impacted revenues in the Company's international sales
channels, slow adoption of ATM services by enterprise customers, and delays in
delivering the Promina 4000 to the marketplace. Specifically, product sales in
the Asia Pacific/Latin America channel declined 48.2%, and the Company's
European channel declined 18.7%. International product sales were 42.0% and
48.1% of total product sales in fiscal 1999 and fiscal 1998, respectively. Total
product sales in the U.S. Federal channel, which includes U.S. government sales
and sales to U.S. government contractors, decreased 13.2% in fiscal 1999,
principally due to governmental delays in network upgrade programs. Product
sales for the Company's North America channel, while relatively flat
year-over-year, were negatively impacted in the fourth quarter of fiscal 1999 by
the restructuring of the sales organization.
<PAGE>
================================================================================
================================================================================
Service and other revenue decreased 1.7% from the prior year. A $2.9 million
decrease in service revenue, principally in the North America channel in the
fourth quarter of fiscal 1999, offset the growth in revenue of $1.1 million in
systems integration services in support of product sales to the U.S. government.
Service revenue in the fourth quarter of fiscal 1999 was negatively impacted by
lower product sales in the North America channel and a lower renewal rate for
maintenance contracts.
Overall, revenue in the U.S. Federal channel decreased 4.3% over last year and
decreased as a percentage of total revenue from 33.6% in fiscal 1998 to 32.1% in
fiscal 1999. Total international revenue decreased 26.2% over last year, and in
fiscal 1999, it represented 27.5% of the Company's total revenue as compared to
37.3% in fiscal
1998.
Gross Margin Total gross margin as a percentage of total revenue decreased to
49.3% in fiscal 1999 from 52.8% in fiscal 1998. Product gross margin decreased
to 59.2% in fiscal 1999 from 60.8% in fiscal 1998. This decrease primarily
resulted from unfavorable manufacturing volume variances, especially in the
fourth quarter of fiscal 1999 where product revenue was down significantly from
historical levels. Offsetting some of the impact of the volume variances was a
favorable channel mix as an increased percentage of fiscal 1999 revenue
represented sales through the North America channel and a decreased percentage
through the Asia Pacific/Latin America channel.
The gross margin for service and other revenue decreased to 34.8% in fiscal 1999
from 38.0% in fiscal 1998. Service gross margin was negatively impacted by lower
product revenue as well as a slow down in maintenance contract renewals in the
fourth quarter of fiscal 1999. The gross margin on the systems integration
services decreased to 20.0% in fiscal 1999 from 22.0% in fiscal 1998 due to
changes in the mix of OEM products and services.
Management expects total gross margin in fiscal 2000 to remain fairly comparable
to gross margins experienced in the second quarter and third quarters of fiscal
1999.
Operating Expenses Operating expenses increased $4.4 million in fiscal 1999 and
increased as a percentage of total revenue to 56.9% in fiscal 1999 from 47.3% in
fiscal 1998. The Company's fiscal 1999 operating expenses include a $4.7 million
charge related to the restructuring of the Company's resources along global
lines of business. In fiscal 1998, the Company's operating expenses included a
$3.3 million charge related to the relocation of the Company's facilities.
Excluding the non-recurring charges for both fiscal years, operating expenses
would have increased $2.6 million and increased as a percentage of total revenue
to 55.0% in fiscal 1999 from 46.2% in fiscal 1998. Due to the restructuring,
management expects fiscal 2000 operating expense levels to remain comparable to
expense levels in the second and third quarters of fiscal 1999.
Sales and marketing expense decreased $0.2 million in fiscal 1999. All of the
year-over-year cost decrease occurred in the fourth quarter of fiscal 1999 as a
result of the lower sales compensation due to lower sales volume and the
realigning and restructuring of the various field sales organizations. As a
percentage of total revenue, sales and marketing expense increased to 33.0% in
fiscal 1999 from 28.3% in fiscal 1998 due to the lower sales volume. In fiscal
2000, management expects quarterly sales and marketing expense levels to remain
comparable to expense levels in the second and third quarters of fiscal 1999.
Research and development expense increased $2.3 million in fiscal 1999 due to a
continued increase in engineering resources directed at projects and technology
under development. These costs are primarily related to recruitment, retention
and staffing of these projects. In addition, the Company purchased over $9.0
million of depreciable capital equipment to support product development in
fiscal 1999. As a result of this increased spending along with the lower total
revenue in fiscal 1999, research and development expense also increased as a
percentage of total revenue to 17.3% in fiscal 1999 from 14.1% in fiscal 1998.
In fiscal 1999, $3.4 million of software production costs were capitalized as
compared to $3.2 million in fiscal 1998. Management plans to continue funding
research and development efforts at levels necessary to advance product programs
and, in fiscal 2000, expects research and development quarterly spending levels
to remain relatively comparable to expense levels in the second and third
quarters of fiscal 1999.
General and administrative expense increased $0.5 million year-over-year and
increased to 4.7% of total revenue as compared to 3.8% in fiscal 1998. In fiscal
2000, management expects general and administrative quarterly expense levels to
remain comparable to expense levels in the second and third quarters of fiscal
1999.
<PAGE>
================================================================================
================================================================================
In the fourth quarter of fiscal 1999, the Company recorded a $4.7 million charge
related to the restructuring of the Company's resources around global lines of
business to address specific markets. The restructuring included a reduction of
approximately 10% of the Company's worldwide work force. This charge is composed
primarily of employee salary continuation and outplacement costs. Also in fiscal
1999, the Company incurred $0.4 million in costs related to the facility move,
which was principally completed in fiscal 1998. The $4.7 million restructuring
and $0.4 million relocation charges had an impact of $0.11 on diluted loss per
share.
Non-operating Items Interest income in fiscal 1999 decreased slightly from
fiscal 1998 due to lower interest rates resulting from investment in tax-free
securities. Interest expense remained fairly consistent year-over-year. Other
income includes a gain of $1.0 million on the sale of a portion of equity
securities held in a publicly traded company.
For the fiscal year ended March 31, 1999, the Company recorded an income tax
benefit of $7.6 million as compared to an expense of $6.8 million for fiscal
1998, at an effective rate of 52% and 32% for fiscal 1999 and fiscal 1998,
respectively. See Note Nine in the Notes to Consolidated Financial Statements.
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 800 product line were 27.3% of product sales. Total
product sales in the U.S. 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 U.S. Federal channel increased 2.3% over the prior 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 the prior
year, and in fiscal 1998, it represented 37.3% of the Company's total revenue as
compared to 35.0% in fiscal 1997.
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 from older
and/or lower-end products which have lower gross margins, 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. This increase was primarily the result of cost
reductions and consolidation of the Company's service operations.
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. The Company's 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 of total revenue to 46.2%.
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 tradeshow,
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.
<PAGE>
================================================================================
================================================================================
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.
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.
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 former site in Redwood City. This charge was
composed primarily of the remaining lease commitment on the Redwood City
facility for the period when the facility was vacant. The $3.3 million charge
had an impact of $0.10 on diluted earnings per share.
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 subordinated 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 Nine in the Notes to 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.
Sales Historically, the majority of the Company's revenue in each quarter has
resulted from orders received and shipped in that quarter. In addition, the
Company's backlog at the beginning of a quarter is generally insufficient to
achieve expected net sales for the quarter. Because of ordering patterns and
potential delivery schedule changes, the Company does not believe that backlog
is indicative of future revenue levels. Since 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. Beginning the fourth quarter of fiscal year 1999, the Company put in
place a lead time policy whereby orders received within the last two weeks of a
quarter may be booked in the current quarter, but will be neither shipped nor
included in revenue until the next quarter. The Company cannot say with
certainty what the effect of the change in lead time policy will be on customer
ordering patterns.
Sales of networking products fluctuate based upon a number of factors such as
capital spending levels and general economic and market conditions. Future
declines in networking product sales as a result of general economic and
marketing conditions or for other reasons could have a materially adverse affect
on the Company's business, financial position or results of operations. In
particular, international sales will continue to account for a significant
portion of the Company's sales in future periods. International sales tend to
have risks which are difficult to foresee and plan for including political and
economic stability, regulatory changes, currency exchange rates, tax rates and
structures, and collection of accounts receivable. Events outside North America,
especially in Asia and Latin America, have adversely impacted and may continue
to adversely impact the Company's business, financial position or results of
operations in the future. 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.
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Further, a significant portion of the Company's revenue comes from contracts
with the U.S. government, most of which do not include purchase commitments.
Orders from the U.S. government or from other customers may not continue at
historical levels, and it is possible that the Company will not be able to
obtain orders from new customers.
