-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HSESPIFh8mxPs8TcrDW6kM3FJnQADSYwSOb0ef6fFM8NjWmDxBNGYEK5Iz8V+h+U giA/JjLl/HHDLw6oulQA8Q== 0000912057-96-012893.txt : 19960624 0000912057-96-012893.hdr.sgml : 19960624 ACCESSION NUMBER: 0000912057-96-012893 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960621 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORK EQUIPMENT TECHNOLOGIES INC CENTRAL INDEX KEY: 0000752431 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 942904044 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10255 FILM NUMBER: 96584173 BUSINESS ADDRESS: STREET 1: 800 SAGINAW DR CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 4153664400 MAIL ADDRESS: STREET 1: 800 SAGINAW DRIVE CITY: REDWOOD CITY STATE: CA ZIP: 94063 10-K 1 FORM 10-K 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 2 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. 3 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. 4 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. 5 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 6 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- 7 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 8 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 21 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. S-1 EX-10.7 2 OFFICER EMPLOYMENT CONTINUATION AGREEMENT EXHIBIT 10.7 OFFICER EMPLOYMENT CONTINUATION AGREEMENT Network Equipment Technologies, Inc. ("the Company") and the undersigned ("Officer"), in partial consideration for their continuing officer and employment relationship and to encourage continued employment in the event of a potential Change of Control, agree as follows: 1. In the event of Termination of Employment of Officer resulting from a Corporate Transaction, Change of Control or Hostile Take-Over (as those terms are defined in the 1993 Stock Option Plan, collectively referred to in this Agreement as "Change of Control") or from involuntary termination for reasons other than cause, the Company will provide severance benefits as follows: a. one year of Officer's base salary ("salary continuance"), b. one year of Officer's variable compensation (computed using the mid-point of the applicable range and the company "meets plan"), c. Officer level medical, dental, life and disability insurance during the period of salary continuance, and d. vesting of outstanding stock options and restricted stock awards during the period of salary continuance. 2. "Termination of Employment" of Officer occurs when one of the following occurs: he or she is terminated without cause, job location is changed more than 50 miles, his or her compensation is materially reduced or responsibilities are substantially altered or reduced (without express consent of the employee) by the Company, or by any successor to the Company in conjunction with or within one year after the close of a Change of Control. 3. In the event of a Termination Of Employment in conjunction with a Change of Control, then vesting of outstanding stock options and restricted stock held by Officer shall accelerate at the time of such Termination. All vested options shall be exercisable for the duration of the life of the option. 4. In order to receive the foregoing, Officer agrees to execute the Company's release and non-competition agreement at the time of any such Termination of Employment. Agreed this 27th day of October, 1995. NETWORK EQUIPMENT Joseph J. Francesconi TECHNOLOGIES, INC. ------------------------------ (Print Name of Officer) BY: /s/ Joseph J. Francesconi ------------------------ ------------------------------ (Signature) TITLE: --------------------- EXHIBIT 10.7 OFFICER EMPLOYMENT CONTINUATION AGREEMENT Network Equipment Technologies, Inc. ("the Company") and the undersigned ("Officer"), in partial consideration for their continuing officer and employment relationship and to encourage continued employment in the event of a potential Change of Control, agree as follows: 1. In the event of Termination of Employment of Officer resulting from a Corporate Transaction, Change of Control or Hostile Take-Over (as those terms are defined in the 1993 Stock Option Plan, collectively referred to in this Agreement as "Change of Control") or from involuntary termination for reasons other than cause, the Company will provide severance benefits as follows: a. one year of Officer's base salary ("salary continuance"), b. one year of Officer's variable compensation (computed using the mid-point of the applicable range and the company "meets plan"), c. Officer level medical, dental, life and disability insurance during the period of salary continuance, and d. vesting of outstanding stock options and restricted stock awards during the period of salary continuance. 2. "Termination of Employment" of Officer occurs when one of the following occurs: he or she is terminated without cause, job location is changed more than 50 miles, his or her compensation is materially reduced or responsibilities are substantially altered or reduced (without express consent of the employee) by the Company, or by any successor to the Company in conjunction with or within one year after the close of a Change of Control. 3. In the event of a Termination Of Employment in conjunction with a Change of Control, then vesting of outstanding stock options and restricted stock held by Officer shall accelerate at the time of such Termination. All vested options shall be exercisable for the duration of the life of the option. 4. In order to receive the foregoing, Officer agrees to execute the Company's release and non-competition agreement at the time of any such Termination of Employment. Agreed this 27th day of October, 1995. NETWORK EQUIPMENT Joseph J. Francesconi TECHNOLOGIES, INC. ------------------------------- (Print Name of Officer) BY: /s/ Craig M. Gentner /s/ Joseph J. Francesconi --------------------------- ------------------------------- (Signature) TITLE: SR VP + CFO ------------------------ EX-10.8 3 OFFICER EMPLOYMENT CONTINUATION AGREEMENT EXHIBIT 10.8 OFFICER EMPLOYMENT CONTINUATION AGREEMENT Network Equipment Technologies, Inc. ("the Company") and the undersigned ("Officer"), in partial consideration for their continuing officer and employment relationship and to encourage continued employment in the event of a potential Change of Control, agree as follows: 1. In the event of Termination of Employment of Officer resulting from a Corporate Transaction, Change of Control or Hostile Take-Over (as those terms are defined in the 1993 Stock Option Plan, collectively referred to in this Agreement as "Change of Control") or from involuntary termination for reasons other than cause, the Company will provide severance benefits as follows: a. one year of Officer's base salary ("salary continuance"), b. one year of Officer's variable compensation (computed using the mid-point of the applicable range and the company "meets plan"), c. Officer level medical, dental, life and disability insurance during the period of salary continuance, and d. vesting of outstanding stock options and restricted stock awards during the period of salary continuance. 2. "Termination of Employment" of Officer occurs when one of the following occurs: he or she is terminated without cause, job location is changed more than 50 miles, his or her compensation is materially reduced or responsibilities are substantially altered or reduced (without express consent of the employee) by the Company, or by any successor to the Company in conjunction with or within one year after the close of a Change of Control. 3. In the event of a Termination Of Employment in conjunction with a Change of Control, then vesting of outstanding stock options and restricted stock held by Officer shall accelerate at the time of such Termination. All vested options shall be exercisable for the duration of the life of the option. 4. In order to receive the foregoing, Officer agrees to execute the Company's release and non-competition agreement at the time of any such Termination of Employment. Agreed this 30th day of October, 1995. NETWORK EQUIPMENT Raymond E. Peverell TECHNOLOGIES, INC. ------------------------------ (Print Name of Officer) BY: /s/ Raymond E. Peverell -------------------------- ------------------------------ (Signature) TITLE: ----------------------- EXHIBIT 10.8 OFFICER EMPLOYMENT CONTINUATION AGREEMENT Network Equipment Technologies, Inc. ("the Company") and the undersigned ("Officer"), in partial consideration for their continuing officer and employment relationship and to encourage continued employment in the event of a potential Change of Control, agree as follows: 1. In the event of Termination of Employment of Officer resulting from a Corporate Transaction, Change of Control or Hostile Take-Over (as those terms are defined in the 1993 Stock Option Plan, collectively referred to in this Agreement as "Change of Control") or from involuntary termination for reasons other than cause, the Company will provide severance benefits as follows: a. one year of Officer's base salary ("salary continuance"), b. one year of Officer's variable compensation (computed using the mid-point of the applicable range and the company "meets plan"), c. Officer level medical, dental, life and disability insurance during the period of salary continuance, and d. vesting of outstanding stock options and restricted stock awards during the period of salary continuance. 2. "Termination of Employment" of Officer occurs when one of the following occurs: he or she is terminated without cause, job location is changed more than 50 miles, his or her compensation is materially reduced or responsibilities are substantially altered or reduced (without express consent of the employee) by the Company, or by any successor to the Company in conjunction with or within one year after the close of a Change of Control. 3. In the event of a Termination Of Employment in conjunction with a Change of Control, then vesting of outstanding stock options and restricted stock held by Officer shall accelerate at the time of such Termination. All vested options shall be exercisable for the duration of the life of the option. 4. In order to receive the foregoing, Officer agrees to execute the Company's release and non-competition agreement at the time of any such Termination of Employment. Agreed this 30th day of October, 1995. NETWORK EQUIPMENT Raymond E. Peverell TECHNOLOGIES, INC. ------------------------------ (Print Name of Officer) BY: /s/ Joseph J. Francesconi /s/ Raymond E. Peverell --------------------------- ------------------------------- (Signature) TITLE: PRESIDENT & CEO ----------------------- EX-10.9 4 OFFICER EMPLOYMENT CONTINUATION AGREEMENT EXHIBIT 10.9 OFFICER EMPLOYMENT CONTINUATION AGREEMENT Network Equipment Technologies, Inc. ("the Company") and the undersigned ("Officer"), in partial consideration for their continuing officer and employment relationship and to encourage continued employment in the event of a potential Change of Control, agree as follows: 1. In the event of Termination of Employment of Officer resulting from a Corporate Transaction, Change of Control or Hostile Take-Over (as those terms are defined in the 1993 Stock Option Plan, collectively referred to in this Agreement as "Change of Control") or from involuntary termination for reasons other than cause, the Company will provide severance benefits as follows: a. one year of Officer's base salary ("salary continuance"), b. one year of Officer's variable compensation (computed using the mid-point of the applicable range and the company "meets plan"), c. Officer level medical, dental, life and disability insurance during the period of salary continuance, and d. vesting of outstanding stock options and restricted stock awards during the period of salary continuance. 2. "Termination of Employment" of Officer occurs when one of the following occurs: he or she is terminated without cause, job location is changed more than 50 miles, his or her compensation is materially reduced or responsibilities are substantially altered or reduced (without express consent of the employee) by the Company, or by any successor to the Company in conjunction with or within one year after the close of a Change of Control. 3. In the event of a Termination Of Employment in conjunction with a Change of Control, then vesting of outstanding stock options and restricted stock held by Officer shall accelerate at the time of such Termination. All vested options shall be exercisable for the duration of the life of the option. 4. In order to receive the foregoing, Officer agrees to execute the Company's release and non-competition agreement at the time of any such Termination of Employment. Agreed this 27th day of October, 1995. NETWORK EQUIPMENT Gerald M. Schumacher TECHNOLOGIES, INC. ------------------------------ (Print Name of Officer) BY: /s/ Gerald M. Schumacher -------------------------- ------------------------------ (Signature) TITLE: ----------------------- EXHIBIT 10.9 OFFICER EMPLOYMENT CONTINUATION AGREEMENT Network Equipment Technologies, Inc. ("the Company") and the undersigned ("Officer"), in partial consideration for their continuing officer and employment relationship and to encourage continued employment in the event of a potential Change of Control, agree as follows: 1. In the event of Termination of Employment of Officer resulting from a Corporate Transaction, Change of Control or Hostile Take-Over (as those terms are defined in the 1993 Stock Option Plan, collectively referred to in this Agreement as "Change of Control") or from involuntary termination for reasons other than cause, the Company will provide severance benefits as follows: a. one year of Officer's base salary ("salary continuance"), b. one year of Officer's variable compensation (computed using the mid-point of the applicable range and the company "meets plan"), c. Officer level medical, dental, life and disability insurance during the period of salary continuance, and d. vesting of outstanding stock options and restricted stock awards during the period of salary continuance. 2. "Termination of Employment" of Officer occurs when one of the following occurs: he or she is terminated without cause, job location is changed more than 50 miles, his or her compensation is materially reduced or responsibilities are substantially altered or reduced (without express consent of the employee) by the Company, or by any successor to the Company in conjunction with or within one year after the close of a Change of Control. 3. In the event of a Termination Of Employment in conjunction with a Change of Control, then vesting of outstanding stock options and restricted stock held by Officer shall accelerate at the time of such Termination. All vested options shall be exercisable for the duration of the life of the option. 4. In order to receive the foregoing, Officer agrees to execute the Company's release and non-competition agreement at the time of any such Termination of Employment. Agreed this 27th day of October, 1995. NETWORK EQUIPMENT Gerald M. Schumacher TECHNOLOGIES, INC. ------------------------------ (Print Name of Officer) BY: /S/ JOSEPH J. FRANCESCONI /s/ Gerald M. Schumacher --------------------------- ------------------------------ (Signature) TITLE: PRESIDENT + CEO ----------------------- EX-10.10 5 OFFICER EMPLOYMENT CONTINUATION AGREEMENT EXHIBIT 10.10 OFFICER EMPLOYMENT CONTINUATION AGREEMENT Network Equipment Technologies, Inc. ("the Company") and the undersigned ("Officer"), in partial consideration for their continuing officer and employment relationship and to encourage continued employment in the event of a potential Change of Control, agree as follows: 1. In the event of Termination of Employment of Officer resulting from a Corporate Transaction, Change of Control or Hostile Take-Over (as those terms are defined in the 1993 Stock Option Plan, collectively referred to in this Agreement as "Change of Control") or from involuntary termination for reasons other than cause, the Company will provide severance benefits as follows: a. one year of Officer's base salary ("salary continuance"), b. one year of Officer's variable compensation (computed using the mid- point of the applicable range and the company "meets plan"), c. Officer level medical, dental, life and disability insurance during the period of salary continuance, and d. vesting of outstanding stock options and restricted stock awards during the period of salary continuance. 2. "Termination of Employment" of Officer occurs when one of the following occurs: he or she is terminated without cause, job location is changed more than 50 miles, his or her compensation is materially reduced or responsibilities are substantially altered or reduced (without express consent of the employee) by the Company, or by any successor to the Company in conjunction with or within one year after the close of a Change of Control. 3. In the event of a Termination Of Employment in conjunction with a Change of Control, then vesting of outstanding stock options and restricted stock held by Officer shall accelerate at the time of such Termination. All vested options shall be exercisable for the duration of the life of the option. 4. In order to receive the foregoing, Officer agrees to execute the Company's release and non-competition agreement at the time of any such Termination of Employment. Agreed this 27th day of October, 1995. NETWORK EQUIPMENT Craig M. Gentner TECHNOLOGIES, INC. ---------------------- (Print Name of Officer) BY: /s/ Craig M. Gentner ---------------------- --------------------- (Signature) TITLE: ------------------- EXHIBIT 10.10 OFFICER EMPLOYMENT CONTINUATION AGREEMENT Network Equipment Technologies, Inc. ("the Company") and the undersigned ("Officer"), in partial consideration for their continuing officer and employment relationship and to encourage continued employment in the event of a potential Change of Control, agree as follows: 1. In the event of Termination of Employment of Officer resulting from a Corporate Transaction, Change of Control or Hostile Take-Over (as those terms are defined in the 1993 Stock Option Plan, collectively referred to in this Agreement as "Change of Control") or from involuntary termination for reasons other than cause, the Company will provide severance benefits as follows: a. one year of Officer's base salary ("salary continuance"), b. one year of Officer's variable compensation (computed using the mid- point of the applicable range and the company "meets plan"), c. Officer level medical, dental, life and disability insurance during the period of salary continuance, and d. vesting of outstanding stock options and restricted stock awards during the period of salary continuance. 