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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
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 ____________
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COMMISSION FILE NUMBER 0-15323
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NETWORK EQUIPMENT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2904044
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(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or No.)
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, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
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(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.
/X/ Yes / / 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, 1997 was $359,211,516.
The number of shares outstanding of the Common Stock, $0.01 par value, on
May 30, 1997 was 21,066,880.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant's Annual Report to Stockholders for the fiscal year ended
March 31, 1997 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 12, 1997 is
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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PART I
ITEM 1. BUSINESS
GENERAL
Network Equipment Technologies, Inc. ("N.E.T." or "the Company") is
headquartered in Redwood City, California. The Company was incorporated in
California in 1983 and reincorporated in Delaware in 1986. Its common stock is
traded on the New York Stock Exchange. N.E.T. is a leading worldwide supplier of
multiservice wide-area networks to enterprises, government agencies and carriers
around the world, has more than 1,300 employees and has installed networks in
over 50 countries.
For over a decade, N.E.T. has manufactured and supported products for
wide-area networks ("WANs"). Solutions for mission-critical applications--those
requiring the highest availability or network "uptime"--are the Company's
specialty. Its product revenue is derived primarily from sales of networking
products known as multiservice bandwidth managers. Multiservice refers to their
diverse capabilities: integrating multiple applications such as video, voice,
image and data; using multiple technologies, providing support such as
switching, adaptation and aggregation for packets, frames, circuits and,
announced this calendar year, cells; and providing access to a variety of
different carrier services such as leased lines, frame relay and ATM. Carriers
around the globe use N.E.T.-TM- Multiservice Bandwidth Managers as edge switches
or access devices in their service provisioning networks, as they offer advanced
services to their business clients in an increasingly competitive environment.
Other carriers as well as enterprises and government agencies use these N.E.T.
products to construct public, private or hybrid multiservice wide-area networks.
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.
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 Company believes that many factors in the worldwide economy in general
and in the telecommunications equipment industry in particular are likely to
result in continued growth for that industry. The global evolution and growth of
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, deregulation of telecommunications
operators is occurring in numerous jurisdictions with increasing rapidity,
creating a series of overlapping transitions and highly competitive
environments. Increasingly, as formerly government-regulated carriers prepare
for or engage in highly competitive markets, they are increasing their
investment in carrier equipment to support a proliferation of innovative
services in the U.S. and abroad. Furthermore, continuing innovations in
semiconductor technology are enabling both a massive increase in computing power
and in a distribution of that power to the desktop. As desktops are linked,
there is a massive increase in the demand for data bandwidth in the local area;
as more and more of these desktops are geographically dispersed, there is a
corresponding increase in the demand for bandwidth across the wide area.
Finally, very recently the Internet, and in particular the World Wide Web, has
been the main driver for an acceleration in the growth of wide-area network data
traffic, initially focused on the Internet Service Providers ("ISPs"), but now
also
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extending to mainstream carriers as they take advantage of opportunities to
increase their data networking revenues. In turn, this increases opportunities
for companies like N.E.T. to supply carriers with wide-area network products.
Over the last two decades, the communications requirements of countless
organizations in developed countries have grown as a result of changes in both
the telecommunications and general business environments. In less developed
countries such as China, major investments in telecommunications infrastructure
are being made as they strive to improve their competitiveness and standard of
living. Telecommunications deregulation, beginning in the United States in the
early 1980s and advancing further following legislation in the mid-1990s,
coupled with increasing volumes and types of communications traffic within many
organizations, encouraged the growth of wide-area networks. More recently,
global alliances have been formed by major telecommunications carriers as
deregulation in Europe, Asia and Latin America opens new market opportunities.
The Company believes that these alliances and their offerings are having and are
likely to continue to have a major impact on the development of international
networking capabilities. Bandwidth managers and other products offered and soon
to be offered by the Company are sophisticated networking platforms that manage
these increasing amounts of bandwidth on wide-area enterprise and service
provisioning networks around the world.
In response to the expanding requirements for wide-area networking products
to support multiple technologies and application types and to provide access to
many different carrier services from a single communications platform,
multiservice bandwidth managers and related platforms have been developed. Such
devices enable the construction of multiservice wide-area networks. Benefits of
the multiservice capabilities include: users may avoid being restricted or
"locked-in" to a single technology or type of application; and such networks may
be customized to meet current needs and may allow the addition of technologies
and applications in the future.
N.E.T. provides multiservice wide-area networks to both main WAN market
segments: enterprise/ government and carrier. The enterprise, or private,
network segment generally refers to communications solutions whereby equipment
is owned and managed by enterprises and is located on their premises. This
segment generally includes the networks of government agencies. The carrier, or
public, network segment includes carrier-owned equipment and services provided
by carriers. Carrier network equipment is generally located on carriers'
premises. However, as carriers respond to market opportunities and deregulation,
there is a trend towards greater use of carrier offerings by enterprises. As a
result, equipment demand is shifting from that of pure enterprise network
equipment, as described above, to carrier-class network equipment that has
higher performance and capacity ratings and more stringent environmental
specifications, and also supports enterprise network requirements. This blurring
of the line between public and private networks has made hybrid networking more
common.
