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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, 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.
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
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
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
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
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
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
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
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
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
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
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
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
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
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
Page in 1999 Annual Report*
---------------------------
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
- ----------
* Incorporated herein by reference and included in this filing as Exhibit 13.
FINANCIAL STATEMENT SCHEDULE
Page in 1999 Form 10-K
----------------------
Independent Auditors' Report 23
Schedule II - Valuation and Qualifying Accounts 24
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
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
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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, 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
- ----------
(1) Amount represents additions to accounts receivable allowances which were
charged primarily to revenue.
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