2. "Termination of Employment" of Officer occurs when one of the following occurs: he or she is terminated without cause, job location is changed more than 50 miles, his or her compensation is materially reduced or responsibilities are substantially altered or reduced (without express consent of the employee) by the Company, or by any successor to the Company in conjunction with or within one year after the close of a Change of Control. 3. In the event of a Termination Of Employment in conjunction with a Change of Control, then vesting of outstanding stock options and restricted stock held by Officer shall accelerate at the time of such Termination. All vested options shall be exercisable for the duration of the life of the option. 4. In order to receive the foregoing, Officer agrees to execute the Company's release and non-competition agreement at the time of any such Termination of Employment. Agreed this 27th day of October, 1995. NETWORK EQUIPMENT Craig M. Gentner TECHNOLOGIES, INC. ---------------------- (Print Name of Officer) BY: /s/ Joseph J. Francesconi /s/ Craig M. Gentner --------------------------- --------------------- (Signature) TITLE: PRESIDENT & CEO ---------------- EX-10.11 6 OFFICER EMPLOYMENT CONTINUATION AGREEMENT EXHIBIT 10.11 OFFICER EMPLOYMENT CONTINUATION AGREEMENT Network Equipment Technologies, Inc. ("the Company") and the undersigned ("Officer"), in partial consideration for their continuing officer and employment relationship and to encourage continued employment in the event of a potential Change of Control, agree as follows: 1. In the event of Termination of Employment of Officer resulting from a Corporate Transaction, Change of Control or Hostile Take-Over (as those terms are defined in the 1993 Stock Option Plan, collectively referred to in this Agreement as "Change of Control") or from involuntary termination for reasons other than cause, the Company will provide severance benefits as follows: a. one year of Officer's base salary ("salary continuance"), b. one year of Officer's variable compensation (computed using the mid-point of the applicable range and the company "meets plan"), c. Officer level medical, dental, life and disability insurance during the period of salary continuance, and d. vesting of outstanding stock options and restricted stock awards during the period of salary continuance. 2. "Termination of Employment" of Officer occurs when one of the following occurs: he or she is terminated without cause, job location is changed more than 50 miles, his or her compensation is materially reduced or responsibilities are substantially altered or reduced (without express consent of the employee) by the Company, or by any successor to the Company in conjunction with or within one year after the close of a Change of Control. 3. In the event of a Termination Of Employment in conjunction with a Change of Control, then vesting of outstanding stock options and restricted stock held by Officer shall accelerate at the time of such Termination. All vested options shall be exercisable for the duration of the life of the option. 4. In order to receive the foregoing, Officer agrees to execute the Company's release and non-competition agreement at the time of any such Termination of Employment. Agreed this 27th day of October, 1995. NETWORK EQUIPMENT Roger A. Barney TECHNOLOGIES, INC. ------------------------------ (Print Name of Officer) BY: /s/ Roger A. Barney -------------------------- ------------------------------ (Signature) TITLE: ----------------------- EXHIBIT 10.11 OFFICER EMPLOYMENT CONTINUATION AGREEMENT Network Equipment Technologies, Inc. ("the Company") and the undersigned ("Officer"), in partial consideration for their continuing officer and employment relationship and to encourage continued employment in the event of a potential Change of Control, agree as follows: 1. In the event of Termination of Employment of Officer resulting from a Corporate Transaction, Change of Control or Hostile Take-Over (as those terms are defined in the 1993 Stock Option Plan, collectively referred to in this Agreement as "Change of Control") or from involuntary termination for reasons other than cause, the Company will provide severance benefits as follows: a. one year of Officer's base salary ("salary continuance"), b. one year of Officer's variable compensation (computed using the mid-point of the applicable range and the company "meets plan"), c. Officer level medical, dental, life and disability insurance during the period of salary continuance, and d. vesting of outstanding stock options and restricted stock awards during the period of salary continuance. 2. "Termination of Employment" of Officer occurs when one of the following occurs: he or she is terminated without cause, job location is changed more than 50 miles, his or her compensation is materially reduced or responsibilities are substantially altered or reduced (without express consent of the employee) by the Company, or by any successor to the Company in conjunction with or within one year after the close of a Change of Control. 3. In the event of a Termination Of Employment in conjunction with a Change of Control, then vesting of outstanding stock options and restricted stock held by Officer shall accelerate at the time of such Termination. All vested options shall be exercisable for the duration of the life of the option. 4. In order to receive the foregoing, Officer agrees to execute the Company's release and non-competition agreement at the time of any such Termination of Employment. Agreed this 27th day of October, 1995. NETWORK EQUIPMENT Roger A. Barney TECHNOLOGIES, INC. ------------------------------ (Print Name of Officer) BY: /s/ Joseph J. Francesconi /s/ Roger A. Barney --------------------------- ------------------------------ (Signature) TITLE: PRESIDENT & CEO ----------------------- EX-10.12 7 EMPLOYMENT AGREEMENT EXHIBIT 10.12 EMPLOYMENT AGREEMENT between WALTER J. GILL and NETWORK EQUIPMENT TECHNOLOGIES, INC. This is an Agreement (the "Agreement") between NETWORK EQUIPMENT TECHNOLOGIES, INC., located at 800 Saginaw Drive, Redwood City, California 94063, on behalf of itself and its successors, officers, directors, employees, subsidiaries and affiliates (collectively referred to as the "Company" or "N.E.T."); and Walter J. Gill, on behalf of himself, his representatives, heirs, and any successors, partnerships, owned or controlled corporations (collectively referred to as the "Gill"). Whereas, Walter J. Gill has been and continues to be a substantial contributor to N.E.T.'s success and possesses knowledge, information, contacts and skills concerning N.E.T.'s business and its current and prospective markets, all of which are and will continue to be of significant benefit to N.E.T. Now, therefore, the parties agree as follows: 1. FULL-TIME EMPLOYMENT. Walter J. Gill will continue to serve in the capacity of a Vice President & Chief Technology Officer, working an average of three (3) days per week, and as a member of the Board of Directors of the Company through October 6, 1994. During the above time period, Gill's primary responsibilities shall be to be available to the C.E.O. or his designee for assignments and to provide advice concerning, among other things, corporate and product architecture and technology, business development activities, activities concerning business with the Federal Government. Subject to Gill performing the responsibilities set forth in this Paragraph and such other reasonable responsibilities as they are assigned by the C.E.O. or his designees, Gill shall be compensated by the Company at 60% of his current base salary. 2. PART-TIME EMPLOYMENT. For a period of up to sixty (60) months after October 6, 1994, Gill shall provide services to N.E.T. as a part-time employee for up to an average of twenty (20) hours per month at reasonable times and places as requested by N.E.T. ("Employment Period"). Duties during the Employment Period shall be as specified or requested by the C.E.O. or his designee. During the Employment Period, Gill shall receive all then standard N.E.T. employee medical and dental coverage, group life and disability insurance coverage, subject to applicable standard terms and conditions (collectively these four elements are "Employee Benefits"). However, if Gill becomes eligible for one or more elements of employee benefits coverage under one or more plans provided by another employer, then N.E.T. may discontinue providing coverage for such elements. During the Employment Period, except as expressly provided in this Agreement, Gill shall not accrue vacation, holiday or sick leave nor shall he participate in or be eligible for any incentive or bonus program offered by the Company, nor shall he receive additional stock options or consideration of any type or amount either as an employee or as a member of the Board of Directors. During the Employment Period and subject to the provisions of this Agreement, Gill agrees to consistently engage in conduct that is supportive of N.E.T. and is not injurious to or in conflict with a material interest of N.E.T. In addition to the benefits set forth above, N.E.T. shall continue to pay premiums of up to $3,107.04 per year on the existing Northwest Mutual Life Insurance Policies (Nos. 12-165-521 and 12250625) while Gill is employed by N.E.T, but in no event beyond October 6, 1999. Gill shall be responsible for all other premium payments. Prior to December 31, 1999, Gill shall be entitled to purchase from the Company Life Insurance Policy No. 12250625 for a purchase price equal to the then current cash value of such policy, after which the Company shall assign all right, title and interest in such policy to Gill. In consideration of Gill's agreements and commitments contained in this Agreement, N.E.T. shall pay to Gill on a bi-weekly basis $7,000 per month from October 7, 1994 through October 6, 1996 and $3,500 per month from October 7, 1996 through October 6, 1999 (all payments shall be less deductions for taxes and other deductions that have been historically taken from his pay ("deductions")). In addition, N.E.T. will reimburse Gill for any out-of-pocket expenses which he incurs in performing such activities including but not limited to travel expenses (except commuting between home and N.E.T.) consistent with Company policy as in effect from time to time. While employed by N.E.T., Gill shall be eligible to continue to participate in or contribute to his 401(k) account, subject to applicable law. N.E.T. will take all reasonable actions to assist Gill in continuing his benefit coverage as an individual as required by law and the Company's Plan Documents at that point in time upon termination of the Employment Period. In the event that Gill secures employment or enters into a consulting or similar relationship with one or more entities or persons (collectively "Other Employment") during the Employment Period, he shall immediately inform the Vice President of Human Resources of N.E.T. If in the reasonable opinion of N.E.T. such Other Employment significantly impairs Gill's ability to provide services under this Agreement, his entitlement to receive monetary consideration under this Paragraph 2 may be reduced by N.E.T. on a dollar for dollar basis commencing thirty (30) days after commencement of such Other Employment. Notwithstanding any other provisions in the Agreement, N.E.T. retains the right to cease providing compensation and/or Employee Benefits or life insurance coverage under this Agreement in the event of a material breach of this agreement by Gill or a termination of the employer/employee relationship by N.E.T. for good cause. Termination shall be "for good cause" if, in the reasonable judgment of N.E.T.: (i) Gill engages in any act or omission which is in bad faith and to the detriment of N.E.T.; (ii) Gill refuses or fails to act in accordance with any direction or order of N.E.T.; (iii) Gill exhibits unfitness or unavailability for service (due to other than disability), misconduct, dishonesty, repeated or habitual neglect, persistent or serious deficiencies in performance, or gross incompetence; (iv) Gill is convicted of a crime; or (v) Gill materially breaches this Agreement or other obligations or duties imposed by law. All Compensation, Employee Benefits and option vesting shall immediately cease if this Agreement or the employee/employer relationship is terminated in accordance with Company policies or by Gill for any reason. In addition, N.E.T. reserves the right to terminate the employer/employee relationship between it and Gill at any time after October 6, 1994 with or without cause and for any reason whatsoever. In the event any such termination is without cause and is not related to a breach of this Agreement, N.E.T. will either (a) retain Gill as a consultant and pay him a retainer equal to the monthly payments and Employee Benefits provided under this Agreement or (b) pay to Gill the present cash value of all sums that would be due under this Agreement as compensation to Gill as an employee, such payment at Gill's option to be either in the form of a lump sum or in equal payments once a year through October 6, 1999. In the event that N.E.T. exercises its termination rights under this paragraph, and such termination was other than for cause or breach of this Agreement, it shall continue to provide Employee Benefits substantially equivalent to those provided by N.E.T. to employees through the end of the Employment Period, except as otherwise expressly provided in this Agreement. 3. STOCK OPTIONS. Gill's Stock Options shall continue to vest through October 6, 1994 and, thereafter, through the end of any Employment Period or consulting period and shall be exercisable in accordance with the terms of the applicable Stock Option Plan documents and the Stock Option Agreements. In the event of a change in control of N.E.T., which, under the terms of the Company's stock option plans and Gill's stock option agreements or as a result of Board action, causes an acceleration of the vesting date of stock options held by continuing executives of the Company, the Company agrees that any such favorable vesting provisions or acceleration applicable to such other executives of the Company will also apply to the options held by Gill on the same terms and conditions as those applicable to the options held by the continuing executives of the Company. 4. NON-COMPETITION. During the Employment Period Gill shall not, without the prior written consent of N.E.T. which N.E.T. may, in its sole discretion withhold,, provide any services to any third party that assists such third party in designing, marketing or selling products which provide or are targeted to provide material competition with the N.E.T. Wide Area Networking products (i.e. existing or planned IDNX, ADNX, STM and SPX) or N.E.T. ATM products or other products that N.E.T. makes or markets during such period. The parties agree that this Paragraph constitutes a material provision of this Agreement. 5. OTHER AGREEMENTS. Notwithstanding any other provision herein, nothing in this Agreement shall affect the rights or obligations of the parties under their Stock Option Agreements; INDEMNIFICATION AGREEMENT, effective January 27, 1994 or the employee PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT signed on April 7, 1989. Gill represents and warrants that he has complied and will continue to comply with all terms of such agreements and applicable Company policies during the period in which Gill has served and will serve as an employee and during the period in which he has agreed to provide consulting services to N.E.T. and thereafter in accordance with its terms of such agreements. Nothing in this Agreement is intended to affect Gill's rights under N.E.T.'s D&O insurance policies for any actions he undertook or which in the future he undertakes as a director and/or officer of N.E.T. or any of its subsidiaries. 6. TAXES. Gill shall be treated as an employee for tax withholding, reporting and payment purposes while he is an employee. Except for such employment related taxes owed by N.E.T., Gill shall be solely and personally responsible for all taxes owed as a result of compensation or other consideration received pursuant to this Agreement. 7. RELEASE AND LEGAL MATTERS. Gill hereby releases N.E.T. and its shareholders, officers, directors, employees, agents, subsidiaries, attorneys, insurers, legal successors and assigns (collectively referred to as "N.E.T.") from any and all claims against N.E.T., known and unknown, suspected or unsuspected which he now has, owns or holds or at any timer heretofore ever had, owned or held or could, shall or may hereafter have, own or hold based upon or arising out of any matter, cause, fact, thing, act or omission whatsoever, including without limitation, any and all claims which Gill now has or ever has had or ever in the future may have based on his employment with or his service as an officer or Director of the Company or the compensation for reducing his employment to part-time or for termination of his officer status, occurring or existing at any time to and including the date hereof, including without limitation, claims of emotional distress, defamation, breach of contract, breach of covenant of good faith and fair dealing, violation of provisions of the California Labor Code and the Age Discrimination in Employment Act of 1967, the Employee Retirement Income Security Act, and any other laws or regulations relating to employment. Gill represents that he is aware of all of the facts that are material to his decision to make this waiver and release. Gill acknowledges that he is waiving and releasing any rights he may have under the Age Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and release is knowing and voluntary. Gill and the Company agree that this waiver and release does not apply to any rights or claims that may arise under ADEA after the effective date of this Release Agreement. Gill acknowledges that the consideration given for this waiver and release is in addition to anything of value to which Gill was already entitled. Gill fully acknowledges that he has been advised that (a) he should consult with an attorney PRIOR to executing this Release Agreement; (b) he has had at least twenty-one (21) days within which to consider this Release Agreement; (c) he has at least seven (7) days following the execution of this Release Agreement by the parties to revoke the Release Agreement; and (d) this Release Agreement shall not be effective until the revocation period has expired. Gill represents that he is not aware of any claim in which he has an interest or which is held or owned (in whole or in part) by him against the Company other than the claims that are released by this Release Agreement. Gill acknowledges that he is familiar with the provisions of California Civil Code Section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Being aware of said Code Section, Gill agrees to expressly waive any rights he may have thereunder, as well as under any other statute or common law principles of similar effect, concerning the claims released in this Agreement. N.E.T. is not aware of any claim, that it presently has against Gill arising from or relating to his employment with N.E.T. ("CLAIM"). Furthermore, N.E.T. shall not assert any Claim against Gill arising out of or relating to actions taken by Gill within the scope of his employment. At N.E.T.'s request at any time (or multiple times) prior to December 31, 1999, Gill agrees to execute a release in a form substantially equivalent to that contained in Exhibit A to this Agreement. Gill understands and agrees that any right he has to receipt of consideration or Employee Benefits of any type provided under this Agreement and any obligation that N.E.T. may have to provide consideration or Employee Benefits to him is contingent upon his prompt execution of such Release when requested by N.E.T. This Paragraph 7 and its representations and releases are material provisions of this Agreement. 