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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 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-15323
NETWORK EQUIPMENT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2904044
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
800 SAGINAW DRIVE
REDWOOD CITY, CALIFORNIA 94063
(415) 366-4400
(Address of principal executive offices, including zip code,
area code, and telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant on May 31, 1996 was $578,989,208.
The number of shares outstanding of the Common Stock, $0.01 par value, on
May 31, 1996 was 20,886,937.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant's Annual Report to Stockholders for the fiscal year ended
March 31, 1996 is incorporated by reference in Parts I, II and IV of this Form
10-K to the extent stated herein. The registrant's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on August 13, 1996 is
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
Exhibit Index is located on page 17.
PART I
ITEM 1. BUSINESS
GENERAL
Network Equipment Technologies, Inc. ("N.E.T." or "the Company") is
headquartered in Redwood City, California, has more than 1,300 employees and has
installed networks in over 50 countries. The Company was incorporated in
California in 1983 and reincorporated in Delaware in 1987. Its common stock is
traded on the New York Stock Exchange. N.E.T. is a leading worldwide supplier of
multiservice backbone networks to enterprises and global carriers.
For over a decade, N.E.T. has manufactured and supported products for
wide-area networks ("WANs"). These networking products, known as multiservice
bandwidth managers, integrate multiple applications (video, voice, image and
data) and use multiple technologies (packet- and circuit-switching).
Multiservice bandwidth managers are used to construct N.E.T.-TM- multiservice
backbone networks for enterprises or are used by carriers as service
provisioning edge nodes. Designed for reliability, flexibility and compliance
with national and international standards, the Company's products manage
business communications traffic across the wide area and are backed by an
extensive service and support infrastructure. Many carriers, enterprises and
government agencies around the world use N.E.T. solutions to provide
cost-effective and reliable digital communications services.
When used in this document the words "believes", "anticipates", "future",
"expects", "will", "intends", "strategy", "planned" and similar words identify
forward-looking statements. Actual results may differ materially from such
forward-looking statements as a result of risks and uncertainties, including
those described below and others as set forth in the Company's subsequent
periodic reports filed with the Securities and Exchange Commission or available
at the Company's worldwide web site (http://www.net.com).
NETWORKING INDUSTRY
The Company believes that certain factors in the worldwide
telecommunications equipment industry are likely to result in continued growth
for that industry. The worldwide move to market economies is creating an
environment that the Company believes is conducive to investment in
communications infrastructures in both the carrier and enterprise segments. At
the same time, the worldwide deregulation of telecommunications operators is
creating a highly competitive environment that is resulting in an increase in
investment in carrier equipment to support the proliferation of innovative
services. Furthermore, continuing innovations in semiconductor technology are
enabling both a massive increase in compute power and in a distribution of that
power to the desktop. This, in turn, continues to create a massive increase in
the demand for data bandwidth in the local area that acts as a driver for
increasing amounts of bandwidth across the wide area.
So, over the last two decades the communications requirements of
organizations have grown as a result of changes in both the telecommunications
and general business environments. Telecommunications deregulation, beginning in
the United States in the early 1980s and advancing further following recent
legislation, coupled with increasing volumes and types of communications traffic
within many organizations encouraged the growth of backbone networks. More
recently, global alliances are being formed by major telecommunications carriers
and the Company believes that these alliances and their offerings are likely to
have a major impact on the development of international networking capabilities.
Bandwidth managers are sophisticated networking platforms that manage these
increasing amounts of bandwidth on backbone networks around the world.
In response to the expanding requirements for bandwidth managers to support
multiple technologies, application types and services on a single communications
platform, multiservice bandwidth managers have been developed. Such platforms
enable the construction of multiservice backbone
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networks, enabling users to avoid being restricted or "locked-in" to a single
technology or type of application. Multiservice bandwidth managers provide
flexibility that enables the customization of a network to meet current needs
and allows the addition of technologies and applications in the future.
N.E.T. provides multiservice backbone networks to both main WAN market
segments: enterprise and carrier. The enterprise network segment generally
refers to communications solutions whereby equipment is owned and managed by
enterprises and is located on their premises. The public network segment
includes carrier-owned equipment and services provided by carriers. Public
network equipment is generally located on carriers' premises. However, there is
a trend towards greater use of carrier offerings by enterprises and, as a
result, equipment demand is shifting from that of pure enterprise network
equipment, as described above, to public network equipment which also supports
enterprise network requirements. This blurring of the line between public and
private networks has made hybrid networking (a mix of public and private
solutions) more common.
Carriers, or network service providers, focus on the provision of advanced
business services and are increasing their wide-area networking market share
with their virtual private network ("VPN") and fast packet (frame-relay and ATM)
strategies. As worldwide deregulation continues to progress, leading carriers
have teamed to form global consortia to provide advanced network services to
large businesses. N.E.T. provides service provisioning edge nodes to many of
these global carriers as they expand and redefine their roles in the rapidly
changing telecommunications industry.
From a capacity-related perspective, there is a trend towards using
higher-bandwidth digital services, as high-capacity optical fiber becomes the
backbone of carrier networks. This extends demand for bandwidth management
capabilities to broadband network equipment. At the same time, and at the other
end of the scale, the benefits which have been realized by larger, central sites
are being desired by smaller, branch sites of information-intensive
organizations. Consequently, access equipment is one of the most rapidly growing
segments of the WAN equipment market.
