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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended March 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to ______________
Commission File Number 0-15323
NETWORK EQUIPMENT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2904044
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6500 Paseo Padre Parkway
Fremont, California 94555
(510) 713-7300
(Address of principal executive offices,
including zip code, area code, and telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 Par Value New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
7 1/4% Convertible Subordinated Debentures
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No|_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of
the registrant on May 30, 1998 was $336,416,241.
The number of shares outstanding of the Common Stock, $0.01 par value, on
May 30, 1998 was 21,635,741.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant's Annual Report to Stockholders for the fiscal year ended
March 31, 1998 is incorporated by reference in Parts I, II and IV of this Form
10-K to the extent stated herein. The registrant's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on August 11, 1998 is
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
PART 1.
Item 1. Business
General
Network Equipment Technologies, Inc. ("N.E.T." or "the Company") was
incorporated in California in 1983 and reincorporated in Delaware in 1986.
N.E.T.'s initial public offering was in 1987 and its common stock is publicly
traded on the New York Stock Exchange under the symbol NWK. The Company employs
over 1,400 people globally and is now headquartered in Fremont, California,
having relocated in May 1998 to a new, custom-built campus. N.E.T. is a leading
designer, developer, manufacturer and supplier of wide-area networks ("WANs")
and associated services to carriers and other service providers, enterprises and
governments around the world. More than 1,500 N.E.T. customers have installed
over 20,000 N.E.T. switches in more than 70 countries worldwide.
The Company provides a range of solutions for mission-critical WAN
applications, primarily through sales of networking hardware and software,
complemented by expertise in systems integration, network design, installation,
implementation and ongoing service and support. N.E.T.'s products are based on a
range of technologies and standards used throughout the industry and provide
support such as switching, adaptation and aggregation for packet-, frame-, cell-
and circuit-based applications. They allow customers to integrate diverse
applications including voice, data, video, multimedia and imaging across single
network infrastructures. They provide efficient, cost effective and manageable
backbones for WANs, along with a range of access capabilities. They allow
carriers to provide a wide range of competitive service offerings such as native
frame relay and ATM services and enterprise customers to access those services
or build their own networks.
Forward-Looking Statements
All statements in this Form 10-K that are not historical are
forward-looking statements that involve risks and uncertainties including, but
not limited to, the risks and uncertainties discussed in this Form 10-K and in
the Company's other filings with the Securities and Exchange Commission or
available at the Company's worldwide Web site (http://www.net.com). Actual
results may differ materially from those projected.
Networking Industry
Despite recent setbacks in Asia, the world is experiencing significant
economic growth and prosperity. This growth is at local and national levels and
in the expansion of global economic trade and business activity. In response to
these economic drivers, and to the related increases in levels of business and
consumer demands, governments and other entities such as the World Trade
Organization are encouraging the rapid development of communications
infrastructure, primarily through deregulation and liberalization of markets.
Deregulation and Liberalization
In the United States, the telecommunications industry has moved from a
monopolistic, primarily voice-oriented environment in the early 1980s to largely
liberalized and competitive networking markets defined by wide ranges of
products, new services and solutions for the communications needs of businesses
and consumers.
In Europe, deregulation and resulting liberalization of the communications
markets started several years ago in the United Kingdom. In January 1998, the
voice segment of the developed European markets was also deregulated. This
latter development in particular is expected to be the catalyst for the
emergence of similar competitive trends to those experienced in the United
States. In other markets around the world, similar developments are under way
allowing increased competition and fueling market growth.
In most markets, deregulation and liberalization has tended to occur in
waves. Newer market segments such as mobile communications or Internet access
tend to be liberalized early in the cycle. Such segments are not already
dominated by an entrenched monopolistic carrier or they require significant new
infrastructure development and the
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liberalization process attracts the necessary capital investment. More
established or traditional market segments such as basic voice services have
historically tended to be highly regulated and dominated by monopolistic or
government-controlled carriers, usually PTTs. Political factors tend to be very
significant in the deregulation and liberalization process. Other trends
encouraging the ongoing liberalization process include the emergence of
alternative solutions such as those provided by international callback carriers
who deliver voice services based on an arbitrage of international calling tariff
differences between many countries.
The ongoing global deregulation and liberalization trends have contributed
to significant new market dynamics, considerably greater competition, a
proliferation of expanded services, increased customer choices and alternatives,
and a general decline in prices and an improvement in quality.
Voice, the Growth of Data Networking and Convergence with Telephony
In the United States, major new networks are being deployed by carriers at
the national, state and city level which, along with competition from cable
operators and wireless providers, is leading to an explosion in bandwidth
supply. Already inexpensive voice services will likely become even more so, and
new bandwidth is also becoming available for the growth of data and other
services. In the United States and other developed voice markets, the
deregulation trend mentioned above has resulted in significantly greater
competition, merger activity, carrier diversification, technological and service
innovation, and more. However, in many emerging country markets, much of the
investment in voice communications is still in the stages of providing basic
services to large proportions of the population or alternatives to basic
fixed-line services via mobile or other technologies.
International voice traffic has traditionally been an area of high cost to
consumers versus prices for local or long distance services. Liberalization has
lead to the emergence of carriers specializing in callback and international
voice resale and, along with increasingly available bandwidth, will likely lead
to a market with steadily declining - and, ultimately, leveling - prices.
In markets such as the United States, a major trend is the growth of data
networking and its anticipated convergence with voice networking, or telephony.
Data networking services have grown from a fraction of the overall
communications market to the point where, in the next few years, they are
generally expected to equal and then substantially exceed the telephony market
segment. Significant among the drivers of this growth are:
o the explosive global expansion and use of the Internet for commercial
and consumer purposes;
o the development of corporate intranets - the use of Internet Protocol
("IP")- based solutions for internal communications (for example,
employee-to-employee) within a particular business;
o the emerging areas of electronic commerce and its close relative, the
extranet - IP-based networks linking companies and their employees
with partners, vendors, other enterprises, franchisees and customers;
o the development of Virtual Private Networks ("VPNs") - a shared
network, with a portion of the network provided on a service basis to
a specific user or business;
o the emergence of new bandwidth intensive applications such as
multimedia, telemedicine and distance learning; and
o the further deployment of business applications built on the client
server and local area computing infrastructures developed in the last
decade or more.
For N.E.T., the emergence of VPNs is a logical extension of the solutions
and applications the Company has always provided. N.E.T.'s networking experience
helps carriers and enterprises migrate to this next generation of WANs, whether
using Asynchronous Transfer Mode ("ATM"), frame relay or IP technologies.
Convergence of traditionally separate voice, video and data environments is
another key trend and may occur at different levels throughout a network. In
WANs, convergence will be driven by emerging customer applications
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such as universal messaging (e-mail and voice mail integration), the development
of new revenue-generating services, business efficiencies such as cost and
management savings, and the merging of multiple traffic types across the same
network infrastructure.