Competition All markets for the Company's products are very competitive and
dynamic. The Company competes directly both internationally and domestically
with a number of different companies. Many of these companies have greater
financial, marketing and technical resources and offer a wider range of
networking products than the Company. In addition, the Company has distribution,
product and technology relationships with a number of significant customers,
resellers and other entities that are considered by the Company to be strategic.
Most of the Company's competitors have similar relationships with their
respective customers and other parties. Changes in the Company's relationships
or changes in similar relationships among competitors could have a material
impact on competitive and other factors described above, including the Company's
operating results.
Products 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 markets for the Company's products are
characterized by rapid technological changes, evolving industry standards,
frequent new product introductions and enhancements and significant price
com-petition. The interaction of these factors could negatively impact the
market for the Company's existing products as well as for products under
development and thereby adversely affect the Company's business, financial
position or results of operations. The Company may not be able to respond
effectively to technological changes or new product announcements by
competitors. Further, the Company may not be able to successfully develop and
market new products or product enhancements, and the Company cannot say for
certain 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 majority of the Company's product sales involve a discount from the
Company's standard list price. Discounting is standard in the sale of networking
products. In fiscal year 2000, the Company has begun a program to price its
products to reflect more accurately the prices charged in the market. It is not
the intent of the program to reduce prices. The program is designed to be
revenue neutral so that while prices are adjusted downward, discounts will be
adjusted downward as well. Although it is the intent of the program not to
impact margins, there can be no guarantee that competition or other factors
would not require continued discounting, thereby adversely affecting the
Company's business, financial position or results of operations.
Technology The Company is currently in the process of filing patent applications
in the U.S. to protect its proprietary technology in its new products. The
Company does not know whether the patents will be granted and until patents are
issued, third parties could assert infringement claims against the Company and
could be successful in those assertions. In addition, the Company does a
material amount of business outside the U.S. Laws outside the U.S. may not
protect the Company's proprietary rights to the same degree as do U.S. laws.
Personnel The Company's success depends in part on its ability to attract and
retain executive officers, senior managers and other employees necessary to
support planned revenue goals. In fiscal year 1999, the Company has undergone
significant changes in its executive officers and senior managers. In
particular, the President and Chief Executive Officer, Chief Financial Officer,
General Counsel and Senior Vice President of Marketing have resigned. The
Company has hired a new President and Chief Executive Officer who started with
the Company on June 1, 1999. The new President and Chief Executive Officer will
be responsible for filling the Chief Financial Officer and Senior Vice President
of Marketing positions. At this time, the Company has decided not to fill the
General Counsel position and instead has made an internal promotion of a
Managing Counsel to manage the Company's legal affairs. The failure of the
Company to attract, hire and retain executive officers, senior managers and
other key personnel or the failure of new management, if hired, to execute
Company strategy could have a material adverse affect on the Company's business,
financial position or results of operations.
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Restructuring In March 1999, the Company instituted a worldwide restructuring
plan to align its operations with its new line of business operating model and
to bring expenses in line with projected revenue. The Company closed several
offices and reduced its work force by approximately 10%. As a result of these
and other factors, the Company incurred significant losses in the fourth quarter
of fiscal year 1999. While the Company does not project any further expenses
related to the restructuring at this time, it cannot be certain that additional
expenditures will not be required in the future, nor can the Company be assured
that the restructuring will have a positive effect long term.
Third Party Suppliers The Company's products include components, assemblies and
subassemblies that are currently available from single sources and, in some
cases, are in short supply. The unavailability of certain components from
current suppliers could result in delayed availability of certain products,
thereby adversely affecting the Company's business. 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
resells products designed or manufactured by third parties, and the Company
relies to a significant degree on such third parties for order fulfillment,
quality control and support of their products. Such 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. Limited availability of products
designed or manufactured by third parties, price increases for such products or
business interruptions in their manufacture could adversely impact revenue,
gross margin or earnings from such third party products.
Year 2000
THIS STATEMENT IS INTENDED AS A YEAR 2000 READINESS DISCLOSURE.
Introduction The Year 2000 computer issue creates risks for all companies,
particularly those heavily dependent on or producing information technology
("IT") products such as the Company. Management believes that the risk for the
Company exists in four principal areas: potential warranty or other claims from
the Company's customers related to its products or services, the potential
failure of systems used by the Company to run its business, the potential
failure of systems used by the Company's suppliers and reduced spending by other
companies on networking solutions as a result of significant information systems
spending on Year 2000 remediation.
In recognition of this risk, in early 1997, the Company established a Year 2000
compliance team to identify and attempt to minimize the effect of Year 2000
issues on the Company. The compliance team is continuing the process of
assessing the potential impact of the advent of the Year 2000 on the Company's
products, customers, suppliers and internal systems, both IT and non-IT. The
Company expects to complete such evaluation no later than September 30, 1999.
The Company cannot predict the ultimate outcome of its Year 2000 compliance
program. If the Company is not successful in identifying and remediating Year
2000 problems relating to its internal systems, or if suppliers or customers
material to the Company experience Year 2000 failures, the Company's business,
financial position or results of operations may be materially adversely
affected.
Products and Services The Company has completed an evaluation of all its current
product offerings to determine Year 2000 compliance. The majority of the
products sold currently by the Company are Year 2000 compliant. A few products
were sold during fiscal year 1999 that were not compliant; however, these
products were not a major source of Company revenue, and no such products are
currently being sold by the Company. Non-compliant products are identified in
the N.E.T. Products Year 2000 Compliance Program posted on the Company's web
site. There are certain non-Year 2000 compliant products installed in customer
networks that the Company no longer sells. While the Company has a migration
path for many of these products that allows customers to become Year 2000
compliant, customers may choose not to take advantage of the available migration
path.
In addition to its own manufactured product lines, the Company has also resold a
number of products manufactured by third parties. Some of those products have
carried the Company's label and have been sold as the Company's product and
warranted by the Company's standard product warranty. The Company is relying
primarily on the written assurances of the private label manufacturers as to the
Year 2000 compliance of these products, as the Company
<PAGE>
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cannot independently assess this compliance for these products. For products
resold by the Company but which carry the original equipment manufacturer's
label ("OEM products"), the Company has passed on to the customer the
manufacturer's warranty rather than the Company's warranty. Although many OEM
products have no Year 2000 problems as they lack a clocking device which would
be affected by the advent of the Year 2000, other OEM products contain
components vulnerable to the Year 2000. The Company has substantially completed
its assessment of the Year 2000 compliance of these OEM products and is in the
process of seeking further protection, if deemed necessary, from OEM vendors.
Notwithstanding the Company's efforts to seek appropriate protection, there can
be no guarantee that the Company will be able to obtain any added protection. In
addition, since the Company is not able to control the Year 2000 compliance of
any OEM products, the Company may face Year 2000 claims should these products
fail.
In addition to the sale of products, the Company also sells post-sale
maintenance services to end users buying products directly from the Company and
to its resellers of product (collectively "customers"). The Company generally
does not provide post-sale maintenance services to customers who purchase
products through resellers ("reseller end users"). The standard written
maintenance agreements in effect since 1992 require the Company to make
reasonable efforts to resolve software errors; however, such standard written
maintenance contracts do not otherwise provide that the Company is to provide
the software or hardware necessary to make the customer's system Year 2000
compliant. Certain older maintenance agreements, however, primarily those
entered into prior to 1992, have broader product support provisions. The Company
is currently evaluating its potential duties under these older maintenance
contracts.
Customers The Company has posted on its web site the N.E.T. Products Year 2000
Compliance Program, which provides its customers and resellers 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, in late 1997, the Company mailed the then current Compliance
Program information to the majority of its customers. The Company is currently
in the process of determining which direct sale end users and which reseller end
users have not yet made their equipment Year 2000 compliant. Substantial
portions of the Company's sales are to end users outside of the U.S. These sales
are through resellers of the Company's products. Not all direct sale or reseller
end users, especially those in locations outside the U.S., have undertaken Year
2000 compliance programs. Regions outside of the U.S. have not been as focused
on the system problems associated with the advent of the Year 2000, and
customers in these regions have been slower to take the remedial action
necessary to become Year 2000 compliant. The inability of the Company's products
to handle the transition to the Year 2000 could result in increased customer
satisfaction issues, servicing costs, potential lawsuits and other material
costs and liabilities.
In addition, while the Company has been working with its resellers to ensure
that the reseller's end user base is informed of Year 2000 issues, the Company
cannot guarantee that its resellers have communicated sufficiently or accurately
with all their end users, that reseller end users have understood the
seriousness of the Year 2000 problem, or that those end users will take the
necessary actions to fix any Year 2000 problem associated with their installed
products.