The proliferation of local-area networks ("LANs") has driven the need for
greater connectivity of LANs and over the past decade the proportion of
LAN-originated traffic on the WAN has increased steadily. The Company believes
this trend will continue as more and more powerful computing takes place at the
desktop, and the increasing globalization of enterprise activities results in
users becoming less sensitive to distance considerations and more accustomed to
sharing data between geographically remote locations.
For the LAN, LAN internetworking and WAN equipment markets, Asynchronous
Transfer Mode ("ATM") is increasingly viewed as the fundamental networking
technology of the future. As a result, the evolution and implementation of ATM
technology and standards related to that technology are expected to have a
significant impact on the entire networking industry.
In summary, the deregulation of telecommunications worldwide, the growth of
business traffic and networking needs and advancements in communications
technology and capacity have all combined to dramatically increase the
complexity, opportunities and competitiveness of the markets in which N.E.T.
operates (see "Competition").
COMPANY STRATEGY
N.E.T.'s mission is to be the premier worldwide supplier of multiservice
backbone networks to enterprises, government agencies and carriers and also of
service provisioning edge nodes to carriers. The Company's strategy is to focus
its products, services and distribution capabilities to address the needs of
these market segments, and, furthermore, it believes that the key wide-area
network market segments it has selected offer a broad range of regional and
global opportunities. The Company's networking products provide distributed
intelligence to manage data and voice bandwidth efficiently for enterprise and
carrier customers, and its service organization provides technical assistance,
installation and maintenance services as well as systems integration and project
management capabilities, thus providing the support necessary for total network
solutions.
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The Company's products and services allow enterprises to build multiservice
backbone networks using private and/or public resources (i.e. services,
equipment and staff), thus leveraging their network alternatives. Similarly,
government agencies are provided with sophisticated, reliable backbone networks
and systems integration services. The needs of global carriers are addressed
through the supply of flexible multiservice platforms. These products may be
used by carriers as service provisioning edge nodes -- enabling carriers to
easily add service overlays to their existing network infrastructures and offer
value-added network services to businesses -- or they may be used to build
multiservice network infrastructures, especially in developing countries (where
they are known as digital data networks or "DDNs"). The Company offers
narrowband and broadband network products. In response to the long-term trend
towards broadband networking, the Company is expanding its strategic core
competencies by developing wide-area ATM products, and has announced its network
architecture -- known as the N.E.T. Vista Architecture -- that provides the
framework for implementation of its product strategy.
Vista is a multiservice network architecture for the wide area. It comprises
products and services for data and voice networking: it encompasses narrowband
and broadband applications, leveraging packet and circuit technologies, for
carriers and enterprises. The Company believes that its standards-based ATM
switching core, currently under development, will provide the levels of
availability that carriers require and enterprises are coming to expect. Vista
takes a systems view of wide-area networking, combining best-of-class narrowband
and broadband network elements with standards-based network management. Enhanced
multiservice bandwidth managers and other devices, collectively referred to as
ATM Service Interfaces ("ASIs"), are being defined to interoperate with an ATM
switching core in order to address the need for incorporation of ATM
capabilities within multiservice backbone networks. The Company's partnership
and OEM strategies take into account its decision to offer best-of-class
products covering a wide range of specific adaptation and aggregation functions:
they are designed to fulfill this requirement by building strategic
relationships with vendors of leading products for enterprise and carrier
markets.
The Company's strategic relationships involve links with equipment
manufacturers and resellers, global carriers, network service providers and
significant customers in the enterprise and carrier arenas worldwide. Objectives
of these relationships vary, ranging from technology licensing agreements,
through OEM and reseller agreements, to joint product development plans and
sales and marketing programs. Most of the Company's competitors have similar
relationships with their respective customers and other parties. Changes in the
Company's relationships or changes in similar relationships among competitors
could have a material impact on competitive and other factors described in this
document, including the Company's operating results. Also, litigation or other
claims based on securities, intellectual property, patent, product, regulatory
or other factors could materially adversely affect the Company's business,
operating results and finances.
PRODUCTS
The Company maintains a single engineering and manufacturing organization
that is responsible for the design, development and manufacture of all of its
products. This organization produces hardware and software network systems for
enterprises and carriers -- offering sophisticated bandwidth management,
connectivity, transmission and network management across the wide area. N.E.T.'s
core multiservice bandwidth managers and frame-relay product lines provide
solutions designed to optimize use of T1, E1, T3 and E3 services. The Company's
access and low-end networking products provide cost-effective connectivity from
smaller locations with lighter traffic requirements, and its broadband switch
family provides transmission management solutions targeted at T1, fractional T3,
T3 and OC-3 traffic for major enterprises and cellular network providers.
N.E.T.'s LAN internetworking products enhance connectivity and interoperability
among devices that transmit information between LANs across WANs. The Company
also develops and supports network management systems to enhance operator
visibility into network conditions, permitting greater control and management of
networks.
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N.E.T. believes it must continue to develop and enhance its product lines to
meet the needs of its strategic markets as they progress. This may be done
either 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.