Network Architectures and Characteristics
The Company competes primarily in the WAN market space. This segment
provides the infrastructure and capability to link local area networks ("LANs"),
campus networks, voice traffic, video and other applications to each other via
public carrier-provided transmission facilities. In WANs, the center, or core,
is the high-capacity backbone or transmission infrastructure developed and
maintained by a major carrier or network service provider. These are typically
high-speed, high-capacity links using ATM, SONET, or other technology and built
on switches characterized by high capacity, high reliability and other
considerations. Beyond and around the core is an edge layer which defines the
area at the boundary between a carrier or service provider and its enterprise
customer or other user. This is the area where significant value is added by
switches providing features to help manage traffic, service levels,
concentration, and with capabilities such as support of traffic from multiple
interfaces such as Frame Relay and native ATM. Products in this space may be
located in carrier facilities or deployed at customer premises. Around the edge
layer is an access layer characterized by products with high port densities and
correspondingly low price per port, by devices such as access concentrators and
by technology or service specific products such as ATM access devices. In
essence, these products allow the access to and from the WAN for the wide number
of users and traffic types.
Company Strategy
N.E.T. focuses its strategy and expertise on the edge and access layers,
and on providing products, services and solutions encompassing the range of
technologies used in these spaces. The Company targets three major vertical
markets or industries: (i) carriers or network service providers, (ii)
enterprises such as financial institutions, manufacturers, utilities and
retailers, and (iii) governmental agencies.
Carriers
Carriers are the entities providing communications services of various
kinds to the public, both consumers and enterprises. They range in size and
scope from major global and national corporations to small local telephone
companies. They may specialize in certain types of traffic or services, such as
cellular services or Internet service provisioning, or they may have developed
an integrated range of services or geographical coverage in an effort to provide
"one stop shopping" for clients.
N.E.T. provides a range of solutions designed to meet carrier requirements.
These solutions typically consist of hardware platforms and related software,
network management tools, expertise and support. N.E.T. customers in this
segment include global consortia, PTTs in markets such as China, major country
and regional carriers, International Simple Resellers ("ISRs"), callback
carriers, Internet Service Providers ("ISPs"), cellular and wireless carriers
and more. Applications that can be enabled by N.E.T. carrier solutions include
Digital Data Networks ("DDNs") providing basic data services in emerging markets
and the provisioning of voice compression and switching capabilities to ISRs.
Enterprises
Commercial enterprises face many challenges in networking. For example,
multinational corporate WANs present multiple problems. Networks are growing and
becoming more complex. Support and management of different platforms running
different applications is expensive and companies must maximize bandwidth use in
the infrastructure to operate at peak efficiency. And in increasingly complex
global environments, multinational enterprises face the continued challenge of
lack of availability of certain services in some markets, skilled employee
availability, and so on.
N.E.T.'s enterprise strategy is to provide an integrated range of solutions
and alternatives with which to address such challenges. In addition, the Company
offers solutions that allow the development of VPNs, the use of public
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networks in conjunction with private infrastructure, or the efficient
outsourcing of networks from an enterprise to a carrier.
Governments
N.E.T.'s strategy includes addressing the needs of government agencies with
a range of communications solutions. For example, military services around the
world require rapidly deployable, secure and reliable mobile communications
systems for success in a variety of operations. Personnel are often deployed at
a moment's notice to a remote location for combat operations, peacekeeping, or
humanitarian missions and must be able to communicate with other remotely
located resources, as well as with strategic communications networks that
support the command structure. For numerous emergency management agencies,
access to reliable mobile communications is vital.
N.E.T. Products and Solutions
The Company's products provide a range of solutions addressing the needs of
carriers, enterprises and governments in the WAN access and edge layers. These
systems offer superior applications availability with sophisticated bandwidth
and traffic management as well as connectivity, broadband transmission and
unified network management across the WAN. Historically, the great majority of
product revenue has been generated by the Company's IDNX(R) Multiservice
Bandwidt Managers. While future sales of IDNX products are expected to decrease,
the Company expects revenue growth to come from its Promina(TM) product line and
PanaVue(TM) network management systems. The major product groups in the
Company's range of solutions now include:
o multiservice access platforms providing solutions designed to optimize
use of ATM, frame relay, leased lines and other services, and
incorporate a range of integrated products for switching, LAN
internetworking, voice compression, ATM access and other options;
o broadband switches providing ATM- and SONET-based solutions targeted
at carriers for consolidation and management of multiservice traffic
across high-speed backbone networks;
o access and lower-end networking products providing cost-effective
connectivity from smaller locations with lighter traffic requirements;
and
o network management systems enhancing operator visibility into network
conditions and providing functions such as fault correlation and
diagnostics.
N.E.T.'s Promina product line is the Company's new ATM-centric family of
switches and access multiplexers in three major groups: the Promina 800 Series,
the Promina 2000 and the Promina 4000.
Introduced in 1997, the Promina 800 Series Multiservice Access Platform
provides integrated, single-platform access to ATM, frame relay, and leased line
services. For ATM services, it provides integration and support for traffic on
one user-to-network interface ("UNI"). Support is provided for a wide range of
applications including voice, video, data, fax, modem, LAN, Internet, ISDN and
frame relay traffic. It is also designed to be a very high availability
platform, with distributed intelligence for mission-critical availability and
rerouting. The Promina 800 Series is complemented and enhanced by a range of
products providing a "mix and match" range of capabilities depending on the
customers' specific requirements. For example:
o The PrimeVoice(TM) Plus Compression Module offers a significant
increase in call capacity on existing leased lines and supports
automatic detection, digitization, and transmission of Group III fax
and voiceband data ("VBD") modem calls.
o N.E.T.'s LAN/WAN Exchange(TM) ("LWX") Edge Router routes and bridges
LAN traffic over the WAN. The LWX incorporates Cisco IOS source code
and offers performance, availability and serviceability features for
remote access bridging and routing.
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o The PrimeVoice ISDN Switching Module supports switched ISDN services,
not only for voice networking, but also for videoconferencing and
LAN-to-LAN connectivity.
o The N.E.T. FrameXpress(TM) Switching Module enables provisioning of
standards-based frame relay services on the network by transporting
frames over private trunks or public frame relay services.
o The CellXpress(TM) ATM Module provides an efficient industry
standards-based solution with the operating advantag of ATM. The
CellXpress Module consolidates internodal trunk connections to a
carrier network at a single access point with resulting traffic
aggregation, reducing line costs by incorporating multiple access
lines into a single ATM UNI link.
o Data Port Modules offer optimum support for packet-, frame- and
circuit-based data traffic using industry-standard interfaces.