Year 2000-related litigation instituted to date indicates that direct sale and
reseller end users who have not upgraded their installed products to become Year
2000 compliant may assert warranty, contract, tort, and/or statutory claims
against the Company as a way to recover any damages suffered as a result of the
customer's failure to become Year 2000 compliant. Resellers may assert similar
claims, as well as claims for indemnity, against the Company if the reseller has
such claims made against it by the reseller's end users. Since early 1998, the
Company's product warranty has limited the warranty provided for Year
2000-related problems. As the Company's product warranty runs for one year, the
Company does not at this time foresee significant exposure in the U.S. from
product warranty claims involving Year 2000 compliance. The Company cannot,
however, predict with any accuracy how legislative action or judicial decisions
may impact the warranty requirements placed upon the Company or a customer's
ability to successfully prosecute a Year 2000 claim against the Company should
one be asserted. Moreover, if claims were to be asserted in countries outside
the U.S., it would be difficult to predict actions or rulings outside the U.S.
where legal responsibilities and judicial proceedings are not as well defined
and, were unfavorable rulings to occur, there could be a material adverse affect
on the Company's business, financial position or results of operations.
<PAGE>
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The Company's revenue may be adversely impacted if current and prospective
customers devote a substantial portion of their information systems spending to
evaluation and remediation of Year 2000 issues that could divert money away from
spending on networking solutions. This diversion could have a material adverse
impact on the Company's future sales volume.
Internal Systems The Year 2000 compliance team has been and is evaluating Year
2000 issues related to the Company's internal systems, both IT systems and
non-IT systems, 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. The Year 2000 compliance team expects to finish its Year
2000 evaluation by September 30, 1999. As the Company's Year 2000 compliance
team continues its work, it may discover new or additional Year 2000 problems,
may not be able to develop and implement remediation or contingency plans, or
may find that the costs of these activities exceed current expectations and
become material.
Mission-Critical Systems The Company is identifying and testing its
mission-critical systems to identify Year 2000 problems, if any, and is in the
process of developing plans to remediate any identified Year 2000 problems.
Mission- critical systems have been categorized according to the level of impact
a failure would have upon the Company, i.e., "catastrophic" (causing a shutdown
of all or a part of the business) or "business interrupting" (interrupting
system functioning but not causing an actual shutdown). Testing of all
mission-critical systems is expected to be completed by September 30, 1999. The
Company intends to have contingency plans in place to deal with any impact of
the Year 2000 on all Company mission-critical systems. All such contingency
plans are scheduled to be finalized by June 30, 1999, and to be implemented by
September 30, 1999. Despite the implementation of any contingency plan, the
inability to remedy a Year 2000 problem and the consequent failure of any
internal systems could cause a material disruption in the Company's operation.
The Company estimates that by June 30, 1999, 90% of its mission-critical systems
in all categories will be compliant with requirements to continue functioning
after the advent of the Year 2000. The Company expects that all systems, both
mission-critical and non-mission-critical, will be Year 2000 compliant by
September 30, 1999.
Third Party Suppliers for Internal Systems The Company has historically worked
with its suppliers to ensure their ability to meet Company demands. The Company
is in the process of reviewing its mission-critical third party suppliers to
determine the suppliers' Year 2000 compliance as it impacts the services and
products supplied to the Company. The Company has surveyed the Year 2000
readiness of the majority of its mission-critical suppliers. The third party
supplier reviews to date have not uncovered any material Year 2000 problems
although most suppliers are currently still in the process of evaluating their
internal systems for Year 2000 compliance. The Company has also evaluated the
Year 2000 compliance of products supplied for mission-critical systems and has
upgraded such products to be Year 2000 compliant in line with the
recommendations made by the supplier. For all mission-critical suppliers, the
Company is in the process of developing contingency plans to ensure that any
potential business interruption caused by Year 2000 problems are mitigated. The
costs of implementing these contingency plans are still being evaluated, and
these costs may have an adverse affect on the Company's business, financial
position or results of operations. Third party supplier Year 2000 failures
remain a possibility and could have an adverse impact on the Company's business,
financial position or results of operations.
Worst-Case Scenario and Contingency Plans The Company believes that the most
reasonably likely worst- case scenario would involve problems with services and
systems supplied by third parties such as electricity, water,
telecommunications, transportation channels and mission-critical suppliers,
rather than from the failure of the Company's internal systems. The Company has
a limited ability to assess and control the failure of third parties, especially
those third parties supplying infrastructure services to a large geographic area
such as electric and telecommunications companies. The Company has developed
contingency plans to deal with the failure of these infrastructure suppliers to
the extent possible. Any contingency plan, however, will be limited by the
Company's ability to provide infrastructure services normally provided on a
large geographic basis.
<PAGE>
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Outside the Company's headquarters facility, Company offices support sales and
service functions. A worst-case scenario involving system-wide failures of
telecommunications services to locations outside the U.S. would impact the
Company's ability to engage in sales activities and to provide post-sale support
services to customers outside the U.S. The Company has developed contingency
plans to deal with the worldwide full or partial loss of telecommunications
services. Should the Company lose telecommunications services worldwide for any
extended period of time, or should alternate communications systems not be
available, the Company may be unable to communicate with worldwide locations.
This could result in an inability to process customer orders and/or manufacture
and ship products, which could materially impact the Company's results of
operations. In addition, the Company's ability to provide maintenance support to
customers with Year 2000 network problems could be seriously limited as
post-sale support relies on telephone calls or e-mail messages to and from the
Company's Technical Assistance Centers.
The Company is planning for increased calls to its Technical Assistance Centers
due to anxiety on the part of its customer base as the Year 2000 approaches. The
Company will be adding staff at both its Virginia and Crawley, England, centers
to handle any increase in call traffic. In addition, staffing will be maximized
for the period running from the end of December 1999 through the beginning of
January 2000.
In addition to infrastructure suppliers, the Company could face a worst-case
scenario involving third party suppliers of mission-critical services or systems
who are forced to shut down either partially or completely due to Year
2000-related systems failure. While the Company has surveyed its
mission-critical third party suppliers to ensure that they are addressing Year
2000 issues and have put into place contingency plans which it believes will
help to alleviate supplier problems, the activities of third parties are outside
the control of the Company so there can be no guarantee that third parties will
take the actions necessary to alleviate Year 2000 issues or that factors not
currently foreseeable will not have a negative impact on the Company's ability
to carry out its contingency plans. In particular, the contingency plans
developed by the Company's manufacturing department require that third party
suppliers provide additional inventory to the Company by December 27, 1999. This
higher level of inventory may involve increased costs to the Company and the
risk of write-downs in the value of the inventory if held for a prolonged period
of time.
Finally, the Company may not be able to provide or obtain alternate materials or
services in all instances. In its contingency plans, the Company has attempted
to identify substitute and second source suppliers. For certain areas of the
Company, substitute or second source suppliers may not be readily available or,
if available, may not be able to quickly supply products or services required.
Risks If certain internal systems, Company products and third party products are
not Year 2000 compliant, the Company could experience a material negative impact
on its business, financial position or results of operations and relating to
factors that include, among others: diversion of resources by the Company to
address and/or remediate Year 2000 issues; disruption of qualification to sell
products in certain foreign jurisdictions; litigation expense; service delays to
the Company's customers arising from the failure of vendors, manufacturers and
service providers to adequately address Year 2000 issues; and increased warranty
and other claims by the Company's customers and/or increased product and system
repair, replacement, service and maintenance obligations under its existing and
future sales, service and maintenance agreements.
The Company currently cannot accurately assess or estimate the possible impact
of the foregoing risks and liabilities because: the legal standards for Year
2000 liability presently are uncertain, particularly in foreign jurisdictions;
the Company's Year 2000 obligations will depend on, among other things, the
varying contractual terms contained in its sales, service and maintenance
agreements with respect to the particular customer and the nature of such
customer's Year 2000 issue; and there can be no assurance that indemnification
or pass-through arrangements relating to the Company's sales, service and
maintenance agreements will cover all of the Company's liabilities and costs
incurred in potential Year 2000-related claims.
Notwithstanding, the Company believes that the aggregate cost of resolving the
foregoing issues, defending any claims that may be asserted and satisfying
adverse judgments, if any, could potentially materially and adversely affect the
Company's business, financial position or results of operations.
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Costs The Company's efforts to make its internal systems and products Year 2000
compliant have been undertaken largely by using its existing work force. In a
few instances, consultants have been engaged. It is expected that the costs for
all consultants should not exceed $300 thousand in total. The Company has spent
approximately $1.3 million to date for Year 2000-related costs and currently
expects that the total cost of all Year 2000 efforts will not exceed $2 million.