N.E.T.'s multiservice, frame-relay and broadband networks are designed to
take advantage of distributed network intelligence. This means that all
platforms designed by N.E.T. are equipped with a high degree of intelligence
that enables each node to communicate with other family members, make decisions
and take appropriate action regarding the state of the network and applications
being supported on it without reference to any external network controlling
processor. In this way, networks can be designed to prevent a single point of
failure (such as could occur at the workstation of an external network
controlling processor) and can benefit from rapid response times provided by the
nodes' up-to-date network knowledge and local nodal processing.
N.E.T.'s networking nodes perform multiplexing and routing (including rapid
automatic re-routing), have sophisticated network intelligence and are designed
to accommodate hybrid public/ private networking. Multiplexing is the process of
aggregating streams of voice, data, image and/or video from multiple sources for
transmission over circuits. Routing refers to the selection of the path that
most efficiently utilizes the network depending on the priority of the
transmission, the condition of the network and the volume of network traffic.
Rapid automatic re-routing is the ability to dynamically route existing network
traffic around a failed circuit fast enough to keep the end-to-end connection
intact. Network intelligence involves data collection, analysis, decision making
and presentation of information to allow the user to view, control and manage
the network's multiplexing, routing and other functions to its fullest
operational and economic potential. Such intelligent nodes can pass information
about the network to N.E.T.'s network management systems that are based on
industry-standard workstations and provide further storage and processing
capacity to enable the display and analysis of conditions and parameters within
the network.
Multiservice Bandwidth Managers
N.E.T.'s IDNX-Registered Trademark- multiservice bandwidth managers allow
users of voice, data, image and video communications to achieve full potential
from wide-area networks in a highly cost-effective manner. This family performs
packet- and circuit-switching: managing each traffic type. N.E.T.'s multiservice
platforms offer a wide range of interfaces to customer premise equipment ("CPE")
and support different types of applications and carrier services. These
platforms support T1, E1, T3 and E3 transmission speeds and the family includes
devices for low-end networking and WAN access. The Company's multiservice
backbone networks can be configured and automatically reconfigured in a wide
variety of complex network topologies including point-to-point, ring, star and
fully interconnected mesh to accommodate clients' evolving requirements. Unlike
many other time division multiplexing products, N.E.T.'s multiservice platforms
use efficient bandwidth allocation algorithms -- assigning bandwidth only as
necessary to accommodate specific user requirements, rather than wasting
valuable bandwidth by allocating it in predetermined segments.
Integral to these multiservice platforms is N.E.T.'s Packet Exchange ("PX")
family of packet processors -- modules that provide support for internetworking
activities and switched services. There are three main product types:
Multiprotocol Routers
The LAN/WAN Exchange-TM- ("LWX") module provides multiprotocol routing with
concurrent bridging support to interconnect geographically dispersed LANs over a
WAN. It is compatible with Cisco routers and supports connections to local
Ethernet or Token Ring interfaces, as well as to remote LWX modules, standalone
routers, packet-switching services or IBM controllers.
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Frame-Relay Systems
The FrameXpress-TM- ("FRX") family of products, consisting of modules and
systems, is available in a variety of configurations. The FRX modules or systems
provide frame-relay access to bridges, routers, front-end processors and other
CPE devices that support frame-relay interfaces, and can also
connect to public frame-relay networks. N.E.T.'s FrameXpress products allow the
integration of traffic from many different sources onto a consolidated
frame-relay or multiservice backbone network, and provide an efficient,
effective transport mechanism for a variety of bursty traffic types.
ISDN Systems
The Integrated Services Digital Network Exchange ("ISDNX-TM-") module
supports ISDN circuit switching and routing capabilities and enables a variety
of devices such as PBXs, video codecs, routers and front-end processors to
connect to the multiservice backbone network via an industry-standard Primary
Rate Interface ("PRI"). The signaling capabilities of the ISDNX module provide
an intelligent connection and offer ISDN services to an attached ISDN device.
N.E.T. markets a comprehensive frame-relay product line which combines
products from other vendors, such as Cascade and Sync Research, with the
Company's own internally-developed FrameXpress family. For very concentrated
data applications, N.E.T. resells Cascade's high-capacity STDX-TM- and
B-STDX-TM- switches that provide high port-density configurations. For smaller
locations, N.E.T. markets Sync Research's FrameNode-TM- frame-relay access
device ("FRAD") that provides branch offices with WAN access to private
frame-relay or multiservice backbone networks or public frame-relay services.
Broadband Switches
SONET Transmission Manager-TM- ("STM-TM-") broadband switches provide
advanced networking functionality for broadband communications. The STM node
provides fast switching of wideband and broadband circuits utilizing a low delay
SONET switching matrix, intelligent networking, inverse multiplexing and
compliance with T1, fractional T3, T3 and OC-3 carrier services. With its
service availability, network management operation through end-to-end connection
management and dynamic connection re-route and restoration, the STM addresses
the needs of carriers, and is particularly well-suited to the needs of cellular
service providers. STM broadband networks also provide wide-area communications
infrastructures capable of supporting mainframe channel extension, high-speed
router, CAD/CAM and other applications requiring high-capacity. Also, traffic
from T1-based devices, such as videos, PBXs, routers and T1 multiplexers can be
integrated, making STM networks suited to large enterprises.