8. CORPORATE MATTERS. Effective October 6, 1994, Gill hereby resigns from his position as Vice President and Chief Technology Officer at N.E.T. and resigns from all Officer positions at N.E.T. and from all Board and Officer positions of N.E.T.'s subsidiaries except his position as director and Chairman of the Board of N.E.T. Federal, Inc. It is anticipated that Gill shall continue to serve as a member of the Board of Directors of Network Equipment Technologies, Inc. and as a member of the Board of Directors of N.E.T. Federal, Inc. after October 6, 1994 until Gill decides to resign or is requested by N.E.T. to resign such positions. Gill shall, at N.E.T.'s direction, promptly execute any documents that N.E.T. reasonably requires to accomplish such resignations, including, without limitation, completing and executing any transfers of stock in N.E.T. subsidiaries and any approvals or any governmental filings directly or indirectly related to such resignations or to accomplish the disengagement of Gill from the active management of the business of N.E.T. and its subsidiaries. 9. CONFIDENTIALITY. Except as required by law, this Agreement and its terms shall not be disclosed by Gill to any third parties (except for Gill's attorney) or to any employees of the Company other than those who have a need to know without the written consent of N.E.T. Provided, however, that (1) Gill shall be entitled to disclose both the facts and terms of this Agreement to his spouse and any other person to whom he is related by family, provided that Gill shall be responsible for any breach of confidentiality by family members, and (2) Gill shall be entitled to disclose to any person the fact that he resigned from N.E.T. under terms which were acceptable to both parties and that he has a continuing relationship with N.E.T. into the future. 10. NO SOLICITATION. Gill acknowledges that he has a continuing duty of loyalty to N.E.T. while employed by or working as a consultant to N.E.T. and he agrees that through the Employment Period (or, if sooner terminated by either party for any reason, for one year after such termination), he shall not encourage or solicit any employee of N.E.T. to leave N.E.T. for any reason or to devote less than all of any such employee's efforts to the affairs of N.E.T. The foregoing agreement not to encourage or solicit is a material provision of this Agreement. For purposes of this Paragraph, Gill shall not be deemed to have encouraged or solicited any employee of N.E.T. if Gill does not actively participate in soliciting such employee or actively encourage such employee to leave N.E.T. or if such employee has, prior to substantive discussions with Gill, clearly and directly informed his/her management up to the Vice President or General Manager level that he/she has decided to explore employment opportunities outside N.E.T. or has decided to leave the employ of N.E.T. 11. COOPERATION AND NON-DISPARAGEMENT. N.E.T. and Gill shall fully cooperate in any internal N.E.T. or external investigations or litigation concerning or relating to N.E.T. and any of N.E.T.'s' or Gill's activities during the time that Gill was employed by or serving as a consultant to N.E.T. Provided, however, that if such cooperation is required (other than in response to a third party subpoena) after the term of the Employment Period under Paragraph 2 or results in his consulting with N.E.T. in excess of the hours set forth in Paragraph 2, then such cooperation shall be (1) required only to the extent and at times that it does not interfere with other employment or professional activities which occupy Gill's time at the time of such cooperation and (2) N.E.T. shall compensate Gill at a mutually agreed rate of $250 per hour for such excess hours. Gill and N.E.T. will promptly advise the other of any formal or informal request for information or cooperation that may concern or relate to the interests of the other in connection with any such investigation or litigation. The parties also agree not to disparage each other or their products or services in the future. N.E.T. shall answer all inquiries about Gill's employment and consulting at N.E.T. by providing only the dates of employment and consulting and the positions Gill held during his tenure as employee or consultant. Gill and N.E.T. agree that this Paragraph constitutes a material provision of this Agreement. 12. GENERAL. Gill represents and warrants that, as of five days after the termination of his employment with N.E.T., he will not have in his possession or under his custody or control any records, documents, data, specifications, drawings, reproductions, notes, reports, proposals, or copies of the foregoing or other documents or material, equipment or other property belonging to N.E.T. or any of its subsidiaries or employees (collectively "N.E.T. materials") other than Macintosh IIX with keyboard, Serial No. F91015YM, N.E.T. Asset #010739; RGB Color Monitor (13"), Serial No.5238669M0401, N.E.T. Asset #010738; Laserwriter II NT, Serial No. CA904AL%M6000, N.E.T. Asset #010740; Okidata FAX600, Serial No. 111948 (collectively "Equipment"). All of N.E.T.'s right, title and interest in and to the items set forth on such Equipment and any applications software loaded on such Equipment is hereby transferred and assigned to Gill effective October 6, 1994. During the shorter of the Employment Period or the term of this Agreement, Gill's phonemail box shall be maintained and available for use by Gill. Except for entitlement to accrued vacation at the end of his regular full-time employment (which will be paid on or about October 6, 1994) and reimbursement under Company policies of reasonable expenses incurred in the course of providing employment or consulting related services to the Company and except as expressly set forth in this Agreement, Gill hereby waives any right to any and all other compensation, including but not limited to salary, bonuses, stock options or commissions. During the shorter of the Employment Period or the term of this Agreement, Gill waives any right to Board Compensation or Director Automatic Grants. The provisions hereof shall be binding on and shall inure to the benefit of the parties hereto, their respective heirs, legal representatives, successors and assigns. The provisions hereof shall be severable and if any provisions other than those identified as material to this Agreement are held to be invalid they shall be deemed omitted and the other shall nevertheless be enforceable. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of California as applied to contracts executed in California between two residents of California. 13. DISPUTE RESOLUTION In the event of any dispute arising from or relating to this Agreement, including but not limited to its formation, enforcement, performance or breach of this Release but not including a request for injunctive relief ("Dispute"), the parties agree that they shall pursue the dispute resolution procedure set forth in this Paragraph 13. Any party which alleges the existence of a Dispute shall give the other party written notice of same stating the nature and basis of the Dispute which notice shall be delivered by overnight service, personally or certified mail, return receipt requested. Within thirty (30) days of the receipt of such notice, the parties shall submit the Dispute to a non-binding mediation before a neutral mediator who shall be an attorney with experience in corporate law and intellectual property ("attorney") or such other person as to whom the parties agree. If the parties are unable to agree on a mediator, then they shall each choose one attorney and the two so chosen shall pick a mediator who shall alone act as the neutral. The parties shall present their cases without discovery of any kind and the mediator shall attempt to work with the parties to structure a resolution to the Dispute. The parties shall negotiate in good faith to reach a resolution of the Dispute and shall bear all mediation expenses equally. In the event that the parties are unable to resolve the Dispute following mediation, the parties agree that the Dispute shall be submitted to arbitration and that arbitration shall be the exclusive remedy for resolution of the Dispute. The parties also agree that this arbitration shall be held in Redwood City, California, and shall be in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"); the arbitrator shall have the authority to award or grant both legal, equitable and declaratory relief. Such arbitration shall be final and binding on the parties and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Finally, the parties both agree that in the event that an arbitration is brought to enforce this agreement, the prevailing party shall be entitled to an award of all reasonable attorney's fees and legal costs, in addition to other relief. 14. ENTIRE AGREEMENT, ETC. This Agreement and any Exhibits hereto constitute the entire agreement between N.E.T. and Gill with respect to the subject matter hereof and supersedes all prior agreements, understandings and proposals, whether written or oral concerning such subject matter. This Agreement may be amended only in a writing signed by both parties. Nor oral statement of any person will, in any manner or degree, modify or otherwise affect the terms and provisions of this Agreement. In the event of a breach or alleged breach of this Agreement, the prevailing party will be entitled to reasonable attorneys' fees and other costs and expenses incurred in connection with the enforcement of its rights under the provisions of this Agreement. NETWORK EQUIPMENT TECHNOLOGIES, INC. WALTER J. GILL By: /s/ Roger A. Barney By: /s/ Walter J. Gill -------------------------- --------------------------- Date: Oct 5, 1994 Date: Oct 5, 1994 ------------------------ ------------------------ EXHIBIT A TO GILL EMPLOYMENT AGREEMENT RELEASE AGREEMENT I, WALTER J. GILL, on behalf of myself, my representatives, heirs, legal representatives, executors, administrators, successors, and assigns, (hereinafter collectively referred to as the "Executive"), and NETWORK EQUIPMENT TECHNOLOGIES, INC., its affiliated and subsidiary entities, and the officers, directors, agents, employees, attorneys, successors, and assigns of all of them (hereinafter collectively referred to as the "Company"), agree as follows: 1. RELEASE OF CLAIMS. Executive hereby releases N.E.T. and its shareholders, officers, directors, employees, agents, subsidiaries, attorneys, insurers, legal successors and assigns (collectively referred to as "N.E.T.") from any and all claims against N.E.T., known and unknown, suspected or unsuspected which he now has, owns or holds or at any timer heretofore ever had, owned or held or could, shall or may hereafter have, own or hold based upon or arising out of any matter, cause, fact, thing, act or omission whatsoever, including without limitation, any and all claims which Executive now has or ever has had or ever in the future may have based on his employment with or his service as an officer or Director of the Company or the compensation for reducing his employment to part-time or termination of his officer or Director status, occurring or existing at any time to and including the date hereof, including without limitation, claims of emotional distress, defamation, breach of contract, breach of covenant of good faith and fair dealing, violation of provisions of the California Labor Code and the Age Discrimination in Employment Act of 1967, the Employee Retirement Income Security Act, and any other laws or regulations relating to employment. Executive represents that he is aware of all of the facts that are material to his decision to make this waiver and release. 2. ACKNOWLEDGMENT OF WAIVER OF CLAIMS UNDER ADEA. The Executive acknowledges that he is waiving and releasing any rights he may have under the Age Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and release is knowing and voluntary. Executive and the Company agree that this waiver and release does not apply to any rights or claims that may arise under ADEA after the effective date of this Release Agreement. Executive acknowledges that the consideration given for this waiver and release is in addition to anything of value to which Executive was already entitled. Executive fully acknowledges that he has been advised that (a) he should consult with an attorney PRIOR to executing this Release Agreement; (b) he has had at least twenty-one (21) days within which to consider this Release Agreement; (c) he has at least seven (7) days following the execution of this Release Agreement by the parties to revoke the Release Agreement; and (d) this Release Agreement shall not be effective until the revocation period has expired. 3. CIVIL CODE SECTION 1542. The Executive represents that he is not aware of any claim in which he has an interest or which is held or owned (in whole or in part) by him against the Company other than the claims that are released by this Release Agreement. Executive acknowledges that he is familiar with the provisions of California Civil Code Section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Being aware of said Code Section, Executive agrees to expressly waive any rights he may have thereunder, as well as under any other statute or common law principles of similar effect, concerning the claims released in this Agreement. 4. CONFIDENTIALITY. Executive and the Company agree to maintain in confidence, the terms of this Release Agreement. Executive will take every reasonable precaution to prevent disclosure of the terms of this Release Agreement and agree not to take action directly or indirectly to publicize such terms. The foregoing shall not prohibit either party from making accurate and complete disclosures or statements in response to legal process or as may be required by law, nor shall this provision require the making of any false or misleading statements. 5. GENERAL. The parties' Agreement, which consists of the Employment Agreement and documents and agreements referenced therein and this Release Agreement, represents the entire Agreement and understanding between the Company and Executive concerning Executive's employment with the Company or his service or termination of his service as an employee, officer or Director. In the event of a conflict between the Employment Agreement and any other Agreements, the Employment Agreement shall control. Except as expressly referenced in the Employment Agreement, all other agreements relating to the subject matter hereof, are hereby terminated and shall be null and void. The Executive and the Company agree to refrain from disparaging the other in the future. The Agreement may only be amended in writing signed by Executive and the Company. The Agreement shall be governed by the laws of the State of California. This Release Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as the original and shall constitute an effective, binding agreement on the part of each of the undersigned. IN WITNESS WHEREOF, the parties have executed this Release Agreement in accordance with the terms of the Employment Agreement. NETWORK EQUIPMENT WALTER J. GILL TECHNOLOGIES, INC. By: /s/ Roger A. Barney By /s/ Walter J. Gill -------------------------- --------------------------- Date: Oct 5, 1994 Date: Oct 5, 1994 ------------------------ ------------------------- EX-10.13 8 OFFICER EMPLOYMENT CONTINUATION AGREEMENT EXHIBIT 10.13 OFFICER EMPLOYMENT CONTINUATION AGREEMENT Network Equipment Technologies, Inc. ("the Company") and the undersigned ("Officer"), in partial consideration for their continuing officer and employment relationship and to encourage continued employment in the event of a potential Change of Control, agree as follows: 1. In the event of Termination of Employment of Officer resulting from a Corporate Transaction, Change of Control or Hostile Take-Over (as those terms are defined in the 1993 Stock Option Plan, collectively referred to in this Agreement as "Change of Control") or from involuntary termination for reasons other than cause, the Company will provide severance benefits as follows: a. one year of Officer's base salary ("salary continuance"), b. one year of Officer's variable compensation (computed using the mid-point of the applicable range and the company "meets plan"), c. Officer level medical, dental, life and disability insurance during the period of salary continuance, and d. vesting of outstanding stock options and restricted stock awards during the period of salary continuance. 2. "Termination of Employment" of Officer occurs when one of the following occurs: he or she is terminated without cause, job location is changed more than 50 miles, his or her compensation is materially reduced or responsibilities are substantially altered or reduced (without express consent of the employee) by the Company, or by any successor to the Company in conjunction with or within one year after the close of a Change of Control. 3. In the event of a Termination Of Employment in conjunction with a Change of Control, then vesting of outstanding stock options and restricted stock held by Officer shall accelerate at the time of such Termination. All vested options shall be exercisable for the duration of the life of the option. 