These cost estimates do not include the fixed costs involved with employee time
spent on Year 2000 matters, nor does it include costs incurred to test products
and make those products Year 2000 compliant as those costs were incurred in 1997
and at that time, were not separated out from other product development costs.
Finally, the cost estimates provided do not include any potential costs related
to customer or other claims or potential amounts related to executing
contingency plans, such as costs incurred as a result of an infrastructure or
supplier failure. The Company has adequate general funds with which to pay for
all expected Year 2000 costs. The Company expects that expenditures for the Year
2000 compliance of internal systems will decline after September 1999.
The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans, third party assurances of Year 2000 compliance and other
factors. There can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to: the
availability and cost of personnel trained in this area; the ability to locate
and correct all relevant computer codes; the nature and amount of programming
required to upgrade or replace each of the affected programs; the rate and
magnitude of related labor and consulting costs; and the success of the
Company's end users and suppliers in addressing the Year 2000 issue. The
Company's evaluation is ongoing and it expects that new and different
information will become available as the evaluation continues. Consequently,
there is no guarantee that all material elements will be Year 2000 ready in
time.
Other Risks Litigation or other claims based on securities, intellectual
property, product, regulatory or other issues or factors could materially
adversely affect the Company's business, financial position or results of
operations.
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.
Quantitative and Qualitative Disclosures The following table presents the
hypothetical changes in fair market values in the financial instruments held by
the Company at March 31, 1999, that are sensitive to changes in interest rates.
These instruments are not leveraged and are held for purposes other than
trading. The modeling technique used measures the change in fair values arising
from selected potential changes in interest rates. Market changes reflect
immediate hypothetical parallel shifts in the yield curve of plus or minus 50
basis points (BPS), 100 BPS and 150 BPS over a six month horizon. Beginning fair
values represent the market principal plus accrued interest, dividends and
certain interest rate sensitive securities considered cash and equivalents for
financial reporting purposes at March 31, 1999. Ending fair values comprise the
market principal plus accrued interest, dividends and reinvestment income at a
six month horizon. This table estimates the fair value of the portfolio at a six
month time horizon:
<TABLE>
<CAPTION>
VALUATION OF SECURITIES NO CHANGE VALUATION OF SECURITIES
GIVEN AN INTEREST RATE IN INTEREST GIVEN AN INTEREST RATE
DECREASE OF X BASIS POINTS RATES INCREASE OF X BASIS POINTS
- ------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) (150 BPS) (100 BPS) (50 BPS) 50 BPS 100 BPS 150 BPS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents $ 12,221 $ 12,237 $ 12,252 $ 12,267 $ 12,283 $ 12,298 $ 12,313
U.S. government
and municipalities 66,132 66,018 65,905 65,741 65,628 65,517 65,405
Corporate notes and bonds 19,191 19,074 18,958 18,544 18,460 18,377 18,295
Other debt securities 29,790 29,592 29,397 29,205 29,015 28,828 28,644
Foreign debt issuances 6,322 6,337 6,352 6,717 6,703 6,688 6,673
- ------------------------------------------------------------------------------------------------------------------
Total $133,656 $133,258 $132,864 $132,474 $132,089 $131,708 $131,330
==================================================================================================================
</TABLE>
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A 50 BPS move in the Federal Funds Rate has occurred in 9 of the last 10 years;
a 100 BPS move in the Federal Funds Rate has occurred in 6 of the last 10 years;
and a 150 BPS move in the Federal Funds Rate has occurred in 4 of the last 10
years.
The following analysis presents the hypothetical change in fair value of the
public equity investment held by the Company that is sensitive to changes in the
stock market. This instrument is held for purposes other than trading. This
stock has only been publicly traded for approximately one year and therefore has
limited historical data. New publicly traded equity instruments are typically
highly volatile. From this instrument's introduction to the market to March 31,
1999, the stock price has ranged from a low of $8 per share to a high of $43.75
per share. In fiscal 2000, the Company liquidated all its holdings at an average
price of $36 per share. The modeling technique used measures the hypothetical
change in the stock's price. Stock price fluctuations of plus or minus 25%, plus
or minus 50% and plus or minus 75% were based upon volatility of the stock and
its limited history.
This table estimates the fair value of the publicly traded corporate equity
instrument:
<TABLE>
<CAPTION>
VALUATION OF SECURITY FAIR VALUE VALUATION OF SECURITY
GIVEN XX% DECREASE AS OF GIVEN XX% INCREASE
IN STOCK PRICE MARCH 31,1999 IN STOCK PRICE
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) (75%) (50%) (25%) 25% 50% 75%
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Equity investment $ 2,906 $ 5,811 $ 8,717 $11,623 $14,528 $17,434 $20,340
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company is exposed to foreign currency rate fluctuation when translating
foreign operations in the Consolidated Financial Statements. If the foreign
currencies fluctuated by 10%, there would not be a material impact to the
Company's business, financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had cash, cash equivalents and temporary cash
investments of $154.6 million, as compared to $161.5 million at the end of
fiscal 1998. Temporary cash investments include an equity investment that was
classified in other assets in fiscal 1998. Cash provided by operations was $19.0
million in fiscal 1999, a $34.7 million decrease over the prior year. This
decrease was principally due to a net loss in fiscal 1999, decreases in accounts
receivable, accounts payable, and accrued liabilities and an increase in
deferred income taxes.
Net cash used for investing activities consisted primarily of purchases of
property and equipment of $32.2 million and additions to software production
costs of $3.4 million. Additionally, net purchases of temporary cash investments
of $27.1 million were made in fiscal 1999.
Net cash used for financing activities was composed of $5.3 million from the
issuance of Common Stock related to the employee stock benefit plans, $5.6
million used for the repurchase of Common Stock and $1.0 million used
for the repurchase of debentures.
As of March 31, 1999, the Company had available an unsecured $10.0 million line
of credit. Borrowings under this committed borrowing facility are available
through May 2000 and bear interest at the bank's base rate (which approximates
prime). At March 31, 1999, there were no outstanding borrowings under this
facility.
In April 1997, the Company announced a 12-year operating lease agreement
pursuant to which a new corporate headquarters facility was built in Fremont,
California. In conjunction with the project management, design and construction
of the new facility, the Company has expended $11.6 million and $1.2 million,
net of landlord contributions, in fiscal 1998 and fiscal 1999, respectively,
most of which has been capitalized. The Company believes that there are no
further significant expenditures to be incurred related to this project.
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 2000.