Other network products developed by the Company such as SPX-TM- statistical
multiplexers and ADNX-Registered Trademark-/48 Integrated Access Multiplexers
provide opportunities for incremental revenue, but the Company expects revenue
from these particular products to decline over the next few years.
The commercial availability of all of the Company's products and services in
a timely manner and their acceptance by customers are important to the future
success of the Company. There can be no assurance that customer acceptance of
products and services will be achieved or maintained. Substantial delays in such
availability or acceptance would materially and adversely affect the Company's
operating results and financial condition.
Network Management Systems
NetOpen-TM- network management systems enhance customers' ability to control
and monitor a network and to diagnose and respond to changes or failures in
equipment and transmission resources, thus increasing the productivity and
responsiveness of customers' network management staff, increasing operational
efficiency and reducing cost. N.E.T.'s network management systems provide
multi-user real-time monitoring, control and management for the Company's
products. They offer various capabilities, including: color graphical
representations of network topology and network
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elements, with object states that change color to reflect alarm conditions; the
ability to software partition a physical multiservice backbone network into
multiple, independent virtual networks; and, for frame-relay systems, collection
and storage of information about network usage, enabling this data to be
accessed for detailed traffic analysis activities such as billing and capacity
planning.
MARKETING, DISTRIBUTION AND CUSTOMERS
N.E.T.'s marketing strategy focuses on information-intensive organizations
that have extensive voice, data, image and video communications needs. N.E.T.
targets enterprises, carriers and government agencies in four main market
segments -- U.S. commercial, U.S. Federal, carriers and international.
Enterprises include banks and other financial institutions, airlines, retail
chains and manufacturers. Carrier organizations include telephone companies
around the world, DDN operators, cellular network service providers and
value-added network ("VAN") suppliers. Government agencies include U.S.
government defense, intelligence and civilian agencies. Increasingly, the
Company has been supplying its products to or through other entities, such as
outsourcers and systems integrators, as prospective customers turn to them to
provide network services and operational capabilities.
The Company employs a highly trained direct sales force in the U.S. and the
U.K., as well as leveraging sales through additional distribution channels
worldwide. As part of the sales process, N.E.T. or distributor personnel consult
extensively with customers concerning their network requirements. N.E.T.
maintains subsidiaries that focus on sales to the European market (N.E.T. Europe
Ltd., N.E.T. Europe SA and N.E.T. Europe GmbH) and to the U.S. government
(N.E.T. Federal, Inc.).
Apart from the U.S. government, no other single customer account was
responsible for ten percent or more of revenue during fiscal 1996 or 1995; one
other customer (IBM) accounted for 11% of revenue in fiscal 1994.
International Sales
N.E.T. has established subsidiaries in the U.K. (N.E.T. Europe Ltd.), France
(N.E.T. Europe SA), and Germany (N.E.T. Europe GmbH), with sales offices in
other European countries, through which it markets and supports its products to
the regions of Europe, the Middle East and Africa. The Company also markets and
supports its products from offices in the U.S., Uruguay, China and other
countries in the regions of Asia Pacific and Latin America. International sales
represented 27%, 28% and 22% of the Company's revenue in fiscal 1996, 1995 and
1994, 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 4 in the
"Notes to Consolidated Financial Statements" in the Company's 1996 Annual Report
to Stockholders ("Annual Report") filed as Exhibit 12.1 to this report.
Relationship with Ericsson
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, Ericsson has the non-exclusive
right to purchase, resell, distribute and license the Company's IDNX
multiservice bandwidth manager products and network management software
worldwide. Ericsson is responsible for providing all service and support for the
N.E.T. products it markets. Under the agreement, the Company and Ericsson share
information to coordinate product development. The Company also appointed
certain Ericsson affiliates as non-exclusive distributors of the Company's
products.
Relationship with IBM
N.E.T. entered into an agreement with International Business Machines
Corporation ("IBM") in June 1987 (the "IBM Agreement"). Pursuant to the IBM
Agreement, as amended, IBM has non-
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exclusive, worldwide marketing, installation and service rights for current and
future releases of N.E.T.'s IDNX multiservice bandwidth manager products and
certain related products. Under the IBM Agreement and other agreements, IBM
licensed to N.E.T. several of its technologies. IBM is also an end-user customer
of N.E.T.'s products under the IBM Agreement. N.E.T. and IBM continue to have an
active distribution relationship and a number of active technology agreements.
Sales to the U.S. Government
N.E.T.'s wholly owned subsidiary, N.E.T. Federal, Inc., markets the
Company's products to United States governmental 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. In fiscal
1996, 1995 and 1994, sales to the U.S. Government accounted for 34%, 28% and
28%, respectively, of N.E.T.'s total revenue. These amounts include sales, which
amounted to 30%, 19% and 20% of revenue for fiscal years 1996, 1995 and 1994,
respectively, under a contract with the Department of Defense under which
various government agencies can order products, installation and service from
N.E.T.
The Company's relationships with carriers further expand the availability of
N.E.T. products and services based on those products. These relationships
include joint marketing agreements with both AT&T and MCI, and a systems
integration agreement with Bell Atlantic Network Integration. The Company's
products are offered by other carriers around the world, such as US WEST and
Southwestern Bell in the U.S., and France Telecom, Telia and Tele-Danmark in
Europe.