The Promina 2000 ATM Network Multiplexer adapts and aggregates legacy
traffic such as frame relay and Circuit Emulation Services onto an ATM backbone.
It provides statistical multiplexing and switching that helps reduce
transmission facility overhead.
The Promina 4000 ATM Switch is a carrier-edge switch designed for the
consolidation of multiservice traffic for reduced management expenses, superior
bandwidth utilization, support for a wide range of applications and quality of
service ("QoS") requirements and is engineered for very high availability. Its
SwiftCell(TM) Advanced Traffic Management provides fair access to network
resources while balancing use of those resources with service integrity. It
employs a scalable ATM network architecture through a "switch on a card"
approach. Configurations can be tailored to application requirements, avoiding
overprovisioning and allowing solutions to match requirements with a great
degree of precision and flexibility.
The N.E.T. PrimeSwitch(TM) 100 Series Multiprotocol Access System provides
low-cost access solutions for voice and data traffic, with the ability to use
ISDN or leased lines for cost-effective connectivity.
N.E.T.'s SONET Transmission Manager(TM) ("STM") is designed for intelligent
broadband networking. The STM platform value to bandwidth-intensive,
mission-critical applications in both carrier and enterprise environments.
The growth and scale of today's networks, the convergence trend discussed
above, and the presence of equipment from multiple vendors within the same
network combine to increase complexity and the requirements for network
management. To address these evolving needs, N.E.T. offers the PanaVue
Management Platform. Its open design, based on industry standards, provides
scalability. The platform's user interface lowers the cost of network ownership
by reducing training time, improving access and streamlining operations
throughout the network. The platform supports the main family of N.E.T. products
and, additionally, the platform's Advanced Fault Management System ("AFMS")
provides unified fault management plus integrated service and network management
for devices in the network including those from other vendors. It delivers
Web-based network management enabling access to real-time network information
from any computer with a Web browser and the proper security clearance.
New Product Introduction
Given the dynamic characteristics of its markets, N.E.T. must continue to
develop and enhance its product lines to add value and meet the needs of those
strategic markets as they evolve, through internal development, the acquisition
of technology, or association with entities whose technologies or product
offerings complement its own. The Company has entered into a number of
agreements relating to the development, license or purchase of technology to
extend the reach and functionality of the Company's product lines, and will
continue to do so as deemed appropriate by management.
Many products designed and manufactured by N.E.T. contain components or
intellectual property obtained from third parties. The Company's ability to
maintain and enhance the value of its intellectual property and technology and
third party licenses and relationships will affect future product and service
offerings. Moreover, the
5
Company believes that operating results will depend on successful development
and introduction of new products and enhancements to existing products and
service offerings. There can be no assurance that the Company will succeed in
such efforts or that customers will accept new, enhanced and existing products
and services in quantities and at prices and margins that are consistent with
the Company's expectations. Changes in the Company's distribution, product and
technology relationships with a number of entities could have a material impact
on competitive and other factors described herein, including the Company's
operating results.
The timely commercial availability of all of the Company's products and
services and their acceptance by customers are crucial to the future success of
the Company. The Company has invested and will continue to invest in designing
and delivering products that will function effectively well into the next
century. The Company expects these investments to be successful but, given the
nature and complexity of the N.E.T. and third party products and software
offered by the Company and the complexity and mixed vendor nature of equipment
used in WANs, there can be no assurance that these development efforts will be
successful or that customer acceptance of products or services will be achieved
or maintained. Substantial delays in availability or acceptance of the Company's
products and services would materially and adversely affect the Company's
operating results and financial condition.
Marketing, Distribution and Customers
As discussed above, the Company focuses primarily on information- and
communications-intensive organizations in the carrier and other service
provider, enterprise and governmental vertical markets. These customers may be
local, national, multinational or global in their operations, either as
suppliers of services or as end-users. Although originally focused on the United
States, N.E.T.'s presence in markets in Europe, Asia, Latin America and other
regions has increased substantially over the years.
In the United States and the United Kingdom, N.E.T. employs a highly
skilled sales and support organization which develops close direct relationships
with customers. These relationships may include pre-sales activities such as
network design and consultation, sale of products and solutions, post-sales
support of the installed base and other value-added services. In addition, the
Company has developed a substantial network of distributors, systems
integrators, value-added resellers and others to represent and support the
N.E.T. product line in other vertical or geographical markets. These
relationships are supported by N.E.T. subsidiaries and offices around the world
and staffed by skilled N.E.T. employees who provide expertise, marketing
support, network design and other assistance.
N.E.T.'s field sales and support structure is organized into three business
units handling North America (the United States and Canada), EMEA (Europe,
Middle East and Africa) and APLA (Asia Pacific/Latin America) that are
responsible for all vertical market customer and partner relationships within
those regions. These units are in turn supported by regional and corporate
marketing, sales support, technical training and other resources.
International sales represented 37%, 35% and 27% of the Company's revenue
in fiscal 1998, 1997 and 1996, respectively. Government ownership or control of
the telecommunications industries and regulatory standards in some foreign
countries could be a substantial barrier to the introduction of wide-area
communications products for use in private or hybrid networks in such countries.
Financial information regarding foreign operations and export sales is discussed
in Note Ten in the "Notes to Consolidated Financial Statements" in the Company's
1998 Annual Report to Stockholders ("Annual Report") filed as Exhibit 13 to this
report.
In December 1989, the Company entered into a systems integration and
distribution agreement with Ericsson Business Networks AB of Sweden
("Ericsson"). Under this agreement, as amended, and additional agreements with
certain Ericsson subsidiaries, Ericsson has the non-exclusive right to purchase,
resell, distribute and license various of the Company's products. Ericsson is
responsible for providing service and support for the N.E.T. products it
markets. Starting in 1993, N.E.T. has entered into a number of distribution and
technology agreements with subsidiaries of Datacraft Ltd., an Australian
corporation, including Datacraft Asia Ltd. and Datacraft Technologies Pty. Ltd.
Datacraft Asia Ltd. accounts for a significant proportion of the Company's
distribution sales in mainland China. During the Company's fiscal 1998,
Dimension Data Holdings Limited ("Dimension Data"), a South African information
technology group, acquired Datacraft Ltd. and, with it, control of the various
subsidiaries. The Company does not anticipate material changes in its operating
results as a result of this acquisition. The Company renewed and extended its
agreement with Datacraft Asia Ltd. during its fiscal 1998 and recently signed an
agreement with Dimension Data for distribution of the Company's products in
Africa. The Company did not renew
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its master agreement with International Business Machines Corporation ("IBM") in
fiscal 1998. However, the Company's products continue to be sold through
distribution agreements with various IBM subsidiaries and operations in
individual countries.