<PAGE>
================================================================================
consolidated balance sheets
================================================================================
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
MARCH 31, 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 13,720 $ 59,512
Temporary cash investments 140,843 101,990
Accounts receivable, net of allowances of $3,375 in 1999
and $3,926 in 1998 46,381 71,714
Inventories 19,193 19,713
Deferred income taxes 5,510 9,836
Prepaid expenses and other assets 6,834 7,254
- ------------------------------------------------------------------------------------------
Total current assets 232,481 270,019
- ------------------------------------------------------------------------------------------
Property and equipment:
Machinery and equipment 108,230 105,128
Furniture and fixtures 9,716 2,881
Leasehold improvements 20,013 2,803
Construction in progress 1,451 14,104
- ------------------------------------------------------------------------------------------
139,410 124,916
Less accumulated depreciation and amortization (83,533) (82,259)
- ------------------------------------------------------------------------------------------
Property and equipment, net 55,877 42,657
Software production costs, net 6,129 5,491
Deferred income taxes 9,053 --
Other assets 9,572 16,390
- ------------------------------------------------------------------------------------------
$313,112 $334,557
==========================================================================================
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable $ 11,755 $ 21,890
Accrued liabilities 43,638 48,239
- ------------------------------------------------------------------------------------------
Total current liabilities 55,393 70,129
- ------------------------------------------------------------------------------------------
Deferred income taxes -- 1,954
71/4% convertible subordinated debentures 24,706 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: 21,509,000 shares in 1999 and
21,454,000 shares in 1998 215 215
Additional paid-in capital 180,596 176,452
Treasury stock (4,853) (1,430)
Cumulative comprehensive income 5,921 3,323
Retained earnings 51,134 58,093
- ------------------------------------------------------------------------------------------
Total stockholders' equity 233,013 236,653
- ------------------------------------------------------------------------------------------
$313,112 $334,557
==========================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
================================================================================
consolidated statements of operations and comprehensive income (loss):
================================================================================
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Product revenue $ 157,119 $ 200,199 $ 214,862
Service and other revenue 106,716 108,522 109,576
- --------------------------------------------------------------------------------------------
Total revenue 263,835 308,721 324,438
- --------------------------------------------------------------------------------------------
Cost of sales:
Cost of product revenue 64,065 78,468 89,746
Cost of service and other revenue 69,575 67,317 72,397
- --------------------------------------------------------------------------------------------
Total cost of sales 133,640 145,785 162,143
- --------------------------------------------------------------------------------------------
Gross margin 130,195 162,936 162,295
Operating expenses:
Sales and marketing 87,025 87,248 77,382
Research and development 45,768 43,442 41,054
General and administrative 12,351 11,815 11,494
Facility relocation costs 395 3,289 --
Restructure costs 4,695 -- --
- --------------------------------------------------------------------------------------------
Total operating expenses 150,234 145,794 129,930
- --------------------------------------------------------------------------------------------
Income (loss) from operations (20,039) 17,142 32,365
Interest income 6,580 6,726 6,284
Interest expense (1,975) (1,968) (2,310)
Other 738 (797) (522)
- --------------------------------------------------------------------------------------------
Income (loss) before income taxes (14,696) 21,103 35,817
Income tax provision (benefit) (7,642) 6,753 12,515
- --------------------------------------------------------------------------------------------
Income (loss) before extraordinary gain (7,054) 14,350 23,302
Extraordinary gain on repurchase of debentures 95 -- 690
- --------------------------------------------------------------------------------------------
Net income (loss) $ (6,959) $ 14,350 $ 23,992
============================================================================================
Basic earnings (loss) per share:
Income (loss) before extraordinary gain $ (.33) $ .68 $ 1.12
============================================================================================
Net income (loss) $ (.32) $ .68 $ 1.15
============================================================================================
Diluted earnings (loss) per share:
Income (loss) before extraordinary gain $ (.33) $ .65 $ 1.08
============================================================================================
Net income (loss) $ (.32) $ .65 $ 1.11
============================================================================================
Shares used in per share computation:
Basic 21,508 21,246 20,888
============================================================================================
Diluted 21,508 22,034 21,637
============================================================================================
Consolidated Statements of Comprehensive Income (Loss)
Net income (loss) $ (6,959) $ 14,350 $ 23,992
- --------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax:
Cumulative translation adjustments (372) 54 441
Net unrealized gains (losses) on securities, net
of taxes of $1,564 In 1999 and $2,054 in 1998 2,970 3,815 (44)
- --------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (4,361) $ 18,219 $ 24,389
- --------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
================================================================================
consolidated statements of cash flows
================================================================================
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
YEARS ENDED MARCH 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents at beginning of year $ 59,512 $ 39,141 $ 52,319
- --------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) (6,959) 14,350 23,992
Adjustments required to reconcile net income (loss)
to net cash provided by operations:
Extraordinary gain on repurchase of debentures (95) -- (690)
Facility relocation costs -- 3,289 --
Restructure costs 4,158 -- --
Depreciation and amortization 21,685 19,206 17,429
Restricted stock compensation 286 401 379
Deferred income taxes (8,226) (2,418) 4,412
Changes in assets and liabilities:
Accounts receivable 25,313 11,128 (5,816)
Inventories 506 2,953 9,156
Prepaid expenses and other assets 403 (594) (927)
Accounts payable (10,114) (1,841) 2,158
Accrued liabilities (7,947) 7,193 (2,005)
- --------------------------------------------------------------------------------------------------
Net cash provided by operations 19,010 53,667 48,088
- --------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of temporary cash investments (131,608) (84,526) (159,095)
Proceeds from maturities of temporary cash investments 104,477 82,304 119,362
Purchases of property and equipment (32,214) (30,322) (13,910)
Additions to software production costs (3,359) (3,160) (2,792)
Other (461) (2,217) (316)
- --------------------------------------------------------------------------------------------------
Net cash used for investing activities (63,165) (37,921) (56,751)
- --------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Sale of Common Stock 5,294 4,485 4,617
Repurchase of convertible subordinated debentures (955) -- (6,419)
Repurchase of Common Stock (5,617) -- (2,722)
- --------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (1,278) 4,485 (4,524)
- --------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (359) 140 9
Net increase (decrease) in cash and cash equivalents (45,792) 20,371 (13,178)
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 13,720 $ 59,512 $ 39,141
==================================================================================================
Other cash flow information: Cash paid during the year for:
Interest $ 1,895 $ 1,932 $ 2,477
Income taxes $ 1,449 $ 5,989 $ 4,050
Non-cash investing and financing activities:
Unrealized gain (loss) on available-for-sale securities $ 2,970 $ 3,815 $ (44)
Income tax benefit arising from employee stock
option plans $ 808 $ 648 $ 1,807
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
================================================================================
consolidated statements of stockholders' equity
================================================================================
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE TOTAL
COMMON PAID-IN TREASURY COMPREHENSIVE RETAINED STOCKHOLDERS'
(DOLLARS IN THOUSANDS) STOCK CAPITAL STOCK INCOME (LOSS) EARNINGS EQUITY
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1996 $ 208 $ 166,013 $ (599) $ (943) $ 19,751 $ 184,430
- --------------------------------------------------------------------------------------------------------------------
Sale of 303,000 shares of
Common Stock under
employee stock benefit plans 3 3,591 -- -- -- 3,594
Purchase of 205,000 shares
of Common Stock (2) -- (2,720) -- -- (2,722)
Reissuance of 113,000 shares of
treasury stock under stock plans 1 627 774 -- -- 1,402
Income tax benefit arising from
employee stock option plans -- 1,807 -- -- -- 1,807
Net unrealized loss on securities -- -- -- (44) -- (44)
Cumulative translation adjustment -- -- -- 441 -- 441
Net income -- -- -- -- 23,992 23,992
- --------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1997 $ 210 $ 172,038 $ (2,545) $ (546) $ 43,743 $ 212,900
- --------------------------------------------------------------------------------------------------------------------
Sale of 242,000 shares of
Common Stock under
employee stock benefit plans 3 2,815 -- -- -- 2,818
Reissuance of 164,000 shares of
treasury stock under stock plans 2 951 1,115 -- -- 2,068
Income tax benefit arising from
employee stock option plans -- 648 -- -- -- 648
Net unrealized gain on securities -- -- -- 3,815 -- 3,815
Cumulative translation adjustment -- -- -- 54 -- 54
Net income -- -- -- -- 14,350 14,350
- --------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1998 $ 215 $ 176,452 $ (1,430) $ 3,323 $ 58,093 $ 236,653
- --------------------------------------------------------------------------------------------------------------------
Sale of 269,000 shares of
Common Stock under
employee stock benefit plans 2 2,877 -- -- -- 2,879
Purchase of 500,000 shares
of Common Stock (5) -- (5,612) -- -- (5,617)
Reissuance of 286,000 shares of
treasury stock under stock plans 3 459 2,189 -- -- 2,651
Income tax benefit arising from
employee stock option plans -- 808 -- -- -- 808
Net unrealized gain on securities -- -- -- 2,970 -- 2,970
Cumulative translation adjustment -- -- -- (372) -- (372)
Net loss -- -- -- -- (6,959) (6,959)
- --------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1999 $ 215 $ 180,596 $ (4,853) $ 5,921 $ 51,134 $ 233,013
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
================================================================================
notes to consolidated financial statements
================================================================================
NOTE 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. 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) 1999 1998
- --------------------------------------------------------------------------------
Purchased components $ 3,728 $ 4,340
Work-in-process 13,168 13,371
Finished goods 2,297 2,002
- --------------------------------------------------------------------------------
$19,193 $19,713
================================================================================
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 ten 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 $3.4 million, $3.2 million and $2.8 million in fiscal
1999, 1998 and 1997, respectively. Software production costs are amortized
over the lives of the products, generally three years. Amortization
amounted to $2.7 million, $2.3 million and $2.3 million in fiscal 1999,
1998 and 1997, respectively. During fiscal 1999, the Company reduced fully
amortized software production costs by $5.4 million, which had no effect on
net balances. Accumulated amortization was $5.7 million and $8.3 million at
March 31, 1999 and 1998, respectively.
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 Operations
and have not been significant. 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, 1999, the Company had no outstanding foreign
exchange contracts.
<PAGE>
================================================================================
================================================================================
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.
Earnings (Loss) Per Share Basic earnings per share ("EPS") excludes
dilution and is computed based upon the weighted average number of common
shares outstanding for the periods presented. Diluted earnings per share
reflects the potential dilution that could occur if Common Stock options
were exercised. Potentially dilutive common shares in the diluted EPS
computation are excluded in net loss periods as their effect would be
antidilutive. There were 4,947,000 of outstanding options excluded from the
dilutive earnings per share calculation at March 31, 1999. Additionally,
there were 784,000 shares of Common Stock issuable upon conversion of
debentures. These shares, and the related effect of accrued interest
expense on the debentures, were not included in the calculation of diluted
earnings per share for the year ended March 31, 1999, as their inclusion
would have been antidilutive.