The Company has entered into distribution and technology agreements with
many other companies, including Datacraft Asia.
Failure to keep pace with technological developments, marketing programs and
distribution capabilities of competitors would negatively affect the Company's
performance. The Company relies on non-exclusive distribution agreements with a
number of partners. Although these channels and their distribution capabilities
are extensive, their levels of sales activity and knowledge of N.E.T. products
vary widely over time and on a geographic basis. In addition, the Company faces
distribution challenges for its next generation products which could impact the
Company's ability to leverage its products as they are introduced, and could
negatively affect the Company's performance.
In recent years, the Company has experienced decreases in first quarter
revenue versus the preceding fourth quarter and this trend is expected to
continue. Historically, the majority of the Company's revenue in each quarter
results from orders received and shipped in that quarter. Because of these
ordering patterns and potential delivery schedule changes, the Company does not
believe that backlog is indicative of future revenue levels. For further
information, please refer to "Business Environment and Risk Factors" in
"Management's Discussion and Analysis" on page 19 of the Company's 1996 Annual
Report.
CUSTOMER SERVICE AND SUPPORT
N.E.T.'s service strategy is to provide superior support for its own
products and other vendors' products when appropriate. The Company provides a
wide range of service and support options for its products including
installation, a choice of different hardware and software maintenance programs,
upgrades and repairs, technical assistance and training for many categories of
network staff. N.E.T. has also performed a significant amount of systems
integration business for the U.S. Department of Defense ("DoD"), and N.E.T.'s
strategy includes leveraging the experience gained to extend this aspect of its
service business -- thus adding professional services that go beyond the
traditional installation and maintenance services typically offered. In this
regard, a "template" for systems
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integration services and network operations services has been developed by
N.E.T. Federal to meet the needs of the DoD, and management intends to use this
template to extend variations on these capabilities to commercial customers over
time.
The Company employs a highly trained N.E.T. service and support organization
in the U.S. and the U.K., including three Technical Assistance Centers ("TACs"),
and leverages service and support capabilities of authorized service agents,
many of whom are also authorized to sell N.E.T.'s products, around the world. In
addition, the Company is developing appropriate service and support capabilities
via third-party agreements to address the requirements of smaller organizations.
A high level of continuing customer service is integral to both the Company's
strategy of providing long-term support and developing long-term relationships
with customers and to its financial plans and performance. N.E.T. trains
customer personnel to operate its products and, in some cases, to perform
routine maintenance and repair of these systems. Service at customers'
facilities may be handled either by N.E.T. personnel operating out of N.E.T.'s
service locations or by IBM, Ericsson, Datacraft, other distributors or
third-party service organizations who are trained by and under contract with
N.E.T. Customers around the world can access one of N.E.T.'s three TACs, located
on east and west coasts of the U.S. and in the U.K. TAC support is fee-based,
staffed year-round and available 24 hours a day. TAC engineers provide
assistance over the telephone or, when authorized, by dialing into clients'
networks. N.E.T. products are generally sold with limited warranties on
equipment and software ranging in length from 90 days to one year that, when
sold by N.E.T. to end-users, generally commence upon completion of installation
or acceptance. Certain products have different warranty periods and conditions.
As the Company adds OEM products to its portfolio with different price points
and service options from those typical of N.E.T., the service organization will
need to adapt to the change in product mix and different warranty and service
terms and conditions will be developed and offered to customers. 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. If it is not, the
Company's operating results could be materially and adversely affected.
RESEARCH AND DEVELOPMENT
N.E.T. engages in research and development ("R&D") to develop new products
and enhancements to existing products as technology and the Company's
performance permits and as markets evolve. N.E.T.'s development efforts are
focused on N.E.T.'s strategic market segments, providing multiservice platforms
for information-intensive enterprises and carriers worldwide. Product
development priorities include those intended to enable N.E.T. to occupy a
leadership 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.
Management believes that product and technology leadership are keys to
long-term success in an industry and market that evolves as rapidly as
networking does today. N.E.T. believes that its future operating results will
depend on its ability to continue to enhance existing products as well as to
develop and timely bring to market new products that satisfactorily meet market
needs. There can be no assurance that N.E.T.'s product development efforts will
result in commercially successful products, that N.E.T.'s products will not be
rendered obsolete by changing technology, or that recently announced or
available products will be successful.
Research and development expense increased by $2.5 million (7.4%) in fiscal
year 1996 to a total of $36.4 million, from $33.9 million in fiscal year 1995.
The increase in R&D expense in fiscal 1996 was due to an increase in direct
project funding, primarily salary-related expenses and purchases of hardware and
software tools to support product development. The Company's R&D expense as a
percentage of total revenue decreased to 10.8% in fiscal 1996 from 12.0% in
fiscal 1995. In addition, $1.9 million, $2.0 million and $2.7 million in fiscal
1996, 1995 and 1994, respectively, of software production costs were capitalized
and have since been partially amortized or written-down to net
9
realizable value. For further information on accounting policies relating to
software production costs, please refer to Note 1 in the "Notes to Consolidated
Financial Statements" in the Company's 1996 Annual Report filed as Exhibit 12.1
to this report. Management plans to continue funding R&D efforts at levels
necessary to advance product programs and expects R&D spending to increase in
fiscal 1997, while remaining fairly constant as a percentage of planned revenue.