4. In order to receive the foregoing, Officer agrees to execute the Company's release and non-competition agreement at the time of any such Termination of Employment. Agreed this ____ day of __________________, 1995. NETWORK EQUIPMENT ------------------------------ TECHNOLOGIES, INC. (Print Name of Officer) BY: -------------------------- ------------------------------ (Signature) TITLE: ----------------------- EX-10.14 9 DIRECTOR INDEMNIFICATION AGREEMENT EXHIBIT 10.14 DIRECTOR INDEMNIFICATION AGREEMENT THIS AGREEMENT is made and entered into as of the day of , 199 between Network Equipment Technologies, Inc., a Delaware corporation ("Corporation") and __________________ ("Indemnitee"). WHEREAS, Indemnitee, a member of the Board of Directors of Corporation, performs a valuable service in such capacity for Corporation; and WHEREAS, the stockholders of Corporation have adopted By-Laws (the "By-Laws") providing for the indemnification of the officers, directors, agents and employees of Corporation to the maximum extent authorized by Section 145 of the Delaware General Corporation Law, as amended ("Law"); and WHEREAS, such By-Laws and the Law, by their non-exclusive nature, permit contracts between Corporation and the members of its Board of Directors and its Officers with respect to indemnification of such Directors and Officers; and WHEREAS, in order to induce Indemnitee to continue to serve as a member of the Board of Directors of Corporation, Corporation has determined and agreed to enter into this contract with Indemnitee. NOW, THEREFORE, in consideration of Indemnitee's continued service as a member of the Board of Directors after the date hereof, the parties hereto agree as follows: 1. INDEMNITY OF INDEMNITEE. Corporation hereby agrees to hold harmless and indemnify Indemnitee to the full extent authorized or permitted by the provisions of the Law, as may be amended from time to time. 2. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth in Section 4 hereof, Corporation hereby further agrees to hold harmless and indemnify Indemnitee: a. against any and all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action by or in the right of the Corporation) to which Indemnitee is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Indemnitee is, was or at any time becomes a director, officer, employee or agent of Corporation, or is or was serving or at any time serves at the request of Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; and b. otherwise to the fullest extent as may be provided to Indemnitee by Corporation under the non-exclusivity provisions of Article VII, Section 6 of the By-Laws of Corporation and the Law. 3. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to Section 3 hereof shall be paid by Corporation: a. except to the extent of the aggregate of losses to be indemnified thereunder exceed the sum of $1,000 plus the amount of such losses for which Indemnitee is indemnified either pursuant to Sections 1 and 2 hereof or pursuant to any D&O Insurance purchased and maintained by the Corporation; b. in respect to remuneration paid to Indemnitee if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; c. on account of any suit in which judgment is rendered against a Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of Corporation pursuant to the provision of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provision of any federal, state or local statutory law; d. on account of Indemnitee's act or omission which is finally adjudged to have been knowingly fraudulent or deliberately dishonest, or to constitute willful misconduct; e. on account of Indemnitee's conduct which is the subject of an action, suit or proceeding described in Section 7(c)(ii) hereof; f. on account of any action, claim or proceeding (other than a proceeding referred to in Section 8(b) hereof) initiated by the Indemnitee unless such action, claim or proceeding was authorized in the specific case by action of the Board of Directors; g. if a final decision by a Court having jurisdiction in the matter shall determine that such indemnification is not lawful (and, in this respect, both Corporation and Indemnitee have been advised that the Securities and Exchange Commission believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication). 4. CONTRIBUTION. If the indemnification provided in Sections 1 and 2 is unavailable and may not be paid to Indemnitee for any reason other than those set forth in paragraphs (b), (c), (d), (e) and (f) of Section 3, then in respect of any threatened, pending or completed action, suit or proceeding in which Corporation is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), Corporation shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in such proportion as is appropriate to reflect (i) the relative benefits received by Corporation on the one hand and Indemnitee on the other hand from the transaction from which such action, suit or proceeding arose, and (ii) the relative fault of Corporation on the one hand and of Indemnitee on the other in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of Corporation on the one hand and of Indemnitee on the other shall be determined by reference to, among other things, the Indemnitee's relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. Corporation and Indemnitee agree that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. 5. CONTINUATION OF OBLIGATIONS. All agreements and obligations of Corporation contained herein shall continue during the period Indemnitee is a director, officer, employee or agent of Corporation (or is or was serving at the request of Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, 2 employee benefit plan or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal or investigative, by reason of the fact that Indemnitee was a Director of Corporation or serving in any other capacity referred to herein. 6. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30) days after receipt by Indemnitee of notice of the commencement of any action, suit or proceeding, Indemnitee will, if a claim in respect thereof is to be made against Corporation under this Agreement, notify Corporation of the commencement thereof; but the omission to so notify Corporation will not relieve it from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Indemnitee notifies Corporation of the commencement thereof: a. Corporation will be entitled to participate therein at its own expense; b. except as otherwise provided below, to the extent that it may wish, Corporation jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Indemnitee. After notice from Corporation to Indemnitee of its election so as to assume the defense thereof, Corporation will not be liable to Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ its counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after notice from Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized by Corporation, (ii) if the counsel designated by the Corporation is also representing the Corporation in the same matter and the Indemnitee shall have reasonably concluded that there may be a conflict of interest between Corporation and Indemnitee in the conduct of the defense of such action or (iii) Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of Indemnitee's separate counsel shall be at the expense of Corporation. Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of Corporation or as to which Indemnitee shall have made the conclusion provided for in (ii) above; and c. Corporation shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. Corporation shall be permitted to settle any action except that it shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. Neither Corporation nor Indemnitee will unreasonably withhold its consent to any proposed settlement. 7. ADVANCEMENT AND REPAYMENT OF EXPENSES. a. In the event that Indemnitee employs his own counsel pursuant to Section 6.b.(i) through (iii) above, the Corporation shall pay in advance to Indemnitee, prior to any final disposition of any threatened or pending action, suit or proceeding, whether civil, criminal, administrative or investigative, any and all reasonable expenses (including legal fees and expenses) incurred in investigating or defending any such action, suit or proceeding within thirty (30) days after receiving from Indemnitee copies of invoices for such expenses. b. Indemnitee agrees that he will repay the Corporation for all reasonable expenses so advanced by the Corporation in investigating or defending any civil or criminal action, suit or proceeding against Indemnitee in the event and only to the extent it shall 3 be ultimately determined by a final decision (from which there is no right of appeal) that Indemnitee is not entitled, as authorized by the provisions of the Law, the By-Laws, this Agreement or otherwise, to be indemnified by the Corporation for such expenses. c. Notwithstanding the foregoing, Corporation shall not be required to advance such expenses to Indemnitee if Indemnitee (i) commences any action, suit or proceeding as a plaintiff unless such advance is specifically approved by a majority of the Board of Directors or (ii) is a party to an action, suit or proceeding brought by Corporation and approved by a majority of the Board which alleges willful misappropriation of corporate assets by Indemnitee, disclosure of confidential information in violation of Indemnitee's fiduciary or contractual obligations to Corporation, or any other willful and deliberate breach of Indemnitee's duty to Corporation or its stockholders. 8. ENFORCEMENT. a. Corporation expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on Corporation hereby in order to induce Indemnitee to continue as a Director of Corporation, and acknowledges that Indemnitee is relying upon this Agreement in continuing such capacity. b. In the event either party is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, such prevailing party shall be entitled to a judgment for reasonable fees and expenses in bringing and pursuing such action. 9. SUBROGATION. In the event of payment under this agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable Corporation effectively to bring suit to enforce such rights. 10. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Indemnitee by this Agreement shall not be exclusive of any other right which Indemnitee may have or hereafter acquire under any statute, provision of Corporation's Certificate of Incorporation or By-Laws, agreement, vote of stockholders or directors, or otherwise, both as action in his official capacity and as to action in another capacity while holding office. 11. SURVIVAL OF RIGHTS. The rights conferred on Indemnitee by this Agreement shall continue after Indemnitee has ceased to be a director, officer, employee or other agent of Corporation and shall inure to the benefit of Indemnitee's heirs, executors and administrators. 12. SEPARABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof or the obligation of the Corporation to indemnify the Indemnitee to the full extent provided by the By- Laws or the Code. 13. GOVERNING LAW. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Delaware. 14. BINDING EFFECT. This Agreement shall be binding upon Indemnitee and upon Corporation, its successors and assigns, and shall inure to the benefit of Indemnitee, his heirs, personal representatives and assigns and to the benefit of Corporation, its successors and assigns. 4 15. AMENDMENT AND TERMINATION. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 16. PRIOR INDEMNITY AGREEMENT. This Agreement shall supersede and replace for all purposes any prior Agreement with respect to the same subject matter entered into between the Corporation and the Indemnitee. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. NETWORK EQUIPMENT TECHNOLOGIES, INC. By: _____________________________ Joseph J. Francesconi President and Chief Executive Officer ATTEST: __________________________ Craig M. Gentner Senior Vice President, Chief Financial Officer and Corporate Secretary INDEMNITEE: __________________________________ (Name) 5 EX-10.15 10 OFFICER INDEMNIFICATION AGREEMENT EXHIBIT 10.15 OFFICER INDEMNIFICATION AGREEMENT THIS AGREEMENT is made and entered into as of the __________ day of _____, 199__ between Network Equipment Technologies, Inc., a Delaware corporation ("Corporation") and __________________ ("Indemnitee"). WHEREAS, Indemnitee, an Officer of Corporation, performs a valuable service in such capacity for Corporation; and WHEREAS, the stockholders of Corporation have adopted By-Laws (the "By-Laws") providing for the indemnification of the officers, directors, agents and employees of Corporation to the maximum extent authorized by Section 145 of the Delaware General Corporation Law, as amended ("Law"); and WHEREAS, such By-Laws and the Law, by their non-exclusive nature, permit contracts between Corporation and its Officers with respect to indemnification of such Officers; and WHEREAS, in order to induce Indemnitee to continue to serve as an Officer of Corporation, Corporation has determined and agreed to enter into this contract with Indemnitee. NOW, THEREFORE, in consideration of Indemnitee's continued service as an Officer after the date hereof, the parties hereto agree as follows: 1. INDEMNITY OF INDEMNITEE. Corporation hereby agrees to hold harmless and indemnify Indemnitee to the full extent authorized or permitted by the provisions of the Law, as may be amended from time to time. 2. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth in Section 4 hereof, Corporation hereby further agrees to hold harmless and indemnify Indemnitee: a. against any and all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action by or in the right of the Corporation) to which Indemnitee is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Indemnitee is, was or at any time becomes a director, officer, employee or agent of Corporation, or is or was serving or at any time serves at the request of Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; and b. otherwise to the fullest extent as may be provided to Indemnitee by Corporation under the non-exclusivity provisions of Article VII, Section 6 of the By-Laws of Corporation and the Law. 3. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to Section 3 hereof shall be paid by Corporation: a. except to the extent of the aggregate of losses to be indemnified thereunder exceed the sum of $1,000 plus the amount of such losses for which Indemnitee is indemnified either pursuant to Sections 1 and 2 hereof or pursuant to any D&O Insurance purchased and maintained by the Corporation; b. in respect to remuneration paid to Indemnitee if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; c. on account of any suit in which judgment is rendered against a Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of Corporation pursuant to the provision of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provision of any federal, state or local statutory law; d. on account of Indemnitee's act or omission which is finally adjudged to have been knowingly fraudulent or deliberately dishonest, or to constitute willful misconduct; e. on account of Indemnitee's conduct which is the subject of an action, suit or proceeding described in Section 7(c)(ii) hereof; f. on account of any action, claim or proceeding (other than a proceeding referred to in Section 8(b) hereof) initiated by the Indemnitee unless such action, claim or proceeding was authorized in the specific case by action of the Board of Directors; g. if a final decision by a Court having jurisdiction in the matter shall determine that such indemnification is not lawful (and, in this respect, both Corporation and Indemnitee have been advised that the Securities and Exchange Commission believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication). 4. CONTRIBUTION. If the indemnification provided in Sections 1 and 2 is unavailable and may not be paid to Indemnitee for any reason other than those set forth in paragraphs (b), (c), (d), (e) and (f) of Section 3, then in respect of any threatened, pending or completed action, suit or proceeding in which Corporation is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), Corporation shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in such proportion as is appropriate to reflect (i) the relative benefits received by Corporation on the one hand and Indemnitee on the other hand from the transaction from which such action, suit or proceeding arose, and (ii) the relative fault of Corporation on the one hand and of Indemnitee on the other in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of Corporation on the one hand and of Indemnitee on the other shall be determined by reference to, among other things, the Indemnitee's relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. Corporation and Indemnitee agree that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. 5. CONTINUATION OF OBLIGATIONS. All agreements and obligations of Corporation contained herein shall continue during the period Indemnitee is a director, officer, employee or agent of Corporation (or is or was serving at the request of Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or 2 proceeding, whether civil, criminal or investigative, by reason of the fact that Indemnitee was an Officer of Corporation or serving in any other capacity referred to herein. 6. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30) days after receipt by Indemnitee of notice of the commencement of any action, suit or proceeding, Indemnitee will, if a claim in respect thereof is to be made against Corporation under this Agreement, notify Corporation of the commencement thereof; but the omission to so notify Corporation will not relieve it from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Indemnitee notifies Corporation of the commencement thereof: a. Corporation will be entitled to participate therein at its own expense; b. except as otherwise provided below, to the extent that it may wish, Corporation jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Indemnitee. After notice from Corporation to Indemnitee of its election so as to assume the defense thereof, Corporation will not be liable to Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ its counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after notice from Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized by Corporation, (ii) if the counsel designated by the Corporation is also representing the Corporation in the same matter and the Indemnitee shall have reasonably concluded that there may be a conflict of interest between Corporation and Indemnitee in the conduct of the defense of such action or (iii) Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of Indemnitee's separate counsel shall be at the expense of Corporation. Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of Corporation or as to which Indemnitee shall have made the conclusion provided for in (ii) above; and c. Corporation shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. Corporation shall be permitted to settle any action except that it shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. Neither Corporation nor Indemnitee will unreasonably withhold its consent to any proposed settlement. 7. ADVANCEMENT AND REPAYMENT OF EXPENSES. a. In the event that Indemnitee employs his own counsel pursuant to Section 6.b.(i) through (iii) above, the Corporation shall pay in advance to Indemnitee, prior to any final disposition of any threatened or pending action, suit or proceeding, whether civil, criminal, administrative or investigative, any and all reasonable expenses (including legal fees and expenses) incurred in investigating or defending any such action, suit or proceeding within thirty (30) days after receiving from Indemnitee copies of invoices for such expenses. b. Indemnitee agrees that he will repay the Corporation for all reasonable expenses so advanced by the Corporation in investigating or defending any civil or criminal action, suit or proceeding against Indemnitee in the event and only to the extent it shall be ultimately determined by a final decision (from which there is no right of appeal) that 3 Indemnitee is not entitled, as authorized by the provisions of the Law, the By- Laws, this Agreement or otherwise, to be indemnified by the Corporation for such expenses. c. Notwithstanding the foregoing, Corporation shall not be required to advance such expenses to Indemnitee if Indemnitee (i) commences any action, suit or proceeding as a plaintiff unless such advance is specifically approved by a majority of the Board of Directors or (ii) is a party to an action, suit or proceeding brought by Corporation and approved by a majority of the Board which alleges willful misappropriation of corporate assets by Indemnitee, disclosure of confidential information in violation of Indemnitee's fiduciary or contractual obligations to Corporation, or any other willful and deliberate breach of Indemnitee's duty to Corporation or its stockholders. 8. ENFORCEMENT. a. Corporation expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on Corporation hereby in order to induce Indemnitee to continue as an Officer of Corporation, and acknowledges that Indemnitee is relying upon this Agreement in continuing such capacity. b. In the event either party is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, such prevailing party shall be entitled to a judgment for reasonable fees and expenses in bringing and pursuing such action. 9. SUBROGATION. In the event of payment under this agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable Corporation effectively to bring suit to enforce such rights. 10. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Indemnitee by this Agreement shall not be exclusive of any other right which Indemnitee may have or hereafter acquire under any statute, provision of Corporation's Certificate of Incorporation or By-Laws, agreement, vote of stockholders or directors, or otherwise, both as action in his official capacity and as to action in another capacity while holding office. 11. SURVIVAL OF RIGHTS. The rights conferred on Indemnitee by this Agreement shall continue after Indemnitee has ceased to be a director, officer, employee or other agent of Corporation and shall inure to the benefit of Indemnitee's heirs, executors and administrators. 12. SEPARABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof or the obligation of the Corporation to indemnify the Indemnitee to the full extent provided by the By- Laws or the Code. 13. GOVERNING LAW. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Delaware. 14. BINDING EFFECT. This Agreement shall be binding upon Indemnitee and upon Corporation, its successors and assigns, and shall inure to the benefit of Indemnitee, his heirs, personal representatives and assigns and to the benefit of Corporation, its successors and assigns. 4 15. AMENDMENT AND TERMINATION. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 16. PRIOR INDEMNITY AGREEMENT. This Agreement shall supersede and replace for all purposes any prior Agreement with respect to the same subject matter entered into between the Corporation and the Indemnitee. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. NETWORK EQUIPMENT TECHNOLOGIES, INC. By: _____________________________ Joseph J. Francesconi President and Chief Executive Officer ATTEST: __________________________ Craig M. Gentner Senior Vice President, Chief Financial Officer and Corporate Secretary INDEMNITEE: __________________________________ (Name) 5 EX-10.16 11 COMPENSATION DEFERRAL ELECTION PROGRAM EXHIBIT 10.16 NETWORK EQUIPMENT TECHNOLOGIES, INC. CORPORATE DIRECTORS COMPENSATION DEFERRAL ELECTION PROGRAM I. PURPOSE OF THE PROGRAM This Corporate Directors Compensation Deferral Election Program ("Program") is intended to promote the interests of Network Equipment Technologies, Inc., a Delaware corporation (the "Company"), by providing Corporate Directors of the Company with the opportunity to participate in a deferred compensation arrangement which will allow them to tailor the receipt of their compensation to their own personal needs and thereby encourage them to continue in the service of the Company. II. ADMINISTRATION OF THE PROGRAM The Program shall be administered by the Compensation Committee ("Committee") of the Company's Board of Directors (the "Board") and, consistent with applicable law and the Company's By-laws, a Corporate Officer may be designated to take all action and to execute and deliver all documents which such officer may deem necessary or appropriate to carry out this Program. The Committee shall have full authority to administer the Program, including the authority to interpret and construe the provisions of the Program and to adopt rules and regulations for administering the Program. Decisions of the Committee shall be final and binding on all parties who have an interest in the Program. For purposes of administration and interpretation, the following definitions shall apply: CHANGE IN - A change in Control shall be deemed to occur: CONTROL (i) on the first date that a person or related group of persons, other than the Company or a person that directly or indirectly controls, is controlled by or is under common control with the Company, acquire ownership of twenty-five percent (25%) or more of the Company's outstanding voting stock pursuant to a tender or exchange offer which the Board does not recommend that the shareholders of the Company accept; or (ii) on the first date within any period of twenty-four (24) consecutive months or less on which there is effected a change in the composition of the Board such that a majority of the Board members (rounded up to the next whole number) ceases to be comprised of individuals who either (A) have been members of the Board continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time such election or nomination was approved by the Board. CORPORATE DIRECTOR - A Director of the Company, is elected by the Company's Board of Directors to a position of Corporate Director pursuant to Article V, Section 1 of the Company's By-laws. CORPORATE A Corporate Transaction shall be deemed to TRANSACTION - occur in the event there is: (i) a merger or consolidation of the Company in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the State of the Company's incorporation, (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company in liquidation or dissolution of the Company, or (iii) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the combined voting power of the Company's outstanding securities are transferred to holders different from those who held such securities immediately prior to such merger. EFFECTIVE DATE - January 1, 1994. PARTICIPANT - A Corporate Director and non-employee of the Company, who has been designated as a Participant by the Committee and who elects to participate in the Corporate Directors Deferral Election Program. COMPENSATION - The director's fees payable to each Corporate Director determined by the Committee to be eligible for participation under this Program, for serving as a Board member, for attending meetings of the Board, and for serving as chairman or member of a Board committee for which fees are paid, but excluding 2 reimbursable expenses under applicable Company policies. DEFERRED COMPENSATION ACCOUNT - An investment account reflecting Compensation deferred by a Participant, which may (at the Company's discretion) be established at a bank, brokerage or similar financial institution for the sole purpose of holding and investing Compensation that has been deferred by the Participant. SUBSIDIARY - Each corporation (other than the Company) in an unbroken chain of corporations ending with the Company, provided such corporation (other than the last corporation in the chain) owns, at the time of determination, stock possessing fifty percent (50%) or more of the total combined voting power of all the classes of stock in one of the other corporations in such chain. YEAR OF SERVICE - Any calendar year during which a Participant renders services as a Corporate Director of the Company. III. ELIGIBILITY; DEFERRED COMPENSATION ELECTION Only Corporate Directors designated as Participants by the Committee will be eligible to participate in the program. Participants shall remain eligible to defer Compensation pursuant to this Program until the EARLIEST to occur of (i) of the Participants termination of Board service or (ii) the termination of the Program. Each Participant shall have the right to make an annual election to defer the receipt of up to one hundred percent (100%) of the Participant's Compensation earned by him/her for any Year of Service for which he/she is a Participant in the Program. Any Compensation so deferred shall be paid in accordance with the provisions of the Program. Each deferral election shall be made in compliance with all of the following requirements and shall not be effective unless such requirements are met: A. The election must be exercised be means of a written notice to the Committee. The notice shall be in such form as the Committee deems appropriate and must be delivered to the Committee or its designee prior to the commencement date of the Year of Service for which the fee to be earned. 3 B. The amount deferred with respect to any Year of Service must be made in increments of ten percent (10%). C. The election, once made, shall be irrevocable with respect to the Year of Service for which it is made. IV. DEFERRED COMPENSATION ACCOUNT PAYMENT OF DEFERRED COMPENSATION The Company shall establish a Deferred Compensation Account for each Participant who properly exercises a deferral election under the Program. Any Compensation deferred by a Participant shall be credited to his/her Deferred Compensation Account as of the date such Compensation would have otherwise become payable in the absence of the Participant's deferral election. The balance credited to each Deferred Compensation Account shall earn an investment return over the deferral period in accordance with the following provisions: A. The Committee may in its discretion provide Participants with the right to designate the particular investment funds or specific stocks, securities or certificates of deposit. To the extent such investment authority is provided, the following special guidelines shall be in effect: (i) The Participant must file investment directives with respect to his/her account balance in increments of twenty-five percent (25%), but in any event in increments of no less than $5,000. (ii) Investment directives may be filed at intervals no more frequently than quarterly, and each investment directive shall remain in effect for at least one full calendar quarter and may not be changed at intervals more frequently than quarterly. (iii) To the extent the Company invests assets of the Company (which shall be held as general assets) in the specific investments designated by the Participant, all expenses and charges incurred by the Company or the Deferred Compensation Account in the acquisition of each investment (including, without limitation, the purchase price and any brokerage fees, commission or other front-end charges) and all income and other taxes, together with all other expenses and charges, incurred by the Company or the Deferred Compensation Account in the sale or liquidation of each investment shall be charged directly to the Participant's Deferred Compensation Account. Funds shall be held in the Deferred Compensation Account until the earlier of (i) the date designated for payment by the Participant in the deferral election or (ii) the date described in Section (D) or (E) below (the "Distribution Date") as follows: 4 A. The Deferred Compensation Account of each Participant shall be divided into a series of sub-accounts, one for each Year of Service for which the Participant has a deferral election in effect under the Program. Each sub-account shall become payable at the time designated by the Participant in the deferral election filed with respect to the Compensation credited to that sub-account. B. Each sub-account of a Participant shall be paid in the quarter following the last day of the Year of Service or one, two, three, four or five years following the last day of the Year of Service for which the Compensation was payable, in accordance with the deferral election filed by the Participant. C. The Participant may not subsequently revoke or modify his/her designation of a distribution date for a particular sub-account. D. Should a Participant die at a time when there still exists a balance in his/her Deferred Compensation Account, then the total amount of such account shall become immediately due and payable. E. Should the Participant cease Board service following a Change in Control or Corporate Transaction, then the entire balance credited to his/her Deferred Compensation Account shall become immediately due and payable, notwithstanding any outstanding election or elections of the Participant to the contrary under the Program. Other than described above, a Participant shall have no right to receive any of the funds in the Deferred Compensation Account. Until the Distribution Date, all funds in the Deferred Compensation Account shall be assets of the Company, subject to the claims of general creditors of the Company. Each sub-account which becomes due and payable in accordance with paragraph B, D or E above shall be distributed in one lump sum payment. Lump sum disbursements shall be made by the Company as soon as commercially reasonable after the Distribution Date, but in no event later than the end of the first calendar quarter following the Distribution Date. All disbursements made under the Program to Participants shall be subject to the Company's withholding of any Federal, State or local income and employment taxes, to the extent Federal, State or local law requires withholding of taxes with respect to participants, and all such payments shall be net of such tax withholding. The obligation to pay the deferred compensation and the investment return (if any) thereon shall at all times be an unfunded and unsecured obligation of the Company. The Participant's interest in the Deferred Compensation Account shall remain unvested until the Distribution Date. 5 V. GENERAL PROVISIONS The Program shall become effective as of January 1, 1994. The Board may at any time thereafter amend, suspend or terminate the Program; PROVIDED, however, that such action shall not adversely affect rights previously vested and non-forfeitable under the Program. Each Participant shall receive a calendar year-end statement of the balance credited to each of his/her sub-accounts under the Program. Such statement shall be provided to each Participant within ninety (90) days after the close of each calendar year. The Company shall pay all routine and on-going internal administrative costs incurred in connection with the operation of the Program. The Participant shall have no right to alienate, pledge or encumber his/her interest in the amounts credited to his/her Deferred Compensation Account, and such account shall not, to the extent permitted by law, be subject to any claims of the Participant's creditors or to attachment, execution or other process of law. Any balance credited to the Participant's Deferred Compensation Account at the time of his/her death shall be paid to the Participant's designated beneficiary or, in the absence of such designation, in accordance with the Participant's will or the laws of descent and distribution. A Participant may from time to time revoke his/her beneficiary designation then in effect and file a new beneficiary designation with the Committee. All beneficiary designations, however, must be on the form prescribed by the Committee. Neither the action of the Company in establishing the Program, nor any action taken by the Committee under the Program, nor any provision of the Program itself, shall be construed so as to impair the Company's right to remove any Participant from service on the Board any time in accordance with the provisions of applicable law. The obligation of the Company to make the payments required hereunder shall be binding upon any successor or assign of the Company, whether by merger, consolidation, acquisition or other reorganization. No amendment or termination of the Program by the Company (or any successor or assignee) shall adversely affect or other wise impair the rights of Participants to receive the balance credited to their Deferred Compensation Accounts hereunder, to the extent attributable to deferral elections made prior to the date of such amendment or termination. 