1999 1998 1997
- --------------------------------------------------------------------------------
Numerator:
Income (loss) before extraordinary gain $ (7,054) $14,350 $23,302
- --------------------------------------------------------------------------------
Net income (loss) $ (6,959) $14,350 $23,992
- --------------------------------------------------------------------------------
Denominator:
Weighted average shares outstanding - bas 21,508 21,246 20,888
Dilutive effect of options -- 788 749
Total diluted 21,508 22,034 21,637
- --------------------------------------------------------------------------------
Basic earnings (loss) per share:
Income (loss) before extraordinary gain $ (0.33) $ 0.68 $ 1.12
Net income (loss) $ (0.32) $ 0.68 $ 1.15
Diluted earnings (loss) per share:
Income (loss) before extraordinary gain $ (0.33) $ 0.65 $ 1.08
Net income (loss) $ (0.32) $ 0.65 $ 1.11
- --------------------------------------------------------------------------------
Comprehensive Income (Loss) In fiscal 1999, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which requires an enterprise to report, by major
components and as a single total, the change in net assets during the
period from non-owner sources. Statements of comprehensive income (loss)
for the years ended March 31, 1999, 1998 and 1997, have been included
within the Consolidated Statements of Operations. Cumulative comprehensive
income (loss) at March 31, 1999 and 1998, is comprised of cumulative
foreign translation adjustments of ($808 thousand) and ($436 thousand),
respectively, and cumulative net unrealized gains (losses) on
available-for-sale securities of $6.7 million and $3.8 million,
respectively.
Financial Statement Estimates 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 allowances for potentially uncollectible
accounts receivable, the valuation of inventory, the valuation allowance on
deferred tax assets, lease recourse obligation and certain reserves and
accruals. Actual results could differ materially from those estimates.
Significant Risks and Uncertainties 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. While
the Company does maintain allowances for potential credit losses, actual
bad debt losses have not been material or outside of management's
expectations.
The Company participates in a dynamic high technology telecommunications
industry and believes that changes in any of the following areas and those
set forth in this and other periodic reports and documents filed with the
Securities and
<PAGE>
================================================================================
================================================================================
Exchange Commission could have a material adverse affect on the Company's
future financial position or results of operations; advances and trends in
new technologies; competitive pressures in the form of new products or
price reductions on current products; changes in product mix; changes in
the overall demand for products and services offered by the Company;
changes in certain strategic partnerships or customer relationships;
litigation or claims against the Company based on securities, intellectual
property, patent, product, regulatory or other issues or factors; risks
associated with changes in domestic and international economic and/or
political conditions or regulations; availability of necessary components;
risks associated with Year 2000 compliance; and the Company's ability to
attract and retain employees necessary to support its growth.
Recently Issued Accounting Standards In June 1998, the Financial Accounting
Standards Board adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes
in the fair value of derivatives are recorded each period in the current
earnings or other comprehensive income, depending on whether a derivative
is designed as part of a hedge transaction and, if it is, the type of hedge
transaction. This statement is effective for the Company beginning April 1,
2001, with earlier application permitted. The Company believes that this
statement will not have a significant impact on the Company's consolidated
financial position, results of operations or cash flows.
Facility Relocation Costs In April 1997, the Company entered into a 12-year
operating lease agreement for the construction of a new corporate
headquarters. 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 serve as home to
its marketing, engineering, manufacturing and administrative staff. Related
to the project management, design and construction of the new facility, the
Company has expended $11.6 million and $1.2 million, net of landlord
contributions, in fiscal 1998 and 1999, respectively, most of which has
been capitalized. The Company believes that there are no further
significant expenditures to be incurred related to this project.
NOTE TWO: TEMPORARY CASH INVESTMENTS
The Company classifies its temporary cash investments as available-for-sale
securities. The carrying value of such securities is measured at 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 until realized. Temporary cash investments at March 31
consisted of the following:
<TABLE>
<CAPTION>
1999
- ------------------------------------------------------------------------------------------------------
GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and municipalities $ 75,021 $ 220 $ (12) $ 75,229
Corporate notes and bonds 21,437 38 (21) 21,454
Other debt securities 25,955 45 (5) 25,995
Foreign debt issuances 6,537 8 (3) 6,542
Equity securities 1,625 9,998 - 11,623
- ------------------------------------------------------------------------------------------------------
$130,575 $ 10,309 $ (41) $140,843
======================================================================================================
<CAPTION>
1998
- ------------------------------------------------------------------------------------------------------
GROSS GROSS GROSS
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 issuances 6,314 1 (3) 6,312
- ------------------------------------------------------------------------------------------------------
$101,801 $ 224 $ (35) $101,990
======================================================================================================
</TABLE>
<PAGE>
================================================================================
================================================================================
The Company held $11.6 million of unregistered equity securities in a
publicly traded company which were subject to certain holding restrictions.
At March 31, 1999, the Company held unregistered equity securities in a
privately held company which are recorded at a cost of $1.1 million and are
classified as Other Assets in the Consolidated Balance Sheet.
At March 31, 1999, the fair market value of available-for-sale securities
with maturities less than one year was $56.3 million, with maturities
between one year and five years was $65.9 million, and with maturities
between five years and ten years was $7.0 million. Any gains or losses on
sales of securities are computed on a specific identification basis. In
fiscal 1999, there was a realized gain on the sale of equity securities of
$1.0 million. There were no material realized gains or losses from the sale
of securities in fiscal years 1998 and 1997.
NOTE THREE: ACCRUED LIABILITIES
Accrued liabilities at March 31 were as follows:
(DOLLARS IN THOUSANDS) 1999 1998
- --------------------------------------------------------------------------------
Accrued compensation $15,113 $18,581
Income taxes payable 6,648 10,021
Unearned income 4,735 6,442
Restructure costs 4,158 --
Other 12,984 13,195
- --------------------------------------------------------------------------------
$43,638 $48,239
================================================================================
NOTE FOUR: RESTRUCTURE COSTS
In the fourth quarter of fiscal 1999, the Company announced plans to
restructure along global lines of business to address specific market
segments. These actions resulted mainly in a reduction in the work force.
The Consolidated Statements of Operations for fiscal 1999 includes a charge
of $4.7 million. This charge consists of $4.6 million for employee
severance and other related costs and $0.1 million for office closures. The
$4.7 million charge increased fiscal 1999 loss by $0.10 per diluted share.
The Company expects to pay approximately $3.0 million in fiscal 2000 and
the remainder in fiscal 2001.
RESTRUCTURE EXPENSE REMAINING
COSTS TO DATE COSTS
- --------------------------------------------------------------------------------
Compensation $3,964 $ 424 $3,540
Outplacement 597 98 499
Office closures 135 16 119
- --------------------------------------------------------------------------------
Totals $4,696 $ 538 $4,158
================================================================================
NOTE FIVE: FINANCING ARRANGEMENTS
The Company maintains an unsecured $10.0 million line of credit which was
renewed in May 1999. Borrowings under this committed facility are available
through May 2000 and bear interest at the bank's base rate (which
approximates prime). The terms of the previous agreement required 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 not in compliance with all
covenants as of March 31, 1999; however, such non-compliance at that date
has been waived by the bank. The terms of the new agreement require $10.0
million of cash as
<PAGE>
================================================================================
================================================================================
collateral, however, previous financial covenants are no longer required.
There were no outstanding borrowings under the line of credit agreement at
March 31, 1999. BancBoston Leasing and the Company have an agreement in
which BancBoston Leasing will provide lease financing to the Company's
customers, with limited recourse of a minimum of $5.0 million or 20% of the
outstanding lease balance, whichever is greater. In fiscal 1999, the
Company recognized $5.0 million as revenue. Although the outstanding lease
payments at March 31, 1999 totaled $5.2 million, the Company's recourse is
limited to $5.0 million as discussed above.
NOTE SIX: LEASE COMMITMENTS
The Company leases its facilities under operating leases. The minimum
future lease commitments under these leases as of March 31, 1999, were as
follows:
(DOLLARS IN THOUSANDS)
2000 $ 7,959
2001 7,640
2002 6,771
2003 5,977
2004 5,220
After 2004 37,556
- --------------------------------------------------------------------------------
$71,123
================================================================================
Rental expense under operating leases was $7.6 million, $7.9 million and
$7.7 million for fiscal years 1999, 1998 and 1997, respectively.