Carriers, or (more specifically) network service providers ("NSPs") and
ISPs, targeted by the Company, focus on the provision of advanced business
services. After having increased their wide-area networking market share with
their virtual private network ("VPN") offerings, NSPs, particularly in the U.S.,
are now expanding on that position with their frame-relay and Asynchronous
Transfer Mode ("ATM") strategies. As worldwide deregulation continues to
progress, leading carriers have teamed to form global consortia to provide
advanced network services to large businesses around the world. N.E.T. provides
service provisioning edge switches to many of these global carriers as they
expand and redefine their roles in the rapidly changing telecommunications
industry. Furthermore, the Company's recently announced ATM product family is
directed at the carrier market, and is intended to enable carriers, NSPs, ISPs
and large enterprises to expand their service offerings. The carrier segment of
the WAN equipment market is larger, and is expected to grow faster, than the
enterprise segment, providing growth opportunities for vendors such as N.E.T.
Around the world, there is a trend toward homogenization of network
applications and capabilities. However, network equipment standards, such as
those for interfaces, often have distinct and different
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specifications and implementations in different regions or countries. N.E.T.
provides multiservice wide-area networks to three main geographical market
segments: U.S., Europe and Asia Pacific/Latin America. The sequence of growth in
multiservice wide-area networking--with the U.S. leading the way, followed by
Europe and then Asia Pacific/Latin America--is a pattern that is expected to
hold for the deployment of ATM equipment and services in the WAN.
From a capacity-related perspective, networks are being extended at the high
and low end simultaneously. At the one end, there is a trend towards using
higher-bandwidth digital services, such as Synchronous Optical Network ("SONET")
and ATM, as high-capacity optical fiber becomes the backbone of carrier
networks. This drives demand for bandwidth management capabilities to be
incorporated within 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.
As noted above, 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, 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 having, and are expected to continue to have, a
significant impact on the entire networking industry. Late in its fiscal year
1997, N.E.T. announced a new family of wide-area networking products, under the
name "Promina". The first members of this family include Promina-TM- ATM
switches, with initial availability for certain elements scheduled through the
Company's fiscal year 1998. This move confirms the importance of ATM technology
to N.E.T.'s business and, when combined with other planned announcements,
demonstrates the Company's commitment to significantly expanding its ability to
address broader networking markets while leveraging the opportunities presented
by the emerging ATM WAN market, particularly with respect to the carrier
segment.
In summary, the deregulation of telecommunications worldwide, the growth of
business traffic, the emergence of the Internet, 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" below).
COMPANY STRATEGY
N.E.T.'s mission is to be the premier worldwide supplier of multiservice
wide-area networks to enterprises, government agencies and carriers, including
edge switches and access devices. The Company's strategy is to focus its
products, services and distribution capabilities to address the needs of these
market segments, and it believes that the key WAN market segments it has
selected offer a wide range of regional and global opportunities. Furthermore,
the Company's recent ATM product announcements and other announcements planned
for this year broaden its product line and are intended to broaden the markets
it can address while continuing to leverage N.E.T.'s experience and core
competencies.
The ATM WAN market provides opportunities for the Company within many
different market segments described under "Networking Industry". For example,
there exist opportunities within enterprise and carrier networks, in both
domestic and international segments. N.E.T. intends to initially focus its ATM
efforts on leveraging the more immediate deployment schedules and growth rates
of ATM WAN equipment in the U.S. carrier market. Since fiscal year 1997, the
Company has been adapting the skills and experience of its U.S. sales force, in
particular, to prepare for the launch of ATM products to carriers.
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The Company's networking products efficiently manage data and voice
bandwidth for enterprise, government and carrier customers. 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.
The Company's products and services allow enterprises the flexibility to
build multiservice wide-area networks in such a way as to leverage their network
alternatives. For instance, N.E.T. networks are designed in such a way that
enterprises may choose to use their own resources (i.e. services, equipment and
staff) along with those of other organizations, such as carriers and
outsourcers, if appropriate. Similarly, the Company provides government agencies
with sophisticated, reliable wide-area networks, systems integration and other
services.
The needs of carriers are addressed by the Company through the supply of
flexible multiservice switches and access devices. Today, they are used to build
multiservice network infrastructures, especially in developing countries, where
they are known as digital data networks ("DDNs"). These will be augmented by
N.E.T.'s recently announced Promina product family, especially its ATM switches,
featuring the critical design characteristics required for carrier, NSP and ISP
environments. These products may be used by carriers as service provisioning
edge switches--enabling carriers to easily add service overlays to their
existing network infrastructures and offer value-added network services to
businesses.
The Company offers a comprehensive set of narrowband and broadband products
for multiservice networking. It is in response to the long-term trend towards
broadband networking, and reflecting the importance of ATM technology and
standards as fundamental components of the networking industry, that the Company
is reinforcing and expanding on its strategic core competencies by developing
wide-area ATM products. N.E.T.'s Promina family furthers the fulfillment of the
Company's Vista Architecture, which, since 1995, has defined the framework for
implementation of the Company's long-term WAN product and service strategy.
Vista is a multiservice network architecture for the wide area. It provides
a cohesive framework for N.E.T.'s products and services for data and voice
networking. It incorporates solutions for narrowband and broadband applications,
leveraging cell, packet and circuit technologies, for carriers and enterprises.