6 NETWORK EQUIPMENT TECHNOLOGIES, INC. CORPORATE DIRECTORS COMPENSATION DEFERRAL ELECTION PROGRAM DESIGNATION OF BENEFICIARY I hereby designate either the trust or other entity specified in Part A below or the individual or individuals specified in Part B below as the beneficiary or beneficiaries of all my right, title and interest in and to my Deferred Compensation Account under the Deferral Election Program, hereby revoking any prior designation of beneficiaries made by me: PART A DESIGNATION The following trust or other entity is hereby designated as my sole beneficiary: --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- PART B DESIGNATION The following individual or individuals are hereby designated as my beneficiaries: NAME ADDRESS RELATIONSHIP % OF TOTAL 1. --------------- --------------- ------------------ -------------- 2. --------------- --------------- ------------------ -------------- 3. --------------- --------------- ------------------ -------------- The designated individual must survive me; otherwise, his/her designated share is to be divided equally among the beneficiaries who do survive me. If no beneficiaries survive me, the account balance is to be paid to my estate. Printed Name: -------------------------------- Signature: -------------------------------- Date: -------------------------------- 7 Network Equipment Technologies, Inc. Corporate Directors Compensation Deferral Election Program 1996 Deferral Form I hereby elect to participate in the Network Equipment Technologies, Inc.'s Corporate Directors Compensation Deferral Election Program ("Program") for the calendar year set forth above and to defer payment of ____% of the compensation to which I may become entitled during the 1996 calendar year. I hereby elect to have all deferred amounts initially invested in the account(s) checked below: _____ Investment Fund _____ Other Securities _____ Stock _____ Certificate of Deposit Please give investment description/fund name: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The deferred amounts, together with earned interest or capital gains (or losses) shall become due and payable in one lump sum at the time checked below: / / Jan. 1, 1997 / / Jan. 1, 1998 / / Jan. 1, 1999 / / Jan. 1, 2000 / / Jan. 1, 2001 / / Jan. 1, 2002 Arrange to have duplicate statements mailed to my / / home or / / work address. In the event I should die while any amount deferred hereunder remains unpaid, that amount plus the investment return thereon shall become immediately due and payable in one lump sum. As required by the Federal tax laws, each of the foregoing elections and the time of payment for the deferred amount is irrevocable and cannot be changed or modified under any circumstances. I understand that the Program document is controlling and that in the event my status as an director ceases following a Change in Control or Corporate Transaction, all amounts deferred by me under the Program will be paid to me in an immediate lump sum. I acknowledge and agree that this election is irrevocable and that compensation deferred by me under the program is payable to me only under the terms set out in the program document. Printed Name: ------------------------------ Signature: ------------------------------ Dated: ------------------------------ 8 EX-10.17 12 COMPENSATION DEFERRAL ELECTION PROGRAM EXHIBIT 10.17 EXHIBIT A TO OCTOBER 18, 1995 N.E.T. BOARD RESOLUTION NETWORK EQUIPMENT TECHNOLOGIES, INC. CORPORATE OFFICERS COMPENSATION DEFERRAL ELECTION PROGRAM I. PURPOSE OF THE PROGRAM This Corporate Officers Compensation Deferral Election Program ("Program") is intended to promote the interests of Network Equipment Technologies, Inc., a Delaware corporation (the "Company"), by providing Corporate Officers of the Company with the opportunity to participate in a deferred compensation arrangement which will allow them to tailor the receipt of their compensation to their own personal needs and thereby encourage them to continue in the service of the Company. II. ADMINISTRATION OF THE PROGRAM The Program shall be administered by the Compensation Committee ("Committee") of the Company's Board of Directors (the "Board") and, consistent with applicable law and the Company's By-laws, a Corporate Officer may be designated to take all action and to execute and deliver all documents which such officer may deem necessary or appropriate to carry out this Program. The Committee shall have full authority to administer the Program, including the authority to interpret and construe the provisions of the Program and to adopt rules and regulations for administering the Program. Decisions of the Committee shall be final and binding on all parties who have an interest in the Program. For purposes of administration and interpretation, the following definitions shall apply: CHANGE IN - A change in Control shall be deemed to occur: CONTROL (i) on the first date that a person or related group of persons, other than the Company or a person that directly or indirectly controls, is controlled by or is under common control with the Company, acquire ownership of twenty-five percent (25%) or more of the Company's outstanding voting stock pursuant to a tender or exchange offer which the Board does not recommend that the shareholders of the Company accept; or (ii) on the first date within any period of twenty-four (24) consecutive months or less on which there is effected a change in the composition of the Board such that a majority of the Board members (rounded up to the next whole number) ceases to be comprised of individuals who either (A) have been members of the Board continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time such election or nomination was approved by the Board. CORPORATE OFFICER - An officer is an employee of the Company, who is appointed by the Company's Board of Directors to a position of Corporate Officer pursuant to Article V, Section 1 of the Company's By-laws. CORPORATE A Corporate Transaction shall be deemed to TRANSACTION - occur in the event there is: (i) a merger or consolidation of the Company in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the State of the Company's incorporation, (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company in liquidation or dissolution of the Company, or (iii) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the combined voting power of the Company's outstanding securities are transferred to holders different from those who held such securities immediately prior to such merger. EFFECTIVE DATE - January 1, 1996. PARTICIPANT - A Corporate Officer of the Company, who has been designated as a Participant by the Committee and who elects to participate in the Corporate Officers Deferral Election Program. COMPENSATION - The compensation payable to each Corporate Officer determined by the Committee to be eligible for participation under this Program, including base salary and incentive, but excluding reimbursable expenses under applicable Company policies. 2 DEFERRED COMPENSATION ACCOUNT - An investment account reflecting Compensation deferred by a Participant, which may (at the Company's discretion) be established at a bank, brokerage or similar financial institution for the sole purpose of holding and investing Compensation that has been deferred by the Participant. SUBSIDIARY - Each corporation (other than the Company) in an unbroken chain of corporations ending with the Company, provided such corporation (other than the last corporation in the chain) owns, at the time of determination, stock possessing fifty percent (50%) or more of the total combined voting power of all the classes of stock in one of the other corporations in such chain. YEAR OF SERVICE - Any calendar year during which a Participant renders services as a Corporate Officer of the Company. III. ELIGIBILITY; DEFERRED COMPENSATION ELECTION Only Corporate Officers designated as Participants by the Committee will be eligible to participate in the program. Participants shall remain eligible to defer Compensation pursuant to this Program until the EARLIEST to occur of (i) of the Participants termination of employment service or (ii) the termination of the Program. Each Participant shall have the right to make an annual election to defer the receipt of up to one hundred percent (100%) of the Participant's Compensation earned by him/her for any Year of Service for which he/she is a Participant in the Program. Any Compensation so deferred shall be paid in accordance with the provisions of the Program. Each deferral election shall be made in compliance with all of the following requirements and shall not be effective unless such requirements are met: A. The election must be exercised by means of a written notice to the Committee. The notice shall be in such form as the Committee deems appropriate and must be delivered to the Committee or its designee prior to the commencement date of the Year of Service for which the compensation is to be earned. B. The amount deferred with respect to any Year of Service must be made in increments of ten percent (10%). 3 C. The election, once made, shall be irrevocable with respect to the Year of Service for which it is made. IV. DEFERRED COMPENSATION ACCOUNT PAYMENT OF DEFERRED COMPENSATION The Company shall establish a Deferred Compensation Account for each Participant who properly exercises a deferral election under the Program. Any Compensation deferred by a Participant shall be credited to his/her Deferred Compensation Account biweekly (or at other scheduled pay days) as of the date such Compensation would have otherwise become payable in the absence of the Participant's deferral election. The balance credited to each Deferred Compensation Account shall earn an investment return over the deferral period in accordance with the following provisions: A. The Committee may in its discretion provide Participants with the right to designate the particular investment funds or specific stocks, securities or certificates of deposit. To the extent such investment authority is provided, the following special guidelines shall be in effect: (i) The Participant must file investment directives with respect to his/her account balance in increments of twenty-five percent (25%), but in any event in increments of no less than $5,000. (ii) Investment directives may be filed at intervals no more frequently than quarterly, and each investment directive shall remain in effect for at least one full calendar quarter and may not be changed at intervals more frequently than quarterly. (iii) To the extent the Company invests assets of the Company (which shall be held as general assets) in the specific investments designated by the Participant, all expenses and charges incurred by the Company or the Deferred Compensation Account in the acquisition of each investment (including, without limitation, the purchase price and any brokerage fees, commission or other front-end charges) and all income and other taxes, together with all other expenses and charges, incurred by the Company or the Deferred Compensation Account in the sale or liquidation of each investment shall be charged directly to the Participant's Deferred Compensation Account. Funds shall be held in the Deferred Compensation Account until the earlier of (i) the date designated for payment by the Participant in the deferral election or (ii) the date described in Section (D) or (E) below (the "Distribution Date") as follows: A. The Deferred Compensation Account of each Participant shall be divided into a series of sub-accounts, one for each Year of Service for which the 4 Participant has a deferral election in effect under the Program. Each sub-account shall become payable at the time designated by the Participant in the deferral election filed with respect to the Compensation credited to that sub-account. B. Each sub-account of a Participant shall be paid in the quarter following the last day of the Year of Service or one, two, three, four or five years following the last day of the Year of Service for which the Compensation was payable, in accordance with the deferral election filed by the Participant. C. The Participant may not subsequently revoke or modify his/her designation of a distribution date for a particular sub-account. D. Should a Participant die at a time when there still exists a balance in his/her Deferred Compensation Account, then the total amount of such account shall become immediately due and payable. E. Should the Participant cease employment following a Change in Control or Corporate Transaction, then the entire balance credited to his/her Deferred Compensation Account shall become immediately due and payable, notwithstanding any outstanding election or elections of the Participant to the contrary under the Program. Other than described above, a Participant shall have no right to receive any of the funds in the Deferred Compensation Account. Until the Distribution Date, all funds in the Deferred Compensation Account shall be assets of the Company, subject to the claims of general creditors of the Company. Each sub-account which becomes due and payable in accordance with paragraph B, D or E above shall be distributed in one lump sum payment. Lump sum disbursements shall be made by the Company as soon as commercially reasonable after the Distribution Date, but in no event later than the end of the first calendar quarter following the Distribution Date. All disbursements made under the Program to Participants shall be subject to the Company's withholding of any Federal, State or local income and employment taxes, to the extent Federal, State or local law requires withholding of taxes with respect to employees , and all such payments shall be net of such tax withholding. The obligation to pay the deferred compensation and the investment return (if any) thereon shall at all times be an unfunded and unsecured obligation of the Company. The Participant's interest in the Deferred Compensation Account shall remain unvested until the Distribution Date. V. GENERAL PROVISIONS The Program shall become effective as of January 1, 1996. The Board may at any time thereafter amend, suspend or terminate the Program; PROVIDED, however, 5 that such action shall not adversely affect rights previously vested and non-forfeitable under the Program. Each Participant shall receive a calendar year-end statement of the balance credited to each of his/her sub-accounts under the Program. Such statement shall be provided to each Participant within ninety (90) days after the close of each calendar year. The Company shall pay all routine and on-going internal administrative costs incurred in connection with the operation of the Program. The Participant shall have no right to alienate, pledge or encumber his/her interest in the amounts credited to his/her Deferred Compensation Account, and such account shall not, to the extent permitted by law, be subject to any claims of the Participant's creditors or to attachment, execution or other process of law. Any balance credited to the Participant's Deferred Compensation Account at the time of his/her death shall be paid to the Participant's designated beneficiary or, in the absence of such designation, in accordance with the Participant's will or the laws of descent and distribution. A Participant may from time to time revoke his/her beneficiary designation then in effect and file a new beneficiary designation with the Committee. All beneficiary designations, however, must be on the form prescribed by the Committee. Neither the action of the Company in establishing the Program, nor any action taken by the Committee under the Program, nor any provision of the Program itself, shall be construed so as to impair the Company's right to remove any Participant from Corporate Officer status or to terminate their employment at any time. The obligation of the Company to make the payments required hereunder shall be binding upon any successor or assign of the Company, whether by merger, consolidation, acquisition or other reorganization. No amendment or termination of the Program by the Company (or any successor or assignee) shall adversely affect or other wise impair the rights of Participants to receive the balance credited to their Deferred Compensation Accounts hereunder, to the extent attributable to deferral elections made prior to the date of such amendment or termination. 6 NETWORK EQUIPMENT TECHNOLOGIES, INC. CORPORATE OFFICER COMPENSATION DEFERRAL ELECTION PROGRAM DESIGNATION OF BENEFICIARY I hereby designate either the trust or other entity specified in Part A below or the individual or individuals specified in Part B below as the beneficiary or beneficiaries of all my right, title and interest in and to my Deferred Compensation Account under the Deferral Election Program, hereby revoking any prior designation of beneficiaries made by me: PART A DESIGNATION The following trust or other entity is hereby designated as my sole beneficiary: ---------------------------------------------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- PART B DESIGNATION The following individual or individuals are hereby designated as my beneficiaries: NAME ADDRESS RELATIONSHIP % OF TOTAL ---- ------- ------------ ---------- 1. ---------- --------------- -------------------- ------------- 2. ---------- --------------- -------------------- ------------- 3. ---------- --------------- -------------------- ------------- The designated individual must survive me; otherwise, his/her designated share is to be divided equally among the beneficiaries who do survive me. If no beneficiaries survive me, the account balance is to be paid to my estate. Printed Name: ------------------ Signature: ------------------ Date: ------------------ 7 Network Equipment Technologies, Inc. Corporate Officer Compensation Deferral Election Program 1996 Deferral Form I hereby elect to participate in the Network Equipment Technologies, Inc.'s Corporate Officer Compensation Deferral Election Program ("Program") for the calendar year set forth above and to defer payment of ____% of the compensation to which I may become entitled during the 1996 calendar year. I hereby elect to have all deferred amounts initially invested in the account(s) checked below: Investment Fund Other Securities - ------ ------ Stock Certificate of Deposit - ------ ------ Please give investment description/fund name: - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- The deferred amounts, together with earned interest or capital gains (or losses) shall become due and payable in one lump sum at the time checked below: / / Jan. 1, 1997 / / Jan. 1, 1998 / / Jan. 1, 1999 / / Jan. 1, 2000 / / Jan. 1, 2001 / / Jan. 1, 2002 Arrange to have duplicate statements mailed to my / / home or / / work address. In the event I should die while any amount deferred hereunder remains unpaid, that amount plus the investment return thereon shall become immediately due and payable in one lump sum. As required by the Federal tax laws, each of the foregoing elections and the time of payment for the deferred amount is irrevocable and cannot be changed or modified under any circumstances. I understand that the Program document is controlling and that in the event my employment or my status as an officer is terminated following a Change in Control or Corporate Transaction, all amounts deferred by me under the Program will be paid to me in an