NOTE SEVEN: 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. During fiscal 1996, the Company completed a partial call of
its outstanding debentures, reducing debenture principal by $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 gain in the Consolidated Statements of
Operations.
In fiscal 1999, the Company repurchased debentures in the face amount of
$1.1 million at a cost of $983 thousand, plus accrued interest.
Accordingly, the Company recorded a $95 thousand gain, net of taxes ($0.01
per diluted share), as an extraordinary gain in the Consolidated Statements
of Operations.
<PAGE>
================================================================================
================================================================================
NOTE EIGHT: 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 (1/100) 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 $0.01 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, 1999, no preferred shares were outstanding.
Reserved Stock As of March 31, 1999, 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) 4,946,880
Available for grant 2,894,570
Convertible subordinated debentures 784,317
Employee Stock Purchase Plan 367,754
================================================================================
Employee Stock Purchase Plan Under the current 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 or end
of the offering period. The offering period under the Plan began May 1,
1998 and purchases are made every four months. During fiscal 1999, 1998 and
1997, 286,000, 163,000 and 224,000 shares were issued under this Plan, at
weighted average prices of $9.30, $12.64 and $13.43 per share,
respectively.
Stock Repurchase During fiscal 1999, the Company repurchased 500,000 shares
of its Common Stock at an average price of $11.23 per share.
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
<PAGE>
================================================================================
================================================================================
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. Previously issued restricted stock carries certain restrictions on
transferability, which lapse over the vesting period (generally two to four
years). In fiscal 1999, no restricted stock was awarded, however, the
Company repurchased 5,000 shares. As of March 31, 1999, 239,500 restricted
shares at $0.01 per share have been awarded and issued to certain officers
and employees, of which 13,500 shares are subject to repurchase at the
original purchase price. Such rights expire ratably over the respective
vesting period. Related compensation expense totaled $286 thousand, $401
thousand and $379 thousand for the years ended March 31, 1999, 1998 and
1997, respectively.
Activity in the Company's option plans is summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE NUMBER
SHARES EXERCISE PRICE EXERCISABLE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
Granted 2,970,007 12.72
Exercised (273,845) 9.50
Cancelled (2,445,751) 15.88
- ----------------------------------------------------------------------------------------------------
Options outstanding at March 31, 1999 4,946,880 $11.28 2,180,545
====================================================================================================
</TABLE>
The following table summarizes information concerning options outstanding
and exercisable as of March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------- --------------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.25 - $ 9.50 865,520 5.16 $ 8.09 669,170 $ 7.87
$ 9.63 - $10.25 1,579,444 9.27 $10.23 53,634 $ 9.65
$10.63 - $12.25 995,004 7.63 $11.50 501,218 $11.41
$12.38 - $12.38 1,062,883 7.18 $12.38 707,737 $12.38
$12.75 - $35.75 444,029 7.54 $18.16 248,786 $20.36
- -------------------------------------------------------------------------------------------------------------------
$ 5.25 - $35.75 4,946,880 7.62 $11.28 2,180,545 $11.62
===================================================================================================================
</TABLE>
<PAGE>
================================================================================
================================================================================
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. During
1997, 1,786,000 options were cancelled and regranted.
In October 1998, 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 granted after July 24,1996, with
exercise prices in excess of $10.25 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 $10.25 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. During 1999,
1,634,000 options were cancelled and regranted.
Stock-Based Compensation As discussed in Note One, 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, SFAS 123, "Accounting for Stock Based Compensation" requires
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.
If the computed fair values of the fiscal 1999, 1998 and 1997 awards had
been amortized to expense over the vesting period of the awards, pro forma
net income (loss) and earnings (loss) per share would have been ($12.8)
million (($0.27) per diluted share), $8.0 million ($0.36 per diluted share)
and $16.9 million ($0.78 per diluted share) in fiscal 1999, 1998 and 1997,
respectively.
The Company's calculations for option grants were made using the
Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 1999, 1998 and 1997, respectively: risk-free rates
of 5.3%, 6.1% and 6.3%; stock price volatility factor of 56%, 50% and 52%;
expected option life of four months, three months and six months following
vesting; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and
recognition of forfeitures as they occur. The weighted average fair value
of options granted during fiscal 1999, 1998 and 1997 was approximately
$4.86, $5.08 and $6.49, 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 1999, 1998 and 1997, respectively: risk-free rate of 5.1%, 5.5% and
5.5%; stock price volatility factor of 60%, 48% and 48%; and expected
option life of four months, six months and six months. The weighted average
fair value of purchase rights granted in fiscal 1999, 1998 and 1997 was
approximately $3.69, $4.76 and $6.16, respectively.
<PAGE>
================================================================================
================================================================================
NOTE NINE: INCOME TAXES
Income (loss) before income taxes and the provision (benefit) for income
taxes consist of the following:
(DOLLARS IN THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------------------------
Income before income taxes:
Domestic $(13,217) $ 16,135 $ 31,360
Foreign (1,479) 4,968 4,457
- --------------------------------------------------------------------------------
$(14,696) $ 21,103 $ 35,817
- --------------------------------------------------------------------------------
Provision (benefit) for income taxes:
Current:
Federal $ 1,067 $ 6.310 $ 5,218
State (144) 1,760 1,238
Foreign (338) 1,101 1,647
- --------------------------------------------------------------------------------
585 9,171 8,103
- --------------------------------------------------------------------------------
Deferred:
Federal (4,286) (1,591) 4,070
State (3,941) (827) 342
- --------------------------------------------------------------------------------
(8,227) (2,418) 4,412
- --------------------------------------------------------------------------------
$ (7,642) $ 6,753 $ 12,515
================================================================================
The provision (benefit) for income taxes reconciles to the amount computed
by applying the statutory U.S. federal rate of 35% to income (loss) before
income taxes as follows:
(DOLLARS IN THOUSANDS) 1999 1998 1997
- -------------------------------------------------------------------------------
Statutory federal tax provision $ (5,144) $ 7,386 $ 12,536
State taxes net of federal income tax effect (284) 823 1,397
Change in valuation allowance -- (1,044) (115)
Foreign sales corporation benefit (316) (913) (1,440)
Exempt interest income (1,260) (745) (245)
Other (638) 1,246 382
- -------------------------------------------------------------------------------
Provision (benefit) for income taxes $ (7,642) $ 6,753 $ 12,515
================================================================================
Deferred tax assets (liabilities) are comprised of the following at March
31:
(DOLLARS IN THOUSANDS) 1999 1998
- -------------------------------------------------------------------------------
Reserves not currently deductible for tax purposes $ 9,009 $ 8,079
Depreciation (884) (591)
Loss carryforwards 292 --
Credit carryforwards 13,771 6,240
- -------------------------------------------------------------------------------
Gross deferred tax assets 22,188 13,728
Gross deferred tax liabilities
Capitalized software production costs (4,126) (3,892)
Unrealized gain on securities (3,499) (1,954)
- -------------------------------------------------------------------------------
Net deferred tax assets $ 14,563 $ 7,882
================================================================================
The net deferred tax assets previously shown above are presented in the
Consolidated Balance Sheet as current deferred tax assets of $5.5 million
and non-current deferred tax assets of $9.1 million at March 31, 1999.
<PAGE>
The valuation allowance decreased $1.0 million in fiscal 1998 due to the
realization of the benefit of certain tax loss carryforwards. The Company
has not provided a valuation allowance based on management's evaluation of
the likelihood of the realization of future tax benefits resulting from the
deferred tax assets.
At March 31, 1999, the Company had available federal tax credit
carryforwards of $5.7 million expiring in years 2006 through 2020, and
alternative minimum tax credit carryforwards of $4.1 million available
indefinitely. Also available at March 31, 1999 are state tax credit
carryforwards of $4.0 million, also available indefinitely.
NOTE TEN: SIGNIFICANT CUSTOMERS
Sales to the U.S. government and its agencies amounted to 24%, 33% and 29%
of revenue for fiscal years 1999, 1998 and 1997, respectively. These
amounts include sales under contracts with the U.S. Department of Defense
under which various government agencies can order products, installation
and service from the Company which amounted to 24%, 30% and 27% of revenue
for fiscal years 1999, 1998 and 1997, respectively. The Company had no
other customers that accounted for more than 10% of revenue during these
same periods.