Vista takes a systems view of wide-area networking, combining best-of-class
narrowband and broadband network elements with standards-based network
management. To further the Vista vision, enhanced N.E.T. Multiservice Bandwidth
Managers and other Multiservice Access Platforms and ATM Service Interfaces
("ASIs") have been defined to interoperate with the Company's ATM switching core
in order to address the need for incorporation of ATM capabilities within
multiservice wide-area networks. For example, the recently announced
CellXpress-TM- module for N.E.T.'s Multiservice Bandwidth Managers adapts and
aggregates legacy, frame and LAN traffic and provides access for that traffic to
an ATM backbone. The Company's partnership and alliance strategies take into
account its decision to offer superior products covering a wide range of
specific adaptation and aggregation functions for enterprise and carrier
markets. In addition, the Company's standards-based ATM switch, the Promina
4000, is designed to the levels of mission-critical availability, scalability
and advanced traffic management that carriers have said they require and
enterprises are coming to expect. So, the Vista architecture takes into account
that the increasing importance of data networking requires carrier-class
switches with ASIs or Integrated Access Devices ("IADs") to enable the provision
of advanced services.
The Company's strategic relationships continue to evolve in the context of
technology developments, telecommunications deregulation and consolidation among
equipment providers. Current relationships include links with equipment
manufacturers and resellers, global carriers, and network service providers.
Individual 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. Collectively, these
relationships are intended by the Company to promote the provision of superior
networking solutions for current and prospective customers, thereby enabling
enhanced financial results
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and shareholder value. Most of the Company's competitors have similar
relationships with their respective customers and other parties. Changes in the
Company's strategic 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 affect the Company's
business and operating results.
PRODUCTS
The Company maintains an integrated engineering and manufacturing
organization that is responsible for the design, development and manufacture of
its products. This organization produces hardware and software network systems
for enterprises and carriers. Internally developed products are integrated with
products acquired from other vendors to create systems that are sold to
customers. These systems combine to offer superior applications availability
with sophisticated bandwidth and traffic management as well as connectivity,
broadband transmission and unified network management across the wide area. More
specifically, the Company's products can be summarized as follows:
- multiservice bandwidth managers constitute the core business and, along
with a complementary frame-relay product line, provide solutions designed
to optimize use of T1, E1, T3 and E3 services;
- integrated frame relay switching products allow organizations to migrate
their data traffic to frame relay to take advantage of bandwidth savings
offered by this technology;
- integrated LAN internetworking products enhance connectivity and
interoperability among devices that transmit information between LANs
across WANs;
- integrated voice switching and compression products support new
applications, such as video conferencing, and offer substantial savings in
voice transmission;
- the initial members of the recently announced Promina product family
feature switching, multiplexing and access products, and are designed for
mission-critical, multiservice applications in the emerging ATM WAN
market;
- the broadband switch family provides transmission management solutions
targeted at T1, fractional T3, T3 and OC-3 traffic for major enterprises
and cellular network providers;
- access and low-end networking products provide cost-effective connectivity
from smaller locations with lighter traffic requirements; and
- network management systems enhance operator visibility into network
conditions providing functions such as fault correlation and diagnostics,
thereby permitting greater control and management of networks.
N.E.T.'s switching products are designed with a high degree of intelligence
that enables each switch to communicate with its peers. The switches can 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. Rapid response times provided by the switches' up-to-date
network knowledge and local nodal processing minimize network downtime and
maximize applications availability.
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N.E.T.'s different types of networking switches are described in the
following paragraphs. Simply put, many of the Company's main products perform
switching, multiplexing and routing (including rapid automatic re-routing), have
sophisticated network intelligence and are designed to facilitate hybrid
networking. In brief:
- switching is the process of directing streams of voice, data, image and/or
video from multiple sources to multiple destinations in a network based on
addressing information provided by the network administrator or embedded
within the information stream;
- 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 quickly enough to keep the
end-to-end connection intact; and
- network intelligence involves data collection, analysis, decision making
and presentation of information to allow the user to view, control and
manage the network's switching, multiplexing, routing and other functions
to its fullest operational and economic potential. Such intelligent
switches 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. These platforms offer
a wide range of interfaces to customer premise equipment ("CPE") and support
different types of applications, technologies and carrier services. Primary
transmission speeds of T1, E1, T3 and E3 are supported, and the family includes
devices for low-end networking and WAN access. Packet- and circuit-switching are
performed, along with the recently announced adaptation and aggregation of ATM
cells. Bandwidth-efficient algorithms are used to manage each traffic type and
combinations of these traffic types. Moreover, unlike many other time division
multiplexing products, N.E.T.'s multiservice platforms assign bandwidth only as
necessary to accommodate specific user requirements, rather than wasting
valuable bandwidth by allocating it in predetermined segments. The Company's
multiservice wide-area 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 customers' evolving
requirements.
Completely integrated within these multiservice platforms is N.E.T.'s family
of packet processors. These modules provide support for internetworking and
switching activities and access to switched services, such as ISDN, as well as
frame relay and ATM carrier offerings. There are four main product types:
INTEGRATED MULTIPROTOCOL ROUTERS
The LAN/WAN Exchange-TM- 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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INTEGRATED FRAME-RELAY SYSTEMS
The FrameXpress-TM- family of products, consisting of modules and
systems, is available in a variety of configurations. The FrameXpress
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 wide-area network and provide an
efficient, effective transport mechanism for a variety of bursty traffic
types.