As discussed above, the Company targets the carrier and service provider
vertical markets as a key element of its strategy. A number of these carriers
also act as distribution channels for the Company's products to enterprises and
other carriers worldwide. These relationships include joint marketing, systems
integration, resale and other agreements with carriers such as Concert,
GlobalOne, MCI, Bell Atlantic Network Integration, US West, SouthWestern Bell,
Unisource Business Networks, Tele Danmark and Hanwha Corporation.
Sales to Significant Customers
N.E.T.'s wholly-owned subsidiary, N.E.T. Federal, Inc., which is part of
the Company's North America business unit, markets the Company's products to
United States government entities both directly and through collaborative
government contracting and subcontracting arrangements. It has entered into
several contracts under which it provides its products and services to various
government agencies (the "Government Contracts"). The Government Contracts
encompass varying periods, but most may be terminated by such government
agencies at their convenience or at annual intervals. Sales to the U.S.
government and its agencies amounted to 33%, 29% and 34% of revenue for fiscal
years 1998, 1997 and 1996, respectively. These amounts include sales, which
amounted to 29%, 27% and 30% of revenue for fiscal years 1998, 1997 and 1996,
respectively, under contracts with the Department of Defense ("DoD") under which
various government agencies can order products, installation and service from
the Company. Discontinuance of orders from, or disqualification of the Company
by, the DoD or other significant federal customers would materially affect the
Company's operating results and financial condition. Apart from the U.S.
government and its agencies, no other single customer account was responsible
for ten percent or more of revenue during fiscal 1998, 1997 or 1996.
Historically, the Company has experienced customer ordering patterns that
have resulted in the majority of the Company's revenues in each quarter coming
from orders received and shipped in that quarter, including a large portion of
orders received and filled in the last month of the quarter. For further
information, please refer to "Business Environment and Risk Factors" in
"Management's Discussion and Analysis" on pages 20 through 23 of the Company's
1998 Annual Report.
Customer Service and Support
The markets, customers and complex challenges of the networking industry
described earlier require not only hardware- and software-based solutions, but
also significant support, service and other value-added assistance in the
development, operation and expansion of the related networks. Since its
inception, N.E.T. has viewed customer service and support as a key element of
its overall strategy and competitive differentiator, and a critical component of
its long-term relationships with customers.
The Company's SourcePoint(TM) Services offerings provide a wide range of
service and support options to end users and distributors of N.E.T. products.
These offerings include product installation, a choice of different hardware and
software maintenance programs, upgrades, repairs, technical assistance and
training. In addition to these and other traditional support activities,
including field service and the Company's investments in Technical Assistance
Centers ("TACs"), the Company continues to introduce new programs and tools to
enhance its value add and customer satisfaction in this area. For example, the
Company has introduced an Electronic Support Center. This is a Web-based service
offering first-line troubleshooting information for major N.E.T. product lines.
Technical information provided includes Troubleshooting Guides, Hints and Tips,
Cabling Diagrams, Frequently Asked Questions and other product-specific details.
A Web-based interface with N.E.T.'s TAC is also available using a new Online
Case Management tool. Online Case Management enables clients to open trouble
cases, query case status and add Notes to existing cases. Clients can also use
OnLine Case Management to track case status from opening to closing, all via
their local Web browser.
The Company continues to invest in its TAC operations, adding tools and
capabilities to enhance its support role. TAC support is fee-based under
contracts or on a time basis. The TACs are staffed 24 hours a day and are
7
available on a year-round basis. TAC engineers provide assistance over the
telephone to their clients or partners or, when authorized, by accessing
customers' networks directly. TAC engineers have access to facilities to
replicate customer problems and test solutions prior to implementation.
The Company provides educational services to partners and end-users at a
number of facilities in the United States, Latin America, and Europe, and
through its partners and via traveling facilities in other locations. N.E.T.'s
educational services can be customized to meet the unique requirements of its
customers.
N.E.T. has also developed expertise in systems integration and services
provided globally as N.E.T. SourcePoint Professional Services. These high value
services include helping customers optimize their investments, the outsourcing
of selected operations functions to N.E.T., or provision of additional expertise
on a project basis. N.E.T.'s Professional Services can be utilized throughout
the various phases in the network life cycle from planning to design through
implementation.
In the case of the Company's international and multinational customers,
services are provided by either N.E.T. or by its integrated network of
authorized partners trained and supported by N.E.T.'s headquarters, TAC and
field operations.
A significant amount of the Company's revenues and profits are generated by
its service and support offerings. There can be no assurance that customer
acceptance of such current and future offerings will be maintained or achieved.
Competition, product reliability, remote diagnostic and repair capabilities,
sales through distribution partners and other factors may impact service and
support revenues and profitability.
Research and Development
The Company believes that product and technology leadership are critical to
long-term success in the highly dynamic markets in which it competes.
Furthermore, it believes that the Company's future operating results will depend
on its ability to continue to enhance its Promina and PanaVue product lines as
well as to develop and bring to market on a timely basis new products and
services that meet market and customer requirements. N.E.T. therefore
continually monitors markets, its customers' businesses and technology
developments in order to develop solutions that proactively address customer
needs, and engages in research and development ("R&D") to develop new products
and enhancements to existing products and services as technology and the
Company's performance permits. The Company's R&D spending totaled $43.4 million,
$41.0 million and $36.0 million for the fiscal years ended 1998, 1997 and 1996,
respectively.
The Company's development efforts are focused on its strategic market
segments and the key technologies involved in providing solutions for these
markets. Product development priorities include those intended to enable N.E.T.
to occupy a prominent position in the ATM WAN solutions market; to enhance the
carrier-compatibility of certain products; and to introduce product enhancements
which meet the evolving requirements of specific markets and distribution
channels. While most development activity is undertaken in-house, the Company
uses external development organizations to complement its own resources and
shorten time to market for resulting products and enhancements. The scalable and
modular architecture employed by the Company for its main product families
allows not only greater efficiency in the development and delivery of new
products and enhancements, but also benefits customers who can "mix-and-match"
modules according to their networking needs and use the same modules within
different switch chassis.
For additional discussion of the Company's R&D expenditures in fiscal 1998,
1997 and 1996, see "Management's Discussion and Analysis" on pages 16 through 23
of the Company's 1998 Annual Report. The Company plans to continue funding R&D
efforts at levels necessary to advance product programs and expects R&D spending
to increase in fiscal 1999, while decreasing as a percentage of planned revenue.
Manufacturing
The N.E.T. manufacturing process consists of the production of mechanical
and electrical subassemblies as well as custom system assembly and test. N.E.T.
uses custom fabricated printed circuit boards and subassemblies, standard and
custom integrated circuits, and power supplies and mechanical hardware purchased
from outside
8
suppliers. The Company's products also include components, assemblies and
subassemblies that are currently available from single sources and, in some
cases, are in short supply. Testing and manufacturing of products designed by
N.E.T. have generally been outsourced to third parties. Final assembly, quality
control and testing is generally performed at the Company's manufacturing
facilities, now located in Fremont, California. Availability limitations,
performance of outside vendors, quality control issues, price increases, or
business interruptions could materially impact the Company's financial
performance.