NOTE ELEVEN: SEGMENT INFORMATION
The Company operates in one segment; the design, development, manufacture
and sale of multiservice wide area networks and associated services used by
enterprises, government organizations and carriers worldwide, and follows
the requirements of SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information." At the end of fiscal 1999, the Company was
reorganized into a line of business structure. Previously, the Company's
reportable segments under SFAS 131 were geographic areas. The financial
information for the lines of business structure is not available for
disclosure, therefore, the geographic segments are disclosed. The following
presents operating information by geographic territory for fiscal 1999,
1998 and 1997:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------
NORTH UNITED OTHER
1999 AMERICA FEDERAL KINGDOM INTERNATIONAL ELIMINATIONS TOTALS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Product $ 50,503 $ 44,330 $ 26,416 $ 39,660 $ (3,790) $157,119
Service and training 33,392 54,679 14,244 4,563 (162) 106,716
- ------------------------------------------------------------------------------------------------------------
Total revenue $ 83,895 $ 99,009 $ 40,660 $ 44,223 $ (3,952) $263,835
============================================================================================================
Long-lived assets $ 86,472 $ 1,172 $ 4,885 $ 1,058 $(12,956) $ 80,631
- ------------------------------------------------------------------------------------------------------------
NORTH UNITED OTHER
1998 AMERICA FEDERAL KINGDOM INTERNATIONAL ELIMINATIONS TOTALS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Product $ 50,724 $ 50,674 $ 31,832 $ 64,545 $ 2,424 $200,199
Service and training 37,854 52,314 16,429 2,265 (340) 108,522
- ------------------------------------------------------------------------------------------------------------
Total revenue $ 88,578 $102,988 $ 48,261 $ 66,810 $ 2,084 $308,721
============================================================================================================
Long-lived assets $ 70,164 $ 947 $ 5,758 $ 287 $(12,618) $ 64,538
- ------------------------------------------------------------------------------------------------------------
NORTH UNITED OTHER
1997 AMERICA FEDERAL KINGDOM INTERNATIONAL ELIMINATIONS TOTALS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Product $ 71,868 $ 46,244 $ 34,537 $ 62,213 $ -- $214,862
Service and training 37,956 55,024 16,667 3,735 (3,806) 109,576
- ------------------------------------------------------------------------------------------------------------
Total revenue $109,824 $101,268 $ 51,204 $ 65,948 $ (3,806) $324,438
============================================================================================================
Long-lived assets $ 53,749 $ 1,129 $ 5,943 $ 469 $(18,104) $ 43,186
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Total revenues are based on the country from which customers are invoiced.
<PAGE>
================================================================================
================================================================================
NOTE TWELVE: 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 thousand per
year). Company contributions are discretionary and were $1.1 million, $961
thousand and $860 thousand for fiscal years 1999, 1998 and 1997,
respectively.
NOTE THIRTEEN: FAIR VALUE of FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments at March 31 were as follows:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------- ----------------------
Carrying Estimated Carrying Estimated
(Dollars in thousands) Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 13,720 $ 13,720 $ 59,512 $ 59,512
Temporary cash investments $140,843 $140,843 $101,990 $101,990
Equity securities $ 1,103 $ 1,103 $ 7,582 $ 7,582
Liabilities
Foreign exchange contracts $ -- $ -- $ 5,097 $ 4,984
Convertible subordinated debentures $ 24,706 $ 19,765 $ 25,821 $ 24,530
=============================================================================================
</TABLE>
The following methods and assumptions were used in estimating the fair
values of financial instruments:
Cash and cash equivalents-the carrying amounts reported in the balance
sheets for cash and cash equivalents approximate their estimated fair
values due to their short maturities.
Temporary cash investments, equity securities, foreign exchange contracts
and convertible subordinated debentures- estimated fair values are based on
quoted market prices.
NOTE FOURTEEN: SUBSEQUENT EVENTS
During the first quarter of fiscal 2000, the Company sold all the equity
securities held in a publicly traded company at an average price of $36 per
share and a gain of $7.5 million. See Note Two in the Notes to Consolidated
Financial Statements.
During April and May 1999, the Company repurchased an additional 361,000
shares of its Common Stock at an average price of $8.30 per share. The
Company intends to continue its share repurchase program in fiscal 2000 and
from time to time will enter the market to repurchase shares. See Note
Eight in the Notes to Consolidated Financial Statements.
<PAGE>
================================================================================
independent auditors' report
================================================================================
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF NETWORK EQUIPMENT TECHNOLOGIES,
INC.
We have audited the accompanying consolidated balance sheets of Network
Equipment Technologies, Inc. and subsidiaries as of March 31, 1999 and 1998, and
the related consolidated statements of operations and comprehensive income
(loss), stockholders' equity and cash flows for each of the three years in the
period ended March 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
San Jose, California
April 19, 1999
(May 24, 1999 as to Note Fourteen)
<PAGE>
================================================================================
stock information
================================================================================
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
Network Equipment Technologies, Inc.'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 1999 HIGH LOW
- --------------------------------------------------------------------------------
First quarter $20.63 $13.94
Second quarter 17.00 8.94
Third quarter 13.63 8.00
Fourth quarter 10.88 7.88
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
In addition, the Company's 71/4% convertible subordinated debentures trade in
the over-the-counter market.
<PAGE>
================================================================================
corporate directory and information
================================================================================
Corporate Directory
Hubert A. J. Whyte*
President and Chief Executive Officer
Roger A. Barney
Senior Vice President, Corporate Services
and Assistant Secretary
Robert P. Bowe
Acting Chief Financial Officer
David P. Owen
Vice President, Strategy and Technology
Raymond E. Peverell
Senior Vice President, International
G. Michael Schumacher
Senior Vice President, Product Operations
Charles S. Shiverick
Vice President, Information Services
and Process Management
Robert T. Warstler
Senior Vice President, North America
DIRECTORS
Dixon R. Doll
Managing General Partner,
Doll Capital Management
James K. Dutton
Director, Caere Corporation and ECCS, Inc.
Walter J. Gill
Vice President and Chief Technology Officer
(retired), N.E.T.
George M. Scalise
President, Semiconductor Industry Association
Hubert A. J. Whyte*
President and Chief Executive Officer, N.E.T.
Hans A. Wolf
Chairman of the Board, N.E.T.
Vice Chairman of the Board (retired),
Syntex Corporation
*Successor to Joseph J. Francesconi commencing June 1, 1999
CORPORATE INFORMATION
Annual Meeting
The annual meeting of shareholders will be held at 10:00 a.m. on August 10,
1999, at the Company's headquarters in Fremont, California.
N.E.T. on the Internet
N.E.T.'s home page on the World Wide Web contains background on the Company and
its products, financials, and other useful information. Our web site is located
at www.net.com.
Investor Relations
N.E.T. welcomes inquiries from its stockholders and other interested investors.
To access the Company's Annual Report, Form 10-K, quarterly financial results,
and other corporate information, please visit our web site, call our hotline at
1.888.828.8080, or write to Investor Relations at N.E.T., 6500 Paseo Padre
Parkway, Fremont, California 94555.
Transfer Agent
BankBoston, NA
c/o EquiServe
Boston, Massachusetts
Independent Auditors
Deloitte & Touche LLP
San Jose, California
The N.E.T. logo and Promina are registered trademarks, and CellXpress, N.E.T.,
and PanaVue are trademarks of Network Equipment Technologies, Inc. All other
trademarks are the sole properties of their respective companies.
(C)1999 Network Equipment Technologies, Inc. All rights reserved.
Printed in the U.S.A.
LIT004-AR-0599-15K
EXHIBIT 21.1
<TABLE>
<CAPTION>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Wholly-Owned Subsidiaries of Registrant
as of June 29, 1999
<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)
</TABLE>
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 19, 1999 (May 24, 1999 as to Note
Fourteen), appearing and incorporated by reference in this Annual Report on Form
10-K of Network Equipment Technologies, Inc. for the year ended March 31, 1999.
DELOITTE & TOUCHE LLP
San Jose, California
June 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 13,720
<SECURITIES> 140,843
<RECEIVABLES> 49,756
<ALLOWANCES> 3,375
<INVENTORY> 19,193
<CURRENT-ASSETS> 232,481
<PP&E> 139,410
<DEPRECIATION> 83,533
<TOTAL-ASSETS> 313,112
<CURRENT-LIABILITIES> 55,393
<BONDS> 0
0
0
<COMMON> 215
<OTHER-SE> 232,798
<TOTAL-LIABILITY-AND-EQUITY> 313,112
<SALES> 157,119
<TOTAL-REVENUES> 263,835
<CGS> 64,065
<TOTAL-COSTS> 133,640
<OTHER-EXPENSES> 150,234
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,975
<INCOME-PRETAX> (14,696)
<INCOME-TAX> (7,642)
<INCOME-CONTINUING> (7,054)
<DISCONTINUED> 0
<EXTRAORDINARY> 95
<CHANGES> 0
<NET-INCOME> (6,959)
<EPS-BASIC> (.32)
<EPS-DILUTED> (.32)
</TABLE>