INTEGRATED ISDN SYSTEMS
The PrimeVoice-TM- ISDN 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
wide-area network via an industry-standard Primary Rate Interface ("PRI").
The signaling capabilities of this module provide an intelligent connection
and offer ISDN services to an attached ISDN device. The PrimeVoice ISDN
module provides special features for worldwide PBX networking over N.E.T.
multiservice wide-area networks. These include worldwide feature
transparency, increased interoperability and the potential for lower costs.
INTEGRATED ATM ACCESS
The CellXpress-TM- module announced this year provides integrated access
for N.E.T. multiservice wide-area networks connecting to ATM services and
networks. It aggregates legacy mission-critical traffic along with LAN and
frame relay traffic, adapting these traffic types for transport over ATM
services. It is designed to enable flexible provisioning of multiple
services, and extends the multiservice wide-area network to include ATM
interfaces.
INTEGRATED VOICE SYSTEMS
In addition to the modules based on packet processors and described above,
N.E.T. has integrated many other features within its Multiservice Bandwidth
Managers. Notable amongst these is its sophisticated support for voice traffic.
This year, the Company extended the integrated voice capabilities in its
PrimeVoice family. This product line includes a number of value-added features
such as voice compression, ISDN switching (described above under "Integrated
ISDN Systems"), echo cancellation and industry-standard voice interfaces. In
particular, the PrimeVoice compression modules made available this year are
significant in that they double the toll-quality voice capacity on wide-area
networks. This allows carriers and service providers a cost-effective way to
carry more subscriber traffic on their networks.
ATM SWITCHES
The Promina product family features ATM switching, multiplexing and access
products. The Promina 4000 ATM switch, a member of N.E.T.'s new family, is
classed as a carrier edge switch, supporting superior traffic management for
service offerings such as ATM, frame relay and circuit emulation. Scheduled for
availability in fiscal year 1998, it features critical design characteristics
required for the carrier, NSP and ISP environment: mission-critical
availability, a scalable architecture, advanced traffic management and a unified
network management capability. With a unique distributed switch fabric, allowing
in-service upgrades, "hot-swap" capability, redundancy options and compliance to
NEBS ("Network Equipment Building System") standards, the Promina 4000 switch is
well-suited to the stringent requirements of carriers, NSPs and ISPs. Initial
releases provide support for T3, E3, OC3 and STM1 interfaces, a variety of
ATM-standard traffic types and popular ATM protocols. Advanced traffic
management capabilities that simultaneously achieve high statistical gain with
high levels of service integrity differentiate this product from other ATM
switches currently on the market.
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SONET 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 switch
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.
NETWORK MANAGEMENT SYSTEMS
A range of NetOpen-TM- network management systems from N.E.T. operate on
Sun-TM- workstations and enhance the ability of customers to control and monitor
a network and to diagnose and respond to changes or failures in equipment and
transmission resources. They are designed to help increase the productivity and
responsiveness of customers' network management staff, increase operational
efficiency and reduce cost.
The PanaVue-TM- network management system, announced this calendar year, is
a standards-based HP OpenView-TM- application that uses Web technology for its
operator interface and provides a comprehensive set of SNMP-based network
management capabilities. As part of the N.E.T. Vista Architecture, it provides
integrated management through functions such as fault correlation and
diagnostics for the N.E.T. Promina ATM and IDNX product families.
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 elements, with object states that change color to reflect alarm
conditions; the ability to software partition a physical multiservice wide-area
network into multiple, independent virtual networks; and, for frame-relay
systems, collection and storage of information about network usage, enabling
detailed traffic analysis for billing and capacity planning purposes.
NEW PRODUCT INTRODUCTION
N.E.T. believes it must continue to develop and enhance its product lines to
add relevant value and meet the needs of its strategic markets as they evolve,
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. For example, N.E.T. markets a comprehensive
frame-relay product line which combines frame relay access products from another
vendor with the Company's own internally developed frame relay switching
products. Also, the Company's recently announced Promina family includes
products developed and manufactured by other vendors that are compatible with
N.E.T.'s Vista Architecture and its products and strategy.
Many products designed and manufactured by N.E.T. contain components or
intellectual property obtained from third parties. The Company's ability to
maintain and enhance the value of its intellectual property and technology and
third party licenses and relationships will affect future product and service
offerings. Moreover, the Company believes that operating results will depend on
successful development and introduction of new products and enhancements to
existing products and service offerings. There can be no assurance that the
Company will succeed in such efforts or that customers will accept new, enhanced
8
and existing products and services in quantities and at prices and margins that
are consistent with the Company's expectations. Changes in the Company's
distribution, product and technology relationships with a number of entities
could have a material impact on competitive and other factors described herein,
including the Company's operating results.
The commercial availability of all of the Company's products and services in
a timely manner and their acceptance by customers are crucial to the future
success of the Company. Revenue generated from products designed and
manufactured by original equipment manufacturers is expected to increase
significantly in fiscal year 1998. The Company has invested and will continue to
invest in designing and delivering products that will function effectively well
into the next century. The Company expects these investments to be successful,
but, given the nature and complexity of the N.E.T. and third party products and
software offered by the Company and the complexity and mixed vendor nature of
equipment used in WANs, there can be no assurance that these development and
Year 2000 compliance efforts will be successful or that customer acceptance of
products or services will be achieved or maintained. Substantial delays in
availability or acceptance of the Company's products and services would
materially and adversely affect the Company's operating results and financial
condition.