N.E.T. products are manufactured from components and assemblies designed to
meet the Company's quality and reliability requirements. The Company also
resells certain complementary products that are manufactured by outside vendors.
The Company relies to a significant degree on such third parties for quality
control and support of their products and for order fulfillment. To date, N.E.T.
has not experienced any significant delays in the delivery of material or
products from either subcontractors or vendors, but availability limitations
could adversely affect operating results. The Company's products include
components, assemblies and subassemblies that are currently available from
single sources and, in some cases, are in short supply. Although N.E.T. believes
alternative sources or substitutes for most of such single-sourced items are
available or, in most cases, could be developed, if necessary, any delay or
difficulties in developing such alternatives or substitutes could result in
shipment delays and could adversely affect operating results.
The Company has entered into software escrow arrangements and has granted
to certain customers manufacturing rights that are exercisable by the customer
in limited circumstances, such as upon material default by the Company of its
obligations under its agreement with such customers.
The Company seeks to maintain inventory in quantities sufficient to ship
product quickly (normally within 15 to 60 days) after receipt of order. It
schedules some production and supply of products based on internal sales
forecasts. Many of N.E.T.'s customer agreements provide that delivery dates may
be rescheduled or orders canceled, although in certain circumstances a charge
may be assessed upon rescheduling or cancellation. Because of these and other
factors, there are risks of excess or inadequate inventory that could materially
impact expenses, revenue and, to a greater degree, net earnings.
Quality
The Company has a Total Quality Management process and is focused on
continually enhancing the quality of products and services delivered to
customers worldwide. This includes activities to improve the quality of supplied
components, subassemblies and internal Company processes. The Company's quality
system, which includes its business processes and procedures worldwide, is
certified to ISO 9000 international standards. N.E.T. is also certified to ISO
9001, which covers quality standards for design and development, production,
installation and servicing. In addition, N.E.T. has received TickIT
certification for complying with quality standards for software development.
The Company established a Year 2000 compliance team in early 1997 to
identify and take reasonable steps to minimize the effect of Year 2000 issues
that may impact the Company's products and business operations. The Company
developed its N.E.T. Products Year 2000 Compliance Program, which is posted on
the Company's Web site. This Compliance Program provides N.E.T. customers and
partners with information on the Year 2000 compliance status of N.E.T. products
and identifies solutions for achieving network system and application compliance
prior to the year 2000. In addition, the Year 2000 compliance team has been, and
is, evaluating Year 2000 issues relating to the Company's internal systems and
third-party capabilities upon which the Company relies in conducting its
business, including financial systems, manufacturing applications, customer
service and support, desktop applications and infrastructure such as networks,
telecommunications products, banking and financial services, service providers
and security systems. Although the Company has not yet determined whether all of
the foregoing systems and applications are fully Year 2000 compliant, based upon
the information currently available, the Company believes that the costs
associated with the Year 2000 issue, and the consequences of incomplete or
untimely resolution of the Year 2000 issue, will not have a material adverse
effect on its business, operating results or financial condition.
9
Competition
The communications industry in general, including the specific segments
within which N.E.T. competes, is intensely competitive and is characterized by
advances in technology that frequently result in the introduction of new
products and services with improved performance characteristics. Recently, the
industry has experienced consolidation resulting in a significant increase in
the size and capabilities of many entities that compete with N.E.T. The Company
believes that the principal competitive factors in its target markets are
experience, product capabilities, standards compliance, technical services and
support, quality, technical and other reliability, vendor reputation, stability
and long-term prospects, distribution capabilities and value propositions.
The Company believes that it currently competes favorably with respect to
many of these factors. However, many of the Company's current and potential
competitors have greater name recognition, a larger installed base of networking
products, more extensive engineering, manufacturing, marketing, distribution and
support capabilities in addition to greater financial, technological and
personnel resources. Actual or perceived failure to keep pace with technological
advances or other competitive factors would adversely affect the Company's
competitive position and could adversely affect N.E.T.'s future revenue levels
and operating results.
In the Company's selected markets it competes with other WAN communications
equipment vendors. These include products and services from vendors such as
Ascend Communications, Cisco Systems, General DataComm Industries, Lucent
Technologies, Newbridge Networks Corporation and Northern Telecom ("Nortel").
Consolidation in the networking industry continues to accelerate through
strategic alliances, mergers and acquisitions and joint technology and marketing
agreements. Continued or successful consolidation could result in stronger
competitors and may adversely affect the Company's competitive position and
operations. In addition, new vendors continually emerge as competitors in the
Company's selected markets. N.E.T.'s enterprise WAN solutions also compete with
certain public carrier network services and service providers. Many of these
competitors enjoy substantially greater marketing resources and customer
recognition than the Company.
The Company's agreements with Ericsson and the Datacraft Ltd. companies do
not prohibit manufacturing, marketing or servicing products that compete
directly with N.E.T.'s products. N.E.T.'s operating results could be adversely
affected if these or other companies announced the availability of, or
successfully introduced, such products or services.
As discussed below under "Government Regulation", in the United States, the
Telecommunications Act of 1996 (the "1996 Legislation") removed restrictions
that had been imposed on Regional Bell Operating Companies ("RBOCs") by the AT&T
divestiture decree thus allowing them, under certain conditions, to manufacture
telecommunications equipment or customer premises equipment. Competition from
carriers that decide to manufacture such equipment, with their far greater
resources and large customer bases, or from other competitors as discussed
above, could cause a severe reduction in selling prices or volumes for
multiservice platforms and other communications products or services, which
would have a material adverse affect on the Company's operating results and
financial condition.
Government Regulation
As discussed above, the telecommunications industry is regulated by
governments and other agencies around the world. Government regulatory policies
are likely to continue to have a major impact on N.E.T.'s business by affecting
the availability of voice and data communications services and equipment, the
prices and terms of carriers' competitive offerings and the ability of companies
directly to manufacture and market equipment and services that compete with
N.E.T.'s offerings.
The 1996 Legislation enacted in February of that year, was the first major
change in U.S. telecommunications law since the Communications Act of 1934. This
far-reaching legislation will influence the U.S. telecommunications industry in
many ways. Certain changes could have a direct impact on N.E.T.'s business. For
example, the 1996 Legislation removed restrictions on RBOC activities such that,
under certain conditions, the RBOCs may be permitted to manufacture
telecommunications equipment or customer premises equipment. If any RBOCs
manufacture or form alliances with other manufacturers to develop such
equipment, N.E.T. could be materially and adversely affected by direct
competition with the RBOCs.