MANUFACTURING
N.E.T. manufactures its products 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.
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
N.E.T. manufacturing process consists of the production of mechanical and
electrical subassemblies as well as custom system assembly. N.E.T. uses custom
fabricated printed circuit boards and subassemblies, standard and custom
integrated circuits, custom power supplies and mechanical hardware purchased
from outside suppliers. Certain relatively simple fabrication, assembly and test
processes are performed by subcontractors in the United States and East Asia;
final assembly and testing of N.E.T. products are performed at the Company's
Redwood City, California, facilities. Availability limitations, price increases,
or business interruptions could adversely impact revenue, margins and earnings.
The Company has initiated a Total Quality Management process and is focusing
efforts on 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 has
completed the ISO 9000 International Quality System certification process for
its operations worldwide. N.E.T. is 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 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. 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 this and other factors, including the
Company's generally short delivery cycle, as noted above, N.E.T. does not
believe that backlog at any specific time is indicative of actual revenues that
will be recognized in any succeeding period.
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. The Company
believes that the principal competitive factors in its target markets are
product capabilities, including efficient multiservice bandwidth management and
standards compliance, technical services and support, quality and reliability,
vendor reputation and long-term prospects, distribution capabilities and price.
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
10
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. 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 both the public and enterprise communications markets, the Company
competes with other WAN communications equipment vendors. With respect to
multiservice platforms and related services, including internetworking,
frame-relay and fast packet-based implementations, N.E.T. competes directly with
products and services from vendors such as Ascom Timeplex, Cascade
Communications, General DataComm, Newbridge Networks, Nortel and StrataCom.
As the market for products implementing ATM technology evolves, it is
expected that the Company's ATM WAN product line, currently under development,
will face significant competition. In the WAN segment of the ATM marketplace,
the Company expects to continue to compete with the equipment vendors listed
above. Many other vendors have introduced, or announced plans to develop, ATM
networking equipment for WANs, resulting in very intense competition in the
markets that will be addressed by N.E.T.'s ATM products and services.
N.E.T.'s enterprise WAN solutions compete with certain public carrier
network services and VANs. Most of these carriers enjoy substantially greater
marketing resources and customer recognition than the Company.
IBM and Ericsson are not prohibited by their Agreements from manufacturing,
marketing or servicing products that compete directly with N.E.T.'s IDNX or
other products. N.E.T.'s operating results could be adversely affected if either
entity 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 removes restrictions that had been imposed on the
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
effect on the Company's operating results and financial condition.
GOVERNMENT REGULATION
The telecommunications industry is regulated by governments around the
world. The details and extent of regulation and progress of deregulation vary on
a state, country or regional basis, but there is generally a long-term trend
towards deregulation. 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 the RBOCs directly to
manufacture and market equipment and services that compete with N.E.T.'s
offerings (see "Competition" above).
In February 1996 the Telecommunications Act of 1996 ( "the 1996 Legislation"
) became law. This is 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 removes restrictions on RBOC activities that had been imposed in the
AT&T divestiture decree. Now, 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
11
manufacturers to develop such equipment, N.E.T. could be materially and
adversely affected by direct competition with the RBOCs. However, the Company
expects that the 1996 Legislation is also likely to increase demand for certain
network services and equipment.
In addition, N.E.T. customers usually use carrier network services, the
rates and terms of which are subject to varying degrees of public utility-type
government regulation. 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. Changes in the rates or terms of
carrier-provided service and equipment offerings may affect the demand for
enterprise network products and services, including those provided by N.E.T.
Similarly, many international telecommunications markets are undergoing, and
are impacted by, deregulation. The regulatory policies of foreign governments
and regulatory bodies may affect the demand for N.E.T.'s products and the
ability of N.E.T. to market its products outside the United States. As an
example, within the European Union ("EU") there exists a telecom authority which
requires member country public telecommunications operators ("PTOs") in Europe
to adopt or offer certain transmission services and behaviors. These changes
might significantly affect the demand for or usability of enterprise network
solutions which N.E.T. provides.
The Federal Communications Commission ("FCC") and 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 future 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 impede other companies from
introducing 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 primarily 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 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 this
regard.
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.