immediate lump sum. I acknowledge and agree that this election is irrevocable and that compensation deferred by me under the program is payable to me only under the terms set out in the program document. Printed Name: ------------------ Signature: ------------------ Date: ------------------ 8 EX-10.18 13 LONG TERM VARIABLE COMPENSATION PROGRAM EXHIBIT 10.18 NETWORK EQUIPMENT TECHNOLOGIES, INC. CORPORATE OFFICERS LONG TERM VARIABLE COMPENSATION PROGRAM I. PURPOSE OF THE PROGRAM This Corporate Officers Long Term Variable Compensation Program ("Program") is intended to promote the interests of Network Equipment Technologies, Inc., a Delaware corporation (the "Company"). This Program provides Corporate Officers of the Company with the opportunity to receive long term variable compensation once vesting events occur in accordance with the written terms of this Program, thereby encouraging them to contribute to the long term success and to remain in the service of the Company. This Program will be administered in conjunction with the Company's Variable Compensation Program. Participants will have no right to receive any compensation or consideration under or related to this Program except to the extend that a Vesting Event or Accelerated Vesting Event occurs. II. ADMINISTRATION OF THE PROGRAM This Program shall be administered by the Compensation Committee ("Committee") of the Company's Board of Directors (the "Board") and, consistent with applicable law and the Company's By-laws, a Corporate Officer may be designated by the Committee to take all action and to execute and deliver all documents which such Officer may deem necessary or appropriate to carry out this Program. The Committee shall have full authority to administer the Program, including the authority to interpret and construe the provisions of the Program and to adopt rules for administering the Program. Decisions of the Committee shall be final and binding on all parties who have an interest in the Program. For purposes of administration and interpretation, the following definitions shall apply: CHANGE IN - A Change in Control shall be deemed to occur: CONTROL (i) on the first date that a person or related group of persons, other than the Company or a person that directly or indirectly controls, is controlled by or is under common control with the Company, acquire ownership of twenty-five percent (25%) or more of the Company's outstanding voting stock pursuant to a tender or exchange offer which the Board does not recommend that the shareholders of the Company accept; or (ii) on the first date within any period of twenty-four (24) consecutive months or less on which there is effected a change in the composition of the Board such that a majority of the Board members (rounded up to the next whole number) ceases to be comprised of individuals who either (A) have been members of the Board continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time such election or nomination was approved by the Board. CORPORATE OFFICER - An officer is an employee of the Company who is appointed by the Company's Board of Directors to a position of Corporate Officer pursuant to Article V, Section 1 of the Company's By-laws ("Officer"). CORPORATE A Corporate Transaction shall be deemed to TRANSACTION - occur in the event there is: (i) a merger or consolidation of the Company in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the State of the Company's incorporation, (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company in liquidation or dissolution of the Company, or (iii) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the combined voting power of the Company's outstanding securities are transferred to holders different from those who held such securities immediately prior to such merger. DETERMINATION AND PAYMENT OF LONG TERM VARIABLE COMPENSATION - Once each fiscal year the CEO of the Company shall recommend and, subject to approval by the Committee, a separate amount of up to 50% of the amount received by a Corporate Officer under the Company's Variable Compensation Program in that 2 year shall be identified in the Committee's records as Long Term Variable Compensation that such Participant shall in the future receive, subject to occurrence of a Vesting Event or Accelerated Vesting Event. Payment of such amounts shall be made in increments of 25% following the occurrence of a Vesting Event over the next succeeding four years (no interest shall accrue or be paid on any such amounts). Provided, however, that upon the occurrence of an Accelerated Vesting Event, all such amounts shall be promptly paid to the Participant. PARTICIPANT - An Officer of the Company, who has been designated as a Participant by the Committee and who is a full-time employee of the Company or one of its subsidiaries. Except as provided in the Program document or as otherwise determined in writing by the Committee, a Participant shall cease to be a Participant and shall have no ability or right to receive amounts that are not vested under this Program coincident with the termination of that person's full-time employment by the Company or one of its subsidiaries. SUBSIDIARY - Each corporation (other than the Company) in an unbroken chain of corporations ending with the Company, provided such corporation (other than the last corporation in the chain) owns, at the time of determination, stock possessing fifty percent (50%) or more of the total combined voting power of all the classes of stock in one of the other corporations in such chain. VESTING EVENT - Unless otherwise provided in writing by the Committee, a Vesting Event shall occur annually on the last day of the Company's fiscal year for Participants who are employed full-time by the Company or its subsidiaries. ACCELERATED VESTING EVENT - Should a Participant die or become permanently disabled or cease employment by the Company or its successor or assign following a Change in Control or Corporate Transaction or should this Program be discontinued by a successor in interest or assignee, then the all amounts identified by the Committee as 3 potential Long Term Variable Compensation for such Participant shall become immediately due and payable. III. ELIGIBILITY Only Officers designated as Participants by the Committee will be eligible to participate in this Program. Participants shall have no right to receipt of any consideration or compensation under (or related to) this Program prior to the occurrence of a Vesting Event or Accelerated Vesting Event and except as expressly provided in writing herein or by the Committee. IV. VESTING AND PAYMENT The occurrence of a Vesting Event or Accelerated Vesting Event for a Participant shall trigger an obligation for the Company to make a Payment of Long Term Variable Compensation to that Participant. Other than described above, a Participant shall have no right to receive any of the funds under or related to this Program. Each vested amount which becomes due and payable in accordance with the provisions of this Program shall be distributed in one lump sum payment. Lump sum disbursements shall be made by the Company as soon as commercially reasonable after vesting. All disbursements made under this Program to Participants shall be subject to the Company's withholding of any Federal, State or local income and employment taxes, to the extent Federal, State or local law requires withholding of taxes with respect to employees, and all such payments shall be net of such tax withholding. The Company and its Officers, Directors, employees, attorneys and agents shall have no obligation to pay any amounts under this Program except as expressly provided in writing under this Program. No Officer or individual Director of the Company shall have the right or power to create any such obligation or to modify the provisions of this Program. Participants shall have no right, title or interest in Company assets until a Vesting Date or Accelerated Vesting Date occurs as provided herein. V. GENERAL PROVISIONS The Program is effective beginning in fiscal 1996. The Committee may at any time amend or terminate the Program. However, such action shall not affect any amounts identified as Long Term Variable Compensation pursuant to Article II "Determination and Payment of Long Term Variable Compensation" prior to any such 4 action, which amounts shall continue to vest and be payable upon the occurrence of what would have been Vesting Events or Accelerated Vesting Events had the Program not been amended or terminated. The Participant shall have no right to alienate, pledge or encumber his/her interest in any amounts identified by the Committee as potential Long Term Variable Compensation. Provided all other eligibility conditions exist at that time of a Participant's death, all vested amounts, including amounts vested as a result of that Accelerated Vesting Event, shall be paid to the Participant's designated beneficiary or, in the absence of such designation, to the Participant's estate. Neither the action of the Company in establishing the Program, nor any action taken by the Committee under the Program, nor any provision of the Program itself, shall be construed so as to impair the Company's right to remove any Participant from Corporate Officer status or to modify the terms of their employment or compensation or to terminate their employment at any time. The obligation of the Company to make the payments required hereunder shall be binding upon any successor or assign of the Company, whether by merger, consolidation, acquisition or other reorganization. No amendment or termination of the Program by the Company (or any successor or assignee) shall adversely affect or otherwise impair the rights of Participants to receive vested amounts. 0o0 5 NETWORK EQUIPMENT TECHNOLOGIES, INC. CORPORATE OFFICER LONG TERM VARIABLE COMPENSATION PROGRAM DESIGNATION OF BENEFICIARY I hereby designate either the individual or individuals specified in Part A below or the trust or other entity specified in Part B below as the beneficiary or beneficiaries of all my right, title and interest in any Vested Long Term Variable Compensation under the N.E.T. Long Term Variable Compensation Program. I hereby revoke any prior designation of beneficiaries made by me: PART A DESIGNATION The following individual or individuals are hereby designated as my beneficiaries: NAME ADDRESS RELATIONSHIP % OF TOTAL ---- ------- ------------ ---------- 1. ---------- --------------- -------------------- ------------- 2. ---------- --------------- -------------------- ------------- 3. ---------- --------------- -------------------- ------------- The designated individual(s) must survive me; otherwise, his/her designated share is to be divided equally among the beneficiaries who do survive me. If no beneficiaries survive me, vested amounts are to be paid to my estate. PART B DESIGNATION The following trust or other entity is hereby designated as my sole beneficiary: ---------------------------------------------------------------- ---------------------------------------------------------------- This Beneficiary Designation was completed and signed by: Participant's Printed Name: ----------------------------------- Signature: -------------------------------------- Date: -------------------------------------- 6 EX-11.1 14 EXHIBIT 11.1 EXHIBIT 11.1 NETWORK EQUIPMENT TECHNOLOGIES, INC. STATEMENT REGARDING COMPUTATION OF PER SHARE INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1994 1995 1996 --------- --------- --------- Primary Earnings: Net income (loss).......................................................... $ (6,324) $ 27,070 $ 31,350 --------- --------- --------- --------- --------- --------- Shares: Weighted average number of common shares outstanding....................... 16,778 17,735 19,825 Weighted average options using the treasury stock method................... -- 1,033 1,008 --------- --------- --------- 16,778 18,768 20,833 --------- --------- --------- --------- --------- --------- Primary income (loss) per share.............................................. $ (.38) $ 1.44 $ 1.50 --------- --------- --------- --------- --------- --------- Fully Diluted Earnings: Net income (loss).......................................................... $ (6,324) $ 27,070 $ 31,350 --------- --------- --------- --------- --------- --------- Shares: Weighted average number of common shares outstanding....................... 16,778 17,735 19,825 Weighted average options using the treasury stock method................... -- 2,059 1,083 Number of common equivalent shares assuming conversion of convertible securities (1)............................................................ -- -- -- --------- --------- --------- 16,778 19,794 20,908 --------- --------- --------- --------- --------- --------- Fully diluted income (loss) per share.......................................... $ (.38) $ 1.37 $ 1.50 --------- --------- --------- --------- --------- ---------
- ------------------------ (1) The assumed exercise of these common stock equivalents was excluded as it was anti-dilutive or had no material impact on the earnings per share calculation. EX-12.1 15 EXHIBIT 12.1 Exhibit 12.1 (Front Cover) N.E.T. Logo "N.E.T. Value - 1996 Annual Report" CORPORATE OVERVIEW N.E.T. supplies wide-area networks (WANS) to enterprises and carriers around the world. These organizations manage vast amounts of critical information and require reliable, cost-effective networking solutions. Most of these organizations also need a combination of voice, video, and data capabilities -- which the N.E.T. -TM- multiservice backbone network provides. A network constructed of N.E.T. multiservice bandwidth managers frees our customers from being locked into a single technology or application. It gives them the flexibility to customize a network so that it meets their unique needs and allows them to add technologies and applications as required. For more information on N.E.T. join us at our world wide web site at http://www.net.com FINANCIAL HIGHLIGHTS (Dollars in thousands, except per share amounts) HIGHLIGHTS FOR YEARS ENDED MARCH 31, 1996 1995 - -------------------------------------------------------------------------------- Revenue $ 338,899 $ 284,036 Operating income 47,408 25,970 Net income 31,350 27,070 Primary earnings per share 1.50 1.44 Working capital 174,425 128,683 Total assets 281,957 232,046 7 1/4% convertible subordinated debentures 33,526 68,625 Stockholders' equity 184,430 101,662 Number of employees 1,318 1,189 - -------------------------------------------------------------------------------- Results for fiscal 1995 include a $9.9 million tax benefit. Excluding this tax benefit, primary earnings per share would have been $.91. (Dollars in thousands, except per share amounts) 1996 HIGHLIGHTS BY QUARTER FIRST SECOND THIRD FOURTH - -------------------------------------------------------------------------------- Revenue $ 79,609 $ 82,958 $ 84,561 $ 91,771 Net income 6,422 7,448 8,215 9,265 Primary and fully diluted earnings per share .32 .36 .39 .43 - -------------------------------------------------------------------------------- EXHIBIT 12.1 Three graphs are displayed showing quarterly Revenue (dollars in millions), Net Income (dollars in millions, excluding a $9.9 million tax benefit in Q4 FY95), and Primary Earnings Per Share (dollars, excluding a $9.9 million tax benefit in Q4 FY95). TO OUR SHAREHOLDERS N.E.T.'s outstanding year can be attributed in part to excellent teamwork: an attitude infused throughout the organization. Along with responsible stewardship of resources, it has enabled us to consolidate our position in the fast-moving telecommunications industry. STRENGTHENING YOUR COMPANY . . . OUR GOALS FOR FISCAL 96 We began this year with clear company objectives - to continue to increase both revenue and profitability while further strengthening your company across the board. Another year of record results Our financial results are evidence that we achieved the first objective, increasing revenue and profitability. Revenue for the year was $339 million, up almost 20% from the previous year, and reached an all-time high of over $91 million in the fourth quarter. Operating income grew 83% to over $47 million. Net income for the year was $31 million, or $1.50 per share. Our record operating results were complemented by an equivalent strengthening of the balance sheet - cash resources grew by over $25 million to $112 million, and long-term debt was reduced by more than 50 percent to less than $34 million. Overall company performance Our improvement and results as a dedicated team go deeper than financial highlights can reveal. We achieved the second objective - to strengthen your company - through well-executed initiatives throughout the organization. Some of these activities include . . . Sales and marketing We continued to reallocate and direct our sales and marketing teams to achieve a greater share of the international, carrier, and government marketplaces - growth areas for the best-of-class products that N.E.T. is delivering today. In fact, our performance and excellent financial results this year are based on the worldwide competitive success of our Multiservice Bandwidth Managers. Obviously, as a trusted vendor to many world-class organizations, our loyal customer base is a key strength. We are determined to keep on earning this trust, delivering the right products and services through appropriate channels. Business relationships During the year we announced our Vista architecture, describing how N.E.T. networks can grow to support broadband network needs for the future. A key element designed into this architecture is the ability to integrate complementary, best-of-class products with our own internally developed products. Consequently, we initiated or strengthened several key business partnerships this year. Our objective is to be able to provide more complete solutions - matching a comprehensive product portfolio, greater than any single vendor can offer, with our world-class service and support capabilities. Engineering . . . and Reengineering Our internal engineering capabilities have improved significantly over the past year. We have increased both the size and the quality of our engineering staff, and made aggressive capital investments to enhance our overall development environment. We are investing in major new developments in ATM and network management and enhancements to our Multiservice Bandwidth Managers. Other initiatives such as the ISO 9000 program, begun several years ago and aimed at raising our product-related activities to unparalleled standards, have resulted in greater efficiencies and predictability of our