10
In addition, N.E.T. customers usually are carriers or use carrier network
services, the rates and terms of which are subject to varying degrees of public
utility-type government regulation. For example, in the U.S., decisions at the
federal and state level have, in some instances, provided certain carriers with
increased flexibility in structuring and pricing their services. Similar impact
of regulation or deregulation may occur in other N.E.T. markets, such as in
Europe, as mentioned earlier. Changes in the rates or terms of carrier-provided
service offerings may adversely affect the demand for, or limit the usability
of, network products and services including those provided by N.E.T. to
carriers, enterprises and other customers.
The Federal Communications Commission ("FCC") in the U.S. and some foreign
governments require that N.E.T.'s products comply with certain rules and
regulations, including technical rules designed to prevent harm to the telephone
network and avoid interference with radio-based communications. The Company
believes it complies with, or is exempt from, all applicable rules and
regulations with respect to the sale of its existing products in the United
States and in certain foreign countries. Failure to comply with FCC or similar
governmental requirements may result in the disconnection of installed equipment
from common carrier-provided circuits. Any delays in complying with FCC or
foreign requirements with respect to products could delay their introduction or
affect the Company's ability to produce and market its products. Sales to the
U.S. government are subject to compliance with applicable regulations (e.g.,
Federal Acquisition Regulations).
Proprietary Rights and Licenses
N.E.T. has obtained patents in the United States and other countries on
inventions relating to its products and has applied for others. While possession
of patents, copyrights and trade secrets could affect the ability of companies
to introduce products competitive with the Company's products, N.E.T. believes
that its success does not depend primarily on the ownership of intellectual
property rights, but on its innovative skills, technical competence and
marketing abilities, and, accordingly, that patents, copyrights and trade
secrets will not constitute an assurance of N.E.T.'s future success. N.E.T. is
aware that the laws of some other countries do not protect proprietary rights to
the same extent as the laws of the United States.
Because of the existence of a large number of third-party patents in the
telecommunications field and the rapid rate of issuance of new patents, some of
the Company's products, or the use thereof, could infringe on third-party
patents. If any such infringement exists, the Company believes that, based upon
historical industry practice, it or its customers should be able to obtain any
necessary licenses or rights under such patents on terms which would not be
materially adverse to the Company. However, there can be no assurance in the
future that actual or alleged infringement will not materially affect the
Company's operating results or financial condition.
The Company regards elements of its software and engineering as proprietary
and relies upon non-disclosure obligations, copyright laws and software
licensing agreements for protection. Despite these restrictions, it is possible
that competitors may obtain information that N.E.T. regards as proprietary. Some
of the technology incorporated in certain of the Company's products is licensed
from third parties. In the event of termination or expiration of the licensing
agreements for such technology, the Company's ability to market those products
could be adversely affected, which in turn could materially affect the Company's
operating results and financial condition.
Employees
As of March 31, 1998, the Company had 1,408 employees. None of the
Company's domestic employees are represented by a collective bargaining
agreement. Certain of the Company's employees outside the United States are
governed by national collective bargaining or similar agreements. The Company
has never experienced any work stoppage. The Company believes that its employee
relations are good.
Item 2. Properties
N.E.T. currently leases approximately 290,000 square feet of office, R&D,
and manufacturing space in a modern industrial park in Fremont, California under
a new 12-year lease agreement for three buildings, with an exclusive option to
lease another 200,000 square feet of space. The custom-built Fremont facility
includes two buildings configured for office space and R&D, and one designed for
manufacturing and support functions. N.E.T.
11
and its subsidiaries also lease sales and service offices at other locations in
the United States, China, France, Germany, Mexico, Norway, Singapore, Uruguay,
the United Kingdom and other countries. The Company has recently vacated
approximately 287,000 square feet of space in Redwood City, California under a
lease agreement expiring in October 1998. The Company believes that its current
and planned facilities are, in all material respects, suitable and adequate for
its anticipated needs.
Item 3. Legal Proceedings
The Company is not aware of any material legal proceedings pending or
threatened against it at this time.
Item 4. Submission of Matters to a Vote of Security Holders
On March 10, 1998, the Company held a Special Meeting of Stockholders. At
this meeting, the stockholders voted to approve and adopt the Network Equipment
Technologies, Inc. 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan")
and to authorize issuance of up to 600,000 shares of the Company's Common Stock
under the 1998 Purchase Plan as follows: 14,862,474 votes in favor, 3,956,032
votes against, and 104,926 votes abstaining.
Executive Officers of the Registrant
The Executive Officers (or "Corporate Officers") of the Company and their
ages at June 1, 1998, are as follows:
Name Age Position
---- --- --------
Roger A. Barney 58 Vice President, Human Resources and Corporate Services
James B. De Golia 48 Vice President, General Counsel and Assistant Corporate Secretary
Samuel H. Ezekiel 54 Senior Vice President, Marketing
Joseph J. Francesconi 55 President, Chief Executive Officer and Director
Craig M. Gentner 51 Senior Vice President, Chief Financial Officer and Corporate Secretary
David P. Owen 57 Vice President, Strategy and Technology
Raymond E. Peverell 50 Senior Vice President, Sales and Support
G. Michael Schumacher 59 Senior Vice President, Product Operations
Charles S. Shiverick 54 Vice President, Information Services and Reengineering
Roger A. Barney joined the Company in October 1987 as Vice President of
Human Resources, and in 1992, became Vice President of Human Resources and
Corporate Services. Prior to joining the Company, Mr. Barney held numerous
management positions, including Director of Human Resources for Verbatim
Corporation. He also founded his own management consulting business, which he
ran from 1983 to 1987.
James B. De Golia joined the Company in December 1988 and has served as its
General Counsel and Assistant Secretary since 1991. From 1982 to 1988, Mr. De
Golia served as Corporate Counsel to a number of high technology and federal
divisions and subsidiaries of Xerox Corporation. Prior to joining Xerox, he
practiced law with the San Francisco office of Thelen, Marrin, Johnson &
Bridges.
Samuel H. Ezekiel joined the Company in June 1996 as Vice President of
Marketing and in April 1997, he was appointed Senior Vice President of
Marketing. From 1991 until joining N.E.T., Mr. Ezekiel was Vice President of
12
Acquisitions & Alliances at Amdahl Corporation and from 1980 to 1991, he served
as Vice President and General Manager of the Communications Products Division.
Prior to that, he held a number of sales management, marketing, and business
development positions with companies such as British Telecom, Sperry Univac,
Computer Communications, Inc. and IBM/Rolm.