12
EMPLOYEES
As of March 31, 1996, the Company had 1,318 employees. Of the Company's
total employees, 154 were in Finance and Administration, 256 were in Engineering
and Research and Development, 254 were in Field Service and Training, 159 were
in Marketing, 340 were in Sales and 155 were in Manufacturing and Quality
Assurance. 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. leases approximately 287,000 square feet of office, research and
development, and manufacturing space in a modern industrial park in Redwood
City, California, which is leased until October 1998. N.E.T. also leases sales
and service offices at other locations in the United States, China, France,
Germany, Norway, Uruguay and the United Kingdom. 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. The Company's federal income tax returns for
certain prior years are under examination by the Internal Revenue Service
("IRS"). Certain adjustments previously proposed by the IRS which related
substantially to the timing (years) of tax deductions have been resolved in the
Company's favor. In the opinion of management, any adjustments that may result
from the ultimate resolution of any remaining matters will not have a material
effect on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages at June 1, 1996, are as
follows:
NAME AGE POSITION
- ---------------------------- --- --------------------------------------------------------------
Roger A. Barney 56 Vice President, Human Resources and Corporate Services
Jerry L. Davis 48 Vice President, Client Support
James B. De Golia 46 Vice President, General Counsel and Assistant Corporate
Secretary
Samuel H. Ezekiel 52 Vice President, Marketing
J. Robert Forkish 43 Vice President and Chief Technology Officer
Joseph J. Francesconi 53 President, Chief Executive Officer and Director
Craig M. Gentner 49 Senior Vice President, Chief Financial Officer and Corporate
Secretary
David P. Owen 55 Vice President, Corporate Development and Strategy
Raymond E. Peverell 48 Senior Vice President, Sales and Support
G. Michael Schumacher 57 Senior Vice President, Engineering and Operations
Charles S. Shiverick 52 Vice President, Information Services and Re-engineering
13
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.
Jerry L. Davis joined the Company in January 1984 as the Director of Quality
and Service. In 1989 he was appointed Vice President of Client Support. Prior to
N.E.T., Mr. Davis was the National Service Manager for International Remote
Imaging Systems where he developed their service operations.
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. From 1991 until joining N.E.T., Mr. Ezekiel was Vice President of
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.
J. Robert Forkish is one of the founders of the Company, and from 1983 to
1991 was the principal software architect for the Company's IDNX product line
and Vice President of Strategic Marketing. From 1991 to 1994, Mr. Forkish worked
as an independent networking consultant for numerous companies. He rejoined the
Company in May of 1994 and today serves as the Company's Vice President and
Chief Technology Officer.
Joseph J. Francesconi has served as a Director and as President and Chief
Executive Officer since March 1994. 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
became Vice President of Corporate Development and Strategy. 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, Senior Vice President of Engineering and Operations,
joined the Company in January 1995. Prior to joining the Company, Mr. Schumacher
was Vice President and General
14
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 information required by Item 5 of Form 10-K is set forth in the section
captioned "Common Stock Dividends and Price Range" at page 35 of the
Registrant's 1996 Annual Report and is incorporated herein by reference. At
March 31, 1996, there were 774 stockholders of record of the Company.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 of Form 10-K is set forth in the section
captioned "Five Year Financial Summary" at page 14 of the Registrant's 1996
Annual Report and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by Item 7 of Form 10-K is set forth in the section
captioned "Management's Discussion and Analysis" at pages 15 through 20 of the
Registrant's 1996 Annual Report and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 of Form 10-K is set forth in the sections
captioned "Quarterly Financial Data" and "Five Year Financial Summary" at page
14 of the Registrant's 1996 Annual Report and the "Consolidated Financial
Statements" and "Independent Auditors' Report" thereon at pages 21 to 34 of the
Registrant's 1996 Annual Report.
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 required by Item 10 of Form 10-K with respect to directors
is incorporated by reference from the section captioned "Election of Directors"
in the Proxy Statement.
The information regarding executive officers required by this Item 10 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" in the Proxy Statement.
15
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by
reference from the information contained in the sections captioned "Election of
Directors: Board Committees, Meetings, and Remuneration" and "Executive
Compensation and Related Information" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Stock
Ownership" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned "Executive
Compensation and Related Information" of the Proxy Statement.
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 Schedules at page 20 of this Report.
(2) Financial Statement Schedules -- See Index to Financial Statements
and Financial Statement Schedules at page 20 of this Report.
(3) Exhibits -- See Exhibit Index at page 17 of this Report.
(b) The Registrant filed no reports on Form 8-K during the fourth quarter of
the fiscal year ended March 31, 1996.
16
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION NOTE
- ----------- --------------------------------------------------------------------------------------------- ---------
3.1 Registrant's Restated Certificate of Incorporation, as amended. n.1
3.2 Registrant's Bylaws, as amended. n.1
4.1 Indenture dated as of May 15, 1989, between Registrant and Morgan Guaranty Trust Company of
New York. n.4
4.2 Rights Agreement dated as of August 15, 1989, between Registrant and The First National Bank
of Boston, as amended. n.6
4.3 Certificate of Designations of Series A Junior Participating Preferred Stock filed with the
Secretary of State of Delaware on August 24, 1989. (Exhibit 4.1 in the Registrant's Form S-8