MARKETING, DISTRIBUTION AND CUSTOMERS
N.E.T.'s marketing strategy focuses on information-intensive organizations
that have extensive voice, data, image and video communications needs and
carriers that provide services to these organizations. N.E.T. targets
enterprises, carriers and government agencies in four main market segments--U.S.
commercial, U.S. Federal, carriers and two geographic international segments.
Enterprises include, among many others, banks and other financial institutions,
airlines, retail chains and manufacturers. Carrier organizations include
telephone companies around the world (especially the evolving global consortia),
DDN operators, NSPs, ISPs, cellular network service providers and value-added
network ("VAN") suppliers. Government agencies include U.S. government defense,
intelligence and civilian agencies such as the State Department, as well as
similar agencies and entities in other countries. Increasingly, the Company has
been supplying its products to or through other entities, such as outsourcers,
distributors 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, and Asia,
Pacific and Latin American markets and to the U.S. government. In fiscal 1997,
the Company began refining the combined skill set of its U.S. sales force to
more effectively leverage the opportunities presented by N.E.T.'s recent product
announcements. As a result, a greater proportion of the Company's U.S. sales
organization is being geared towards supplying ATM WAN solutions to carriers.
There can be no assurance that the Company will succeed in gaining market
acceptance of its Promina product family or that introduction of new products
will not materially affect sale of products currently generating revenue.
As previously indicated by the Company, revenue in the first quarter of
fiscal year 1998 is expected to be lower than revenue in the fourth quarter of
fiscal year 1997. This is consistent with the Company's experience in recent
years. 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. In addition,
because a large portion of the Company's orders historically have been received
and filled in the last month of the quarter, forecasting sales during a quarter
is difficult, and there is a significant risk of excessive or inadequate
inventory if orders do not match forecast. Furthermore, if large orders do not
close when forecasted or if near-term demand weakens for the products the
Company has available to ship, the Company's operating results for that or
subsequent quarters would be adversely affected. For further
9
information, please refer to "Business Environment and Risk Factors" in
"Management's Discussion and Analysis" on pages 20 through 22 of the Company's
1997 Annual Report.
INTERNATIONAL SALES
N.E.T. has established subsidiaries in the U.K. (N.E.T. Europe Ltd.), France
(N.E.T. Europe S.A.), and Germany (Network Equipment Technologies 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 has also established subsidiaries in the U.S., Uruguay, China, Singapore
and Mexico that are focused on marketing and support of its products to these
and other countries in the regions of Asia Pacific and Latin America.
International sales represented 35%, 27% and 28% of the Company's revenue in
fiscal 1997, 1996 and 1995, 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 1997 Annual
Report to Stockholders ("Annual Report") filed as Exhibit 13 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. Ericsson is responsible for providing
all service and support for the N.E.T. products it markets. 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-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. The
current IBM Agreement is scheduled to expire at the end of December 1997 unless
renewed by mutual agreement.
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
1997, 1996 and 1995, sales to the U.S. government and its agencies accounted for
29%, 34% and 28%, respectively, of N.E.T.'s total revenue. These amounts include
sales, which amounted to 27%, 30% and 19% of revenue for fiscal years 1997, 1996
and 1995, respectively, under a contract with the Department of Defense under
which various government agencies can order products, installation and service
from N.E.T. Discontinuance of orders from, or disqualification of the Company
by, the Defense Department or other significant federal customers would
materially affect the Company's operating results and financial condition.
10
Apart from the U.S. government, no other single customer account was
responsible for ten percent or more of revenue during fiscal 1997, 1996 or 1995.
SALES TO AND RELATIONSHIPS WITH CARRIERS
Many of the Company's products are sold to carriers worldwide to provide
multiservice platforms used for services provisioning by the carriers. Sales to
the global carriers, such as Concert and GlobalOne amongst others, and to
emerging market carriers, such as those in China and Latin America, fall into
this category. The carrier services market is an increasingly important part of
the Company's business and is a key initiative of the Company's strategy. In
addition, the Company's relationships with carriers also expand the availability
of N.E.T. products and services to enterprise customers worldwide. 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.
RELATIONSHIP WITH DATACRAFT
The Company has entered into distribution and technology agreements with
many other companies, including Datacraft Asia. Datacraft Asia represents the
majority of N.E.T.'s overall sales into the Southeast Asia region and almost all
of N.E.T.'s sales into mainland China.
TECHNOLOGICAL CHANGE
Failure to keep pace with technological developments, marketing programs and
distribution capabilities of competitors would negatively and materially affect
the Company's performance. In particular, there can be no assurance that the
Company will gain market acceptance of its new and planned Promina product
family. 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 and there can be no assurance that distributors will continue to
effectively promote and sell the Company's products.
CUSTOMER SERVICE AND SUPPORT
N.E.T.'s service strategy is to provide superior support for its own
products and other vendors' products when deemed appropriate by the Company. 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 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. In the past year, for example,
in response to customer requirements and market opportunities, the Company has
developed Professional Services, designed to enable customers to augment their
own internal networking resources with the expertise of technical specialists
through N.E.T. Professional Services include remote network monitoring, project
management, network design, and staging, integration and documentation services.