Joseph J. Francesconi has served as a Director and as President and Chief
Executive Officer since joining the Company in March 1994. He has recently been
elected as a Director of Caere Corporation, a public company. From 1977 until he
joined the Company, Mr. Francesconi served in a number of management capacities
at Amdahl Corporation, a leading mainframe manufacturer, most recently as
Executive Vice President. Prior to joining Amdahl Corporation, Mr. Francesconi
spent 12 years with IBM Corporation.
Craig M. Gentner joined the Company in July 1989 as Vice President,
Finance. In July 1990, Mr. Gentner was appointed Vice President, Chief Financial
Officer and Corporate Secretary, and in May of 1992, he was appointed Senior
Vice President. From 1985 to 1989, Mr. Gentner was employed by Xidex, a
manufacturer of computer peripheral products, most recently as Senior Vice
President and Chief Financial Officer.
David P. Owen joined the Company in April 1990 as Director, Strategy and
Marketing. In 1992, he became Vice President of Corporate Marketing, and in
1994, he became Vice President of Corporate Development and Strategy. More
recently, in 1997, Mr. Owen became Vice President, Strategy and Technology.
Prior to joining the Company, Mr. Owen was Director of Product Marketing at
StrataCom. In 1983, he founded the fast packet development organization at
Packet Technologies, StrataCom's predecessor company. Mr. Owen spent 15 years at
Control Data in a variety of product strategy, architecture and software
development positions.
Raymond E. Peverell joined the Company in 1993 as Senior Vice President of
Worldwide Sales, and in 1996, became Senior Vice President of Sales and Support.
From 1983 to 1992, Mr. Peverell was employed by Tandem Computers, Inc. holding
various positions, his last being Vice President, Strategic Partnership
Development. Prior to 1983, Mr. Peverell held several positions over a 12 year
span with Burroughs Corporation.
G. Michael Schumacher joined the Company in January 1995 as Senior Vice
President of Engineering and Operations, and in 1996, became Senior Vice
President of Product Operations. Prior to joining the Company, Mr. Schumacher
was Vice President and General Manager of the UNIX Systems Division of Unisys
Corporation from 1993 to 1994. He also served at Mentor Graphics as General
Manager of front-end CAE Tools from 1991 to 1993, and at Solbourne Computers as
the Vice President of Engineering from 1989 through 1990.
Charles S. Shiverick, Vice President of Information Services and
Reengineering, joined the Company in 1989. Mr. Shiverick has held various senior
management positions including Senior Director of Corporate Quality and Vice
President of Operations. Prior to 1989, Mr. Shiverick spent 22 years at IBM
Corporation in a variety of management positions.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The section captioned "Common Stock Dividends and Price Range" of the
Registrant's 1998 Annual Report is incorporated herein by reference and included
in this filing as Exhibit 13. At March 31, 1998, there were 723 stockholders of
record of the Company.
Item 6. Selected Financial Data
The section captioned "Five Year Financial Summary" of the Registrant's
1998 Annual Report is incorporated herein by reference and included in this
filing as Exhibit 13.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The section captioned "Management's Discussion and Analysis" of the
Registrant's 1998 Annual Report is incorporated herein by reference and included
in this filing as Exhibit 13.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is not required to provide disclosures regarding market risk in
this Annual Report on Form 10-K as its market capitalization is less than $2.5
billion. Such disclosures will be provided in the Company's Annual Report on
Form 10-K for the year ending March 31, 1999.
Item 8. Financial Statements and Supplementary Data
The sections captioned "Quarterly Financial Data" and "Consolidated
Financial Statements" together with the Notes thereto and the "Independent
Auditors' Report" thereon of the Registrant's 1998 Annual Report are
incorporated herein by reference and included in this filing as Exhibit 13.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Certain information required by Part III is omitted from this Form 10-K
because the Company will file its definitive proxy statement (the "Proxy
Statement") pursuant to Regulation 14A within 120 days after the end of its
fiscal year covered by this Report, and certain information included in the
Proxy Statement is incorporated by reference into this Part III.
Item 10. Directors and Executive Officers of the Registrant
The information with respect to Directors is incorporated by reference from
the section captioned "Election of Directors" at pages 2 and 3 of the Proxy
Statement.
The information regarding Executive Officers is set forth in Item 4 of Part
I of this Form 10-K.
The information required by Item 405 of Regulation S-K is incorporated by
reference from the section captioned "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" at page 13 of the Proxy Statement.
Item 11. Executive and Director Compensation
The Proxy Statement contains information regarding compensation of the
Company's Directors and Executive Officers contained in the sections captioned
"Election of Directors: Board Committees, Meetings, and Remuneration" at pages 5
and 6 of the Proxy Statement and "Executive Compensation and Related
Information" at pages 7 to 10 of the Proxy Statement, which pages are
incorporated herein by reference.
14
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management from the section captioned "Stock Ownership of Five Percent
Stockholders, Directors, and Corporate Officers" at pages 4 and 5 of the Proxy
Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding transactions with the Company's Directors and
Executive Officers from the sections captioned "Election of Directors: Board
Committees, Meetings, and Remuneration" at pages 5 and 6 of the Proxy Statement
and "Executive Compensation and Related Information" at pages 7 to 10 of the
Proxy Statement is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements - See "Index to Financial Statements and
Financial Statement Schedule" at page 20 of this Report.
(2) Financial Statement Schedules - See "Index to Financial
Statements and Financial Statement Schedule" at page 20 of this
Report.
(3) Exhibits - See "Exhibit Index" at page 16 of this Report.
(b) The Registrant filed no reports on Form 8-K during the fourth quarter
of the fiscal year ended March 31, 1998.
15
EXHIBIT INDEX
Exhibit No. Description Note
3.1 Registrant's Restated Certificate of Incorporation, as 1
amended.
3.2 Registrant's Bylaws, as amended. 1
4.1 Indenture dated as of May 15, 1989 between Registrant 2
and Morgan Guaranty Trust Company of New York.
4.2 Rights Agreement dated as of August 15, 1989 between 3
Registrant and The First National Bank of Boston, as
amended.
4.3 Certificate of Designations of Series A Junior 4
Participating Preferred Stock filed with the Secretary
of State of Delaware on August 24, 1989 (Exhibit 4.1 in
the Registrant's Form S-8 Registration Statement).
10.1 Headquarters Facilities Lease Agreements between 5
Sobrato Interests III and Network Equipment
Technologies, Inc. dated April 9, 1997.
10.2 Seaport Centre Phase Three Industrial Net Lease 5
Agreement dated August 12, 1987 between Registrant and
Lincoln Property N.C., Inc.