Registration Statement.) n.5
10.2 Seaport Centre Phase Three Industrial Net Lease Agreement, dated August 12, 1987, between
Registrant and Lincoln Property N.C., Inc. n.2
10.7 Officer Employment and Continuation Agreement dated October 27, 1995, between Registrant and
Joseph J. Francesconi.*
10.8 Officer Employment and Continuation Agreement dated October 30, 1995, between Registrant and
Raymond E. Peverell.*
10.9 Officer Employment and Continuation Agreement dated October 27, 1995, between Registrant and
G. Michael Schumacher.*
10.10 Officer Employment and Continuation Agreement dated October 27, 1995, between Registrant and
Craig M. Gentner.*
10.11 Officer Employment and Continuation Agreement dated October 27, 1995, between Registrant and
Roger A. Barney.*
10.12 Employment Agreement dated October 5, 1994, between Registrant and Walter J. Gill.*
10.13 Form of Officer Employment and Continuation Agreement as signed by all other Executive
Officers of the Company in October 1995.*
10.14 Form of Director Indemnification Agreement as signed by all Directors of the Company.
10.15 Form of Officer Indemnification Agreement as signed by all Executive Officers of the
Company.*
10.16 Corporate Director Compensation Deferral Election Program and 1996 Deferral Form.
10.17 Corporate Officer Compensation Deferral Election Program and 1996 Deferral Form.*
10.18 Corporate Officers Long Term Variable Compensation Program.*
11.1 Statement Regarding Computation of Per Share Income.
13.1 1996 Annual Report to Stockholders. (Such Report, other than those portions thereof that are
expressly incorporated by reference herein, is furnished solely for informational purposes
and shall not be deemed to be "filed" herewith.)
16.1 Registrant's Registration of Form S-8. n.10
21.1 Subsidiaries of Registrant as of June 1, 1996.
23.1 Independent Auditors' Consent.
99.1 Registrant's 1983 Stock Option Plan.* n.8
99.2 Registrant's 1988 Restricted Stock Award Plan.* n.7
99.3 Rules of Registrant's 1988 U.K. Stock Option Scheme.* n.3
99.4 Registrant's 1989 U.K. Stock Option Plan.* n.7
99.5 Registrant's 1990 Employee Stock Purchase Plan.* n.9
99.6 Registrant's 1993 Stock Option Plan, as amended.* n.10
- ------------------------
* 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 Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1988, filed with the Securities and
Exchange Commission on June 29, 1988.
(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, 1989, originally filed with the Securities
and Exchange Commission on May 1, 1989.
(4) 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.
(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 S-8 (Nos. 33-33013 and
33-33063) filed with the Securities and Exchange Commission on January 19,
1990.
(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, 1990, filed with the Securities and
Exchange Commission on June 29, 1990.
(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, 1991, filed with the Securities and
Exchange Commission on June 28, 1991.
(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, 1993 filed with the Securities and Exchange
Commission on June 25, 1993.
(9) 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.
(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. 33-65157) filed with
the Securities and Exchange Commission on December 19, 1995.
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 21, 1996 By: /S/ JOSEPH J.
FRANCESCONI
--------------------------------------
Joseph J. Francesconi
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ---------------------------------------------- ---------------------------------------------- -----------------
/S/ JOSEPH J. FRANCESCONI
- ------------------------------------
Joseph J. Francesconi President, Chief Executive Officer and June 21, 1996
Director (Principal Executive Officer)
/S/ JOHN B. ARNOLD
- ------------------------------------
John B. Arnold Chairman of the Board June 21, 1996
/S/ DIXON R. DOLL
- ------------------------------------
Dixon R. Doll Director June 21, 1996
/S/ JAMES K. DUTTON
- ------------------------------------
James K. Dutton Director June 21, 1996
/S/ CRAIG M. GENTNER
- ------------------------------------
Craig M. Gentner Senior Vice President, Chief Financial Officer June 21, 1996
and Corporate Secretary (Principal Financial
Officer and Principal Accounting Officer)
/S/ WALTER J. GILL
- ------------------------------------
Walter J. Gill Director June 21, 1996
/S/ FRANK S. VIGILANTE
- ------------------------------------
Frank S. Vigilante Director June 21, 1996
/S/ HANS A. WOLF
- ------------------------------------
Hans A. Wolf Director June 21, 1996
19
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
PAGE
-----
Consolidated Balance Sheets as of March 31, 1996 and 1995........................................ *
Consolidated Statements of Operations for the years ended March 31, 1996, 1995 and 1994.......... *
Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1995 and 1994.......... *
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1996, 1995 and
1994............................................................................................ *
Notes to Consolidated Financial Statements....................................................... *
Independent Auditors' Report..................................................................... *
- ------------------------
* Incorporated herein by reference from information contained on pages 21
through 34 of the Registrant's 1996 Annual Report to Stockholders.
FINANCIAL STATEMENT SCHEDULE
PAGE
-----
Independent Auditors' Report..................................................................... 21
Schedule II -- Valuation and Qualifying Accounts................................................. S-1
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, 1996.
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, 1996 and 1995, and for each
of the three years in the period ended March 31, 1996, and have issued our
report thereon dated April 15, 1996; such financial statements and report are
included in your 1996 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, 1996
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NETWORK EQUIPMENT TECHNOLOGIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTION/ END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE OFF OF PERIOD
- -------------------------------------------------- ----------- ------------- ----------- ----------- -----------
For the year ended March 31, 1994:
Accounts receivable allowances.................. $ 3,819 -- $ 1,779(1) $ (2,403) $ 3,195
For the year ended March 31, 1995:
Accounts receivable allowances.................. $ 3,195 -- $ 1,762(1) $ (2,443) $ 2,514
For the year ended March 31, 1996:
Accounts receivable allowances.................. $ 2,514 -- $ 4,615(1) $ (2,596) $ 4,533
- ------------------------
(1) Amount represents additions to accounts receivable allowances which were
charged primarily to revenue.
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