The Company employs a highly trained N.E.T. service and support organization
in the U.S. and the U.K., including a Technical Assistance Center ("TAC") in
North America and another in Europe, and leverages service and support
capabilities of authorized service agents, many of whom are also authorized
11
to sell N.E.T.'s products around the world. In addition, the Company is
developing service and support capabilities via third-party agreements to
address the requirements of smaller organizations and in areas remote from
N.E.T. facilities. The cost-effective success of these third-party relationships
is dependent upon many factors and cannot be assured.
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.
has recently consolidated its North American TAC operations on the East Coast,
to form a single organization with broader capabilities. It has also established
a new Call Coordinator function (in Ashburn, VA) to qualify and route calls
according to severity. These changes reflect input from customers and are
examples of N.E.T.'s intent to continue providing superior service options in
its industry. 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 authorized service organizations who are trained by or under contract with
N.E.T. Customers around the world can access one of N.E.T.'s TACs. TAC support
is fee-based and TACs are staffed year-round and available 24 hours a day. TAC
engineers provide assistance over the telephone or, when authorized, by dialing
into customers' 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.
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. The Company's development efforts are
focused on its strategic market segments, providing multiservice platforms for
information-intensive enterprises, government agencies 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 markets that evolve as rapidly as
networking does today. Furthermore, it believes that the Company's 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 meet
market and customer requirements.
Research and development expense increased by $4.6 million (12.7%) in fiscal
year 1997 to a total of $41.0 million, from $36.4 million in fiscal year 1996.
The increase in R&D expense in fiscal 1997 was due to an increase in direct
project funding, primarily salary-related expenses and purchases of direct
materials and hardware and software tools to support product development. The
Company's R&D expense as a percentage of total revenue increased to 12.7% in
fiscal 1997 from 10.8% in fiscal 1996. In addition, $2.8 million, $1.9 million
and $2.0 million in fiscal 1997, 1996 and 1995, respectively, of software
production costs were capitalized and have since been partially amortized or
written-down to net 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 1997 Annual Report
filed as Exhibit 13 to this report. Management plans to continue funding R&D
efforts at levels necessary to
12
advance product programs and expects R&D spending to increase in fiscal 1998,
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 Southeast
Asia; final assembly and testing of N.E.T. products are performed at the
Company's manufacturing facilities, currently located in Redwood City,
California, and moving to Fremont, California in 1998 when the relocation of
corporate headquarters is planned to take place (see "Item 2. Properties"
below). Availability limitations, price increases, or business interruptions
could adversely impact financial performance.
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. 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. 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, ATM
switching and traffic management and standards compliance, technical services
and support, quality and reliability, vendor reputation and long-term
13
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 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 Ascend, Ascom Timeplex, Cisco,
General DataComm, Newbridge Networks and Nortel. Consolidation in the networking
industry has recently accelerated through strategic alliances, mergers and
acquisitions and joint technology and marketing agreements. In the process,
distinctions between different industry segments are blurring. Continued or
successful consolidation could result in stronger competitors and may adversely
affect the Company's competitive position and operations.
As the market for products implementing ATM technology evolves, it is
expected that the Company's ATM WAN product line, with various components being
scheduled for availability through fiscal 1998, 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
affect 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).
14
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 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 are carriers or use carrier network
services, the rates and terms of which are subject to varying degrees of public
utility-type government regulation. For example, in the U.S., decisions at the
federal and state level have, in some instances, provided certain carriers with
increased flexibility in structuring and pricing their services. Changes in the
rates or terms of carrier-provided service and equipment offerings may adversely
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
could adversely affect the demand for or limit the 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 affect the ability of 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
15
be no assurance in the future that actual or alleged infringement will not
materially affect the Company's operating results or financial condition.
The Company regards elements of its software and engineering as proprietary
and relies upon non-disclosure obligations, copyright laws and software
licensing agreements for protection. Despite these restrictions, it is possible
that competitors may obtain information that N.E.T. regards as proprietary. Some
of the technology incorporated in certain of the Company's products is licensed
from third parties. In the event of termination or expiration of the licensing
agreements for such technology, the Company's ability to market those products
could be adversely affected.
EMPLOYEES
As of March 31, 1997, the Company had 1,367 employees. None of the Company's
domestic employees are represented by a collective bargaining agreement. Certain
of the Company's employees outside the United States are governed by national
collective bargaining or similar agreements. The Company has never experienced
any work stoppage. The Company believes that its employee relations are good.
ITEM 2. PROPERTIES
N.E.T. currently leases approximately 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. In order to
provide the Company with greater flexibility in terms of managing space within
its corporate headquarters, as well as accommodating growth more effectively,
N.E.T. plans to relocate its headquarters to Fremont, California in mid-1998
under a new 12-year lease agreement for three buildings totaling approximately
290,000 square feet of space, with an exclusive option to lease another 200,000
square feet of space. The custom-built Fremont facility will initially include
two buildings configured for office space and research and development, and one
designed for manufacturing and other functions. N.E.T. and its subsidiaries also
lease sales and service offices at other locations in the United States, China,
France, Germany, Mexico, Norway, Singapore, Uruguay, the United Kingdom and
other countries. The Company 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. The Company believes that all substantive issues in this
examination have been resolved and that any necessary adjustments will not have
a material affect 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.