10.7 Officer Employment and Continuation Agreement between
Registrant and Joseph J. Francesconi.*
10.8 Officer Employment and Continuation Agreement between
Registrant and Raymond E. Peverell.*
10.9 Officer Employment and Continuation Agreement between
Registrant and G. Michael Schumacher.*
10.10 Officer Employment and Continuation Agreement between
Registrant and Craig M. Gentner.*
10.11 Officer Employment and Continuation Agreement between
Registrant and Samuel H. Ezekiel.*
10.12 Employment Agreement between Registrant and Walter J. 6
Gill.*
10.13 Form of Officer Employment and Continuation Agreement 6
as signed by all other Executive Officers and
Registrant.*
10.14 Form of Director Indemnification Agreement as signed by 6
all Directors of the Company.
10.15 Form of Officer Indemnification Agreement as signed by 6
all Executive Officers of the Company.*
16
Corporate Director Compensation Deferral Election 6
Program and 1996 Deferral Form.
Corporate Officer Compensation Deferral Election 6
Program and 1996 Deferral Form.*
Corporate Officers Long-Term Variable Compensation 6
Program.*
13 Portions of 1998 Annual Report to Stockholders.
21.1 Subsidiaries of Registrant as of June 24, 1998.
23.1 Independent Auditors' Consent.
27 Financial Data Schedule.
99.1 Registrant's 1983 Stock Option Plan, as amended.* 7
99.2 Registrant's 1988 Restricted Stock Award Plan.* 8
99.3 Rules of Registrant's 1988 U.K. Stock Option Scheme.* 9
99.4 Registrant's 1989 U.K. Stock Option Plan.* 8
99.5 Registrant's 1990 Employee Stock Purchase Plan, as 10
amended.*
99.6 Registrant's 1993 Stock Option Plan, as amended 11
(Exhibit 99.3).*
99.7 Registrant's 1997 Stock Option Program, as amended 11
(Exhibit 99.2).*
99.8 Registrant's 1998 Employee Stock Purchase Plan (Exhibit 11
99.1).
- --------
* A management contract or compensatory plan required to be filed as an
Exhibit to Form 10-K.
17
NOTES
(1) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Form 10-Q (Commission File No. 0-15323) for the fiscal quarter
ended December 24, 1995, originally filed with the Securities and Exchange
Commission on February 7, 1996.
(2) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Form 8 Amendment No. 1 to Annual Report on Form 10-K
(Commission File No. 0-15323) for the fiscal year ended March 31, 1989,
filed with the Securities and Exchange Commission on July 25, 1989.
(3) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1990, filed with the Securities and
Exchange Commission on June 29, 1990.
(4) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Registration Statement on Form S-8 (Nos. 33-33013 and
33-33063), filed with the Securities and Exchange Commission on January 19,
1990.
(5) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Registration Statement on Form 10-K (Commission File No.
0-15323) for the fiscal year ended March 31, 1997, originally filed with
the Securities and Exchange Commission on June 23, 1997.
(6) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1996, filed with the Securities and
Exchange Commission on June 21, 1996.
(7) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1993, filed with the Securities and
Exchange Commission on June 25, 1993.
(8) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1991, filed with the Securities and
Exchange Commission on June 28, 1991.
(9) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1989, originally filed with the Securities
and Exchange Commission on May 1, 1989.
(10) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Registration Statement on Form S-8 (No. 33-68860), filed with
the Securities and Exchange Commission on September 15, 1993.
(11) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Registration Statement on Form S-8 (No. 333-49837), filed with
the Securities and Exchange Commission on April 10, 1998.
18
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NETWORK EQUIPMENT TECHNOLOGIES, INC.
(Registrant)
Date: June 24, 1998 By: /s/ JOSEPH J. FRANCESCONI
-----------------------------------------
Joseph J. Francesconi
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ DIXON R. DOLL
- ------------------------- Director June 24, 1998
Dixon R. Doll
/s/ JAMES K. DUTTON
- ------------------------- Director June 24, 1998
James K. Dutton
/s/ JOSEPH J. FRANCESCONI
- ------------------------- President, Chief Executive June 24, 1998
Joseph J. Francesconi Officer and Director
(Principal Executive Officer)
/s/ CRAIG M. GENTNER
- ------------------------- Senior Vice President, Chief June 24, 1998
Craig M. Gentner Financial Officer and Corporate
Secretary (Principal Financial
Officer and Principal Accounting
Officer)
/s/ WALTER J. GILL
- ------------------------- Director June 24, 1998
Walter J. Gill
/s/ GEORGE M. SCALISE
- ------------------------- Director June 24, 1998
George M. Scalise
/s/ HANS A. WOLF
- ------------------------- Chairman of the Board June 24, 1998
Hans A. Wolf
19
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
- --------------------
Page in 1998 Annual Report*
---------------------------
Consolidated Balance Sheets as of March 31, 1998 24
and 1997
Consolidated Statements of Income for the years 25
ended March 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years 26
ended March 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for 27
the years ended March 31, 1998, 1997 and 1996 28
Notes to Consolidated Financial Statements 41
Independent Auditors' Report
- ----------
* Incorporated herein by reference and included in this filing as Exhibit 13.
FINANCIAL STATEMENT SCHEDULE
- ----------------------------
Page in 1998 Form 10-K
----------------------
Independent Auditors' Report 21
Schedule II - Valuation and Qualifying Accounts 22
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the Consolidated Financial
Statements or notes thereto.
Separate financial statements of the Registrant are omitted because the
Registrant is primarily an operating company and all subsidiaries included in
the Consolidated Financial Statements filed, in the aggregate, do not have a
minority equity interest and/or long-term indebtedness to any person outside the
consolidated group in an amount which together exceeds 5% of total consolidated
assets at March 31, 1998.
20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Network Equipment Technologies, Inc.:
We have audited the consolidated financial statements of Network Equipment
Technologies, Inc. and subsidiaries as of March 31, 1998 and 1997, and for each
of the three years in the period ended March 31, 1998, and have issued our
report thereon dated April 15, 1998; such financial statements and report are
included in your 1998 Annual Report to Stockholders and are incorporated herein
by reference. Our audits also included the financial statement schedule of
Network Equipment Technologies, Inc. listed in the accompanying index to
financial statements and financial statement schedule. The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
April 15, 1998
21
NETWORK EQUIPMENT TECHNOLOGIES, INC.
SCHEDULE II
Valuation and Qualifying Accounts
(in thousands)
Balance at Charged to Charged Balance
beginning costs and to other Deduction/ at end
Description of period expenses accounts write off of period
- ----------- ---------- ---------- -------- ---------- ---------
For the year ended March 31, 1996:
Accounts receivable
allowances $2,514 -- $4,615 (1) $(2,596) $4,533
For the year ended March 31, 1997:
Accounts receivable
allowances $4,533 -- $1,237 (1) $(1,860) $3,910
For the year ended March 31, 1998:
Accounts receivable
allowances $3,910 -- $2,082 (1) $(2,066) $3,926
- ----------
(1) Amount represents additions to accounts receivable allowances which were
charged primarily to revenue.