16
EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers (or "Corporate Officers") of the Company and their
ages at June 1, 1997, are as follows:
NAME AGE POSITION
- --------------------------- --- --------------------------------------------------------------------------
Roger A. Barney 57 Vice President, Human Resources and Corporate Services
James B. De Golia 47 Vice President, General Counsel and Assistant Corporate Secretary
Samuel H. Ezekiel 53 Senior Vice President, Marketing
Joseph J. Francesconi 54 President, Chief Executive Officer and Director
Craig M. Gentner 50 Senior Vice President, Chief Financial Officer and Corporate Secretary
David P. Owen 56 Vice President, Strategy and Technology
Raymond E. Peverell 49 Senior Vice President, Sales and Support
G. Michael Schumacher 58 Senior Vice President, Product Operations
Charles S. Shiverick 53 Vice President, Information Services and Reengineering
Roger A. Barney joined the Company in October 1987 as Vice President of
Human Resources and in 1992, became Vice President of Human Resources and
Corporate Services. Prior to joining the Company, Mr. Barney held numerous
management positions, including Director of Human Resources for Verbatim
Corporation. He also founded his own management consulting business, which he
ran from 1983 to 1987.
James B. De Golia joined the Company in December 1988 and has served as its
General Counsel and Assistant Secretary since 1991. From 1982 to 1988, Mr. De
Golia served as Corporate Counsel to a number of high technology and federal
divisions and subsidiaries of Xerox Corporation. Prior to joining Xerox, he
practiced law with the San Francisco office of Thelen, Marrin, Johnson &
Bridges.
Samuel H. Ezekiel joined the Company in June 1996 as Vice President of
Marketing and in April 1997 he was appointed Senior Vice President of Marketing.
From 1991 until joining N.E.T., Mr. Ezekiel was Vice President of Acquisitions &
Alliances at Amdahl Corporation, and from 1980 to 1991, he served as Vice
President and General Manager of the Communications Products Division. Prior to
that, he held a number of sales management, marketing, and business development
positions with companies such as British Telecom, Sperry Univac, Computer
Communications, Inc. and IBM/Rolm.
Joseph J. Francesconi has served as a Director and as President and Chief
Executive Officer since 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,
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
17
1983 he founded the fast packet 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.
From 1983 to 1992, Mr. Peverell was employed by Tandem Computers, Inc. holding
various positions, his last being Vice President, Strategic Partnership
Development. Prior to 1983, Mr. Peverell held several positions over a 12 year
span with Burroughs Corporation.
G. Michael Schumacher joined the Company in January 1995 as Senior Vice
President of Engineering and Operations and in 1996, became Senior Vice
President of Product Operations. Prior to joining the Company, Mr. Schumacher
was Vice President and General Manager of the UNIX Systems Division of Unisys
Corporation from 1993 to 1994. He also served at Mentor Graphics as General
Manager of front-end CAE Tools from 1991 to 1993, and at Solbourne Computers as
the Vice President of Engineering from 1989 through 1990.
Charles S. Shiverick, Vice President of Information Services and
Reengineering, joined the Company in 1989. Mr. Shiverick has held various senior
management positions including Senior Director of Corporate Quality and Vice
President of Operations. Prior to 1989, Mr. Shiverick spent 22 years at IBM
Corporation in a variety of management positions.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The section captioned "Common Stock Dividends and Price Range" of the
Registrant's 1997 Annual Report is incorporated herein by reference and included
in this filing as Exhibit 13. At March 31, 1997, there were 850 stockholders of
record of the Company.
ITEM 6. SELECTED FINANCIAL DATA
The section captioned "Five Year Financial Summary" of the Registrant's 1997
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
Registrant's 1997 Annual Report is incorporated herein by reference and included
in this filing as Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements together with the Notes thereto and
the Independent Auditors' Report thereon and the section captioned "Quarterly
Financial Data" of the Registrant's 1997 Annual Report are incorporated herein
by reference and included in this filing as Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Form 10-K
because the Company will file its definitive proxy statement (the "Proxy
Statement") pursuant to Regulation 14A within 120 days after the end of its
fiscal year covered by this Report, and certain information included in the
Proxy Statement is incorporated by reference into this Part III.
18
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to Directors is incorporated by reference from
the section captioned "Election of Directors" at page 2 of the Proxy Statement.
The information regarding Executive Officers is set forth in Item 4 of Part
I of this Form 10-K.
The information required by Item 405 of Regulation S-K is incorporated by
reference from the section captioned "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" at page 20 of the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding compensation of the Company's Executive Officers
contained in the sections captioned "Election of Directors: Board Committees,
Meetings, and Remuneration" (at pages 5 and 6 of the Proxy Statement) and
"Executive Compensation and Related Information" (at pages 12 to 15 of the Proxy
Statement), is 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" at pages 3 and 4 of the
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding transactions with the Company's Directors and
Executive Officers from the section captioned "Executive Compensation and
Related Information" at pages 12 to 15 of the Proxy Statement is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements--See "Index to Financial Statements and Financial Statement Schedule" at
page 24 of this Report.
(2) Financial Statement Schedules--See "Index to Financial Statements and Financial Statement
Schedule" at page 24 of this Report.
(3) Exhibits - See "Exhibit Index" at page 20 of this Report.
(b) The Registrant filed no reports on Form 8-K during the fourth quarter of the fiscal year ended March 31,
1997.
19
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 Morgan Guaranty Trust Company of
New York.................................................................................... 2
4.2 Rights Agreement dated as of August 15, 1989 between Registrant and The First National Bank
of Boston, as amended....................................................................... 3
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)..................................................................... 4
10.1 Headquarters Facilities Lease Agreements between Sobrato Interests III and Network Equipment
Technologies, Inc. dated April 10, 1997.....................................................
10.2 Seaport Centre Phase Three Industrial Net Lease Agreement dated August 12, 1987 between
Registrant and Lincoln Property N.C., Inc................................................... 5
10.7 Officer Employment and Continuation Agreement dated October 27, 1995 between Registrant and
Joseph J. Francesconi.*..................................................................... 6
10.8 Officer Employment and Continuation Agreement dated October 30, 1995 between Registrant and
Raymond E. Peverell.*....................................................................... 6
10.9 Officer Employment and Continuation Agreement dated October 27, 1995 between Registrant and
G. Michael Schumacher.*..................................................................... 6
10.10 Officer Employment and Continuation Agreement dated October 27, 1995 between Registrant and
Craig M. Gentner.*.......................................................................... 6
10.11 Officer Employment and Continuation Agreement dated June 3, 1996 between Registrant and
Samuel H. Ezekiel.*.........................................................................
10.12 Employment Agreement dated October 5, 1994 between Registrant and
Walter J. Gill.*............................................................................ 6
10.13 Form of Officer Employment and Continuation Agreement as signed by all other Executive
Officers of the Company in October 1995.*................................................... 6
10.14 Form of Director Indemnification Agreement as signed by all Directors of the Company........ 6
10.15 Form of Officer Indemnification Agreement as signed by all Executive Officers of the
Company.*................................................................................... 6
10.16 Corporate Director Compensation Deferral Election Program and 1996 Deferral Form............ 6
10.17 Corporate Officer Compensation Deferral Election Program and 1996 Deferral Form.*........... 6
10.18 Corporate Officers Long-Term Variable Compensation Program.*................................ 6
11.1 Statement Regarding Computation of Per Share Income.........................................
13 Portions of 1997 Annual Report to Stockholders..............................................
21.1 Subsidiaries of Registrant as of June 1, 1997...............................................
23.1 Independent Auditors' Consent...............................................................
20
EXHIBIT NO. DESCRIPTION NOTE
- --------------- -------------------------------------------------------------------------------------------- -----
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.*............................................ 10
99.6 Registrant's 1993 Stock Option Plan, as amended.*........................................... 11
- ------------------------
*A management contract or compensatory plan required to be filed as an Exhibit
to Form 10-K.
21
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 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.
(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. 33-65157), filed with
the Securities and Exchange Commission on December 19, 1995.
22
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)
By: /s/ JOSEPH J. FRANCESCONI
-----------------------------------------
Joseph J. Francesconi
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
Date: June 23, 1997 DIRECTOR
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ DIXON R. DOLL
- ------------------------------ Director June 23, 1997
Dixon R. Doll
/s/ JAMES K. DUTTON
- ------------------------------ Director June 23, 1997
James K. Dutton
President, Chief Executive
/s/ JOSEPH J. FRANCESCONI Officer and Director
- ------------------------------ (Principal Executive June 23, 1997
Joseph J. Francesconi Officer)
Senior Vice President,
Chief Financial Officer
/s/ CRAIG M. GENTNER and Corporate Secretary
- ------------------------------ (Principal Financial June 23, 1997
Craig M. Gentner Officer and Principal
Accounting Officer)
/s/ WALTER J. GILL
- ------------------------------ Director June 23, 1997
Walter J. Gill
/s/ HANS A. WOLF
- ------------------------------ Chairman of the Board June 23, 1997
Hans A. Wolf
23
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
PAGE IN
1997 ANNUAL REPORT*
-------------------
Consolidated Balance Sheets as of March 31, 1997 and 1996................. 23
Consolidated Statements of Income for the years ended March 31, 1997, 1996
and 1995................................................................ 24
Consolidated Statements of Cash Flows for the years ended March 31, 1997,
1996 and 1995........................................................... 25
Consolidated Statements of Stockholders' Equity for the years ended March
31, 1997, 1996 and 1995................................................. 26
Notes to Consolidated Financial Statements................................ 27-35
Independent Auditors' Report.............................................. 36
- ------------------------
*Incorporated herein by reference and included in this filing as Exhibit 13.
FINANCIAL STATEMENT SCHEDULE
PAGE IN
1997 FORM 10-K
-------------------
Independent Auditors' Report.............................................. 25
Schedule II--Valuation and Qualifying Accounts............................ 26
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, 1997.
24
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, 1997 and 1996, and for each
of the three years in the period ended March 31, 1997, and have issued our
report thereon dated April 16, 1997; such financial statements and report are
included in your 1997 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 16, 1997
25
NETWORK EQUIPMENT TECHNOLOGIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER DEDUCTION/ BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE OFF END OF PERIOD
- --------------------------------------------------- ----------- ----------- ----------- ----------- -------------
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
For the year ended March 31, 1997:
Accounts receivable allowances................... $ 4,533 -- $ 1,237(1) $ (1,860) $ 3,910
- ------------------------
(1) Amount represents additions to accounts receivable allowances which were
charged primarily to revenue.
26