product operations, as well as greatly enhanced product quality. PREPARING FOR GROWTH . . . OUR GOALS FOR FISCAL 97 As we move ahead through FY97, our objective is to prepare the company for faster growth as the market for the new broadband technologies hits stride. The initiatives we took in FY96 to strengthen the company for the long-term will be reinforced this year with even greater zeal. For example, we will deepen our reengineering efforts for further improvements in business processes and practices. Increased operational efficiencies will be achieved through the closer integration of our engineering and manufacturing teams to reduce product costs; and, at the same time, we are combining our field sales and service teams to make us more efficient in handling the needs of our customers. Also in this fiscal year, results of major engineering developments are planned for announcement and availability. Our understanding of the markets in which we operate and our core technology competencies come together in N.E.T.'s Vista architecture - providing network solutions for today and tomorrow. You'll learn more about this in the pages that follow. Our business is bringing value in an industry beset with choices and change. Our value is in blending trust with best-of-class products and services, thus enhancing our customers' ability to deal with the relentless change in telecommunications and in their business environments. Sincerely, Joseph J. Francesconi President and Chief Executive Officer MARKETS Wide-area networking around the world Market Strategy Global Focus N.E.T. has selected key segments of the wide-area networking market to provide the company with a broad range of regional and global opportunities. Our success is in supplying and bringing value to four main market segments while balancing their distinct requirements. U.S. Commercial Customers value our total network solutions, trusting us to deliver products and services for their heartbeat networks. We are continuing to enhance that value by adding service overlays - such as ISDN, frame relay, and internetworking - for our prestigious installed base. In an ever-changing telecommunications environment, our flexible multiservice platforms allow enterprises to leverage their network alternatives: choosing private or public elements as required, and switching between them easily. U.S. Federal As a supplier of highly reliable wide-area networking solutions, N.E.T. has earned the respect of the federal government. We have grown a highly successful Department of Defense (DoD) business, and the DoD depends on our staff to add extra value through systems integration. Opportunities abound for N.E.T. to serve the needs of civilian agencies and international allies. Carriers Carrier consortia need highly flexible platforms as a foundation for global managed network services. N.E.T. continues to be a leading vendor for those global carriers, proving that our Multiservice Bandwidth Manager is the right solution for today's applications. The company also provides highly reliable systems to cellular network operators domestically and has begun to extend this business internationally. International The deregulation of telecommunications markets around the world is driving the need for flexible network solutions, offering tremendous opportunities for N.E.T. to capitalize on the strengths of our Multiservice Bandwidth Manager. Carriers in many countries are increasing their investment in network infrastructure. They require leading-edge capabilities to satisfy today's increasingly demanding network customers. Internationally, N.E.T. has focused both on large enterprises and regional carriers, supplying backbones for several large digital data networks (DDNs). TECHNOLOGIES Managing bandwidth for circuits, frames, packets, and cells Technology Strategy Multiservice N.E.T.'s technology strategy grows from our firm belief in the benefits of multiservice backbone networks. Our success stems from the value customers place on our approach. "Multiservice" means that a single network or system supports multiple applications with multiple technologies - using the most appropriate technology for each application. For example, N.E.T.'s Multiservice Bandwidth Manager integrates packet switching (such as frame relay and routing) and time-division multiplexing (TDM). Key benefits include minimal equipment, ease of management, economies of bandwidth aggregation, and service flexibility. The overall result: a high-value, low-cost solution. Complementary technologies By design, every technology is optimized for certain speeds and types of traffic and is less efficient for others. TDM, which supports a full range of speeds, is optimized for speeds up to T1/E1 and for constant traffic, especially voice. Similarly, most packet traffic uses narrowband technologies optimized for bursty traffic at speeds up to T1/E1. The combination of TDM and packet technologies in N.E.T.'s Multiservice Bandwidth Manager offers an extremely powerful solution for narrowband multiservice networks. Narrowband technologies represent more than 90 percent of today's communications facilities and will hold this lead position well into the next century. Broadband ATM A small but increasing proportion of applications need large and variable amounts of bandwidth. This is where ATM will prove most effective. ATM is a broadband technology optimized for speeds greater than T1/E1 and designed to carry multiservice traffic. It is an important emerging technology being introduced mainly for multimedia or to build backbones for packet or frame traffic. Technology strategy N.E.T. will offer broadband and narrowband support in a single multiservice network through the use of ATM, TDM, and packet technologies. N.E.T.'s Vista architecture, the framework for implementation of this strategy, is described on pages 8 and 9. Key elements are our ATM switch, Multiservice Bandwidth Manager, and ATM Service Interfaces, united by network management. VISTA The true multiservice network architecture Vista Architecture Systems view N.E.T.'s Vista is a true multiservice network architecture for the wide area. It comprises products and services for data and voice networking: it encompasses narrow and broadband applications, leveraging packet and circuit technologies, for carriers and enterprises. N.E.T.'s Vista architecture differs from competitive ATM product strategies: our systems view includes an ATM switch element, but does not stop there! ATM switching core At the heart of the Vista architecture is N.E.T.'s multiservice ATM switch. This highly scalable, standards-based core will offer the availability carriers demand and enterprises are coming to expect. It will support broadband applications directly and interwork with N.E.T.'s Multiservice Bandwidth Manager to support narrowband applications. This facilitates the evolution of our multiservice backbones to incorporate ATM capabilities. Best-of-class products Vista uses open standard interfaces to connect architectural elements. Devices known as ATM Service Interfaces (ASIs) connect to the ATM switch core to support legacy applications over the ATM backbone. The Multiservice Bandwidth Manager, edge router, and frame ASIs are three classes of devices that provide specific adaptation and aggregation functions. The real power of this ASI concept is that it gives N.E.T.'s network designers freedom to select from several best-of-class products. This simplifies the integration of partner products while providing flexibility in Vista network design. Further benefits stem from the "loosely coupled" nature of the Vista architecture - which enables individual elements to be upgraded quickly and simply. For example, the ATM switch component in a system could be upgraded to take advantage of the rapid rate of change in ATM implementation technology, without requiring changes to the ASIs surrounding it. United with NMS The Vista network management system (NMS) will oversee N.E.T. and partner products, providing the support that carriers require for their network applications. It will present a standards-based view of the Vista network and will have tightly integrating characteristics to complement our loosely coupled network architecture. STRATEGY Adding value for customers and shareholders Company Strategy Global market focus Global entities select N.E.T. for our flexibility and reliability: large enterprises trust us to equip and support their private heartbeat networks; global carrier partners trust us to provide the best managed platforms. We are directing our efforts to increase our penetration of carrier and international markets while continuing to be a leader in enterprise networking. Wide-area network focus In line with the long-term trend towards broadband networking, we are expanding our strategic core competencies by developing wide- area ATM products for our Vista architecture. N.E.T.'s powerful distributed intelligence will maximize bandwidth efficiencies for both data and voice across the full range of switching technologies, including ATM. World-class services and support N.E.T. is renowned for its superior service organization. Our well-known strengths in technical assistance, installation, and maintenance are enhanced by our more recent successes with systems integration and project management. We plan to further expand our professional services to leverage our expertise in designing, planning, and operating networks around the world. Value to customers Within our Vista architecture, several well-considered design goals - such as the loose-coupling of elements to enable change and the key expanding role for our Multiservice Bandwidth Manager - allow our network solutions to be deployed to meet current customer requirements while offering a path to leading-edge capabilities in the future. Also, Vista anticipates a wide range of ASIs and leverages our partnerships with industry leaders for best-of-class products. As a result, the breadth of interfaces and network services offered by N.E.T. is expansive. Value to shareholders Company objectives have been defined to strengthen the company long-term. Over time, we believe that the achievement of this goal will yield increasing shareholder value. Recognizing that our employees - some of whom are featured throughout these pages - are key to the company's success, we are investing heavily in their training and development. We will continue our reengineering initiatives to maximize organizational efficiencies while striving to fulfill customer requirements better than ever before. "Fiscal 96 was a year of strong revenue and income growth. It was also a year in which we made significant investments in research and development and capital equipment to position the company for future growth." Craig M. Gentner, Senior Vice President and Chief Financial Officer. EXHIBIT 12.1 Eight graphs are displayed for each quarter Fiscal 1995 and 1996 showing: 1) Product Revenue (dollars in millions; product revenue increased 17% over fiscal year 1995); 2) Operating Income (dollars in millions; compared to fiscal year 1995, income from operations grew 83%); 3) R & D Spending (dollars in millions); 4) Capital Expenditures (dollars in millions); 5) Primary Earnings Per Share (dollars; compared to fiscal year 1995 (excluding a Q4 FY95 tax benefit), primary earnings per share grew 65%); 6) Cash & Investments (dollars in millions; the Company continued to generate cash from operations); 7) Debt to Equity (ratio; debt was reduced more than 50% by completing a partial call of the convertible subordinated debentures); 8) Stockholders' Equity (dollars in millions; stockholders' equity increased 81% from March 1995). QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in thousands, except per share amounts) FIRST SECOND THIRD FOURTH - ----------------------------------------------------------------------------------------- FISCAL QUARTER 1996 Revenue $ 79,609 $ 82,958 $ 84,561 $ 91,771 Gross margin 38,722 41,566 43,671 47,202 Net income 6,422 7,448 8,215 9,265 Primary and fully diluted earnings per share .32 .36 .39 .43 - ----------------------------------------------------------------------------------------- FISCAL QUARTER 1995 Revenue $ 61,538 $ 66,851 $ 73,839 $ 81,808 Gross margin 30,081 32,404 38,175 40,956 Net income 1,427 2,919 5,259 17,465 Primary earnings per share .08 .16 .27 .87 Fully diluted earnings per share .08 .16 .27 .83 - -----------------------------------------------------------------------------------------
Results for the fourth quarter of fiscal 1995 include a $9.9 million tax benefit. Excluding this tax benefit, primary and fully diluted earnings per share would have been $.38. See Note 11 to the Consolidated Financial Statements. FIVE YEAR FINANCIAL SUMMARY
(Dollars in thousands, except per share amounts) YEARS ENDED MARCH 31, 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------- Revenue $ 338,899 $ 284,036 $ 237,672 $ 218,846 $ 180,805 Net income (loss) 31,350 27,070 (6,324) (11,097) (11,213) Primary earnings (loss) per share 1.50 1.44 (.38) (.71) (.76) 7 1/4% convertible subordinated debentures 33,526 68,625 68,625 68,625 68,625 Other long-term obligations - - - 52 1,212 Total assets 281,957 232,046 187,015 186,596 178,605 - -----------------------------------------------------------------------------------------------
Results for fiscal 1995 include a $9.9 million tax benefit. Excluding this tax benefit, primary earnings per share would have been $.91. See Note 11 to the Consolidated Financial Statements. MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion should be read in conjunction with the Consolidated Financial Statements and the accompanying notes. The Company's future operating results may be affected by a number of factors, trends, and risks - many beyond the Company's control. These factors are discussed in more detail below and include, among others: advances and trends in new technologies; competitive pressures in the form of new products or price reductions on current products; changes in product mix; changes in domestic and international economic and/or political conditions or regulations; ability to develop and deliver new products; customer acceptance of existing and new products; and other factors identified below. RESULTS OF OPERATIONS The following table depicts data derived from the Consolidated Statements of Operations expressed as a percentage of revenue for each of the three years in the period ended March 31, 1996. Percent of Revenue 1996 1995 1994 ---- ---- ---- Product revenue 66.7 67.9 69.8 Service and other revenue 33.3 32.1 30.2 ----- ----- ----- Total revenue 100.0 100.0 100.0 ----- ----- ----- ----- ----- ----- Gross margin product revenue 59.9 58.9 56.2 Gross margin service and other revenue 31.6 30.7 31.4 ----- ----- ----- Total gross margin 50.5 49.9 48.7 ----- ----- ----- ----- ----- ----- Sales and marketing 22.2 24.8 29.9 Research and development 10.8 12.0 14.2 General and administrative 3.5 4.0 5.6 ----- ----- ----- Total operating expenses 36.5 40.8 49.7 ----- ----- ----- ----- ----- ----- Income (loss) from operations 14.0 9.1 (1.0) Interest income 1.8 0.9 0.6 Interest expense (1.4) (1.8) (2.2) Other (0.2) 0.0 (0.1) ----- ----- ----- Income (loss) before income taxes 14.2 8.2 (2.7) Income tax (provision) benefit (4.9) 1.3 0.0 ----- ----- ----- Net income (loss) 9.3 9.5 (2.7) ----- ----- ----- ----- ----- ----- COMPARISON OF 1996 AND 1995 REVENUE Total revenue in fiscal 1996 increased $54.9 million, or 19.3% from fiscal 1995. Product revenue and service and other revenue increased $33.2 million and $21.7 million, respectively, for the year. The 17.2% increase in product revenue is principally due to increased IDNX -Registered Trademark- product sales across all sales channels. Over one-half of this increase is attributable to the U.S. federal channel. Total product sales in the U.S. federal channel, which includes U.S. government sales and sales to U.S. government contractors, increased 38.3% to 27.4% of product revenue. International product sales increased 11.4% to 34.1% of product revenue, primarily due to growth in the European region. Growth in other product lines includes a 13.6% year-over-year increase in STM -TM- product sales and incremental revenues earned in fiscal 1996 on sales of OEM equipment sold under recent marketing alliances. Service and other revenue increased 23.8% from the prior year. This increase is attributable to increases in systems integration services in support of product sales to the U.S. government and, to a lesser extent, to continued growth in the installed base of the Company's products. Overall, revenue in the U.S. federal channel grew 37.4% over last year and increased as a percentage of total revenue from 31.6% in fiscal 1995 to 36.4% in fiscal 1996. Total international revenue increased 15.2% over last year and in fiscal 1996 represented 27.1% of the Company's total revenue as compared to 28.1% in fiscal 1995. GROSS MARGIN Total gross margin as a percentage of total revenue increased to 50.5% in fiscal 1996 from 49.9% in fiscal 1995. Product gross margin increased to 59.9% in fiscal 1996 from 58.9% in fiscal 1995. The increase in fiscal 1996 was primarily due to favorable manufacturing variances from higher production volumes. Favorable sales channel and IDNX product mix in fiscal 1996 was partially offset by lower margins on sales of OEM equipment. The gross margin for service and other revenue increased to 31.6% in fiscal 1996 from 30.7% in fiscal 1995 as a result of improved margins on both service and systems integration services provided under a U.S. government contract. The gross margin on these systems integration services increased to 14.8% in fiscal 1996 from 11.5% in fiscal 1995 due to changes in the mix of OEM products and services provided. Management expects product gross margin to continue to be affected by sales channel and product mix as well as manufacturing volume variances, and expects service and other revenue gross margin to continue to fluctuate as a result of the changes in mix between systems integration services and other service revenue. OPERATING EXPENSES Operating expenses increased $8.1 million in fiscal 1996. Operating expenses as a percentage of total revenue decreased to 36.5% in fiscal 1996 from 40.8% in fiscal 1995. Management expects operating expenses as a percentage of total revenue to continue to trend downward in fiscal 1997 as planned revenue growth exceeds that of operating expenses. Sales and marketing expense increased $5.1 million in fiscal 1996 due to the addition of personnel to support expansion of the sales infrastructure, and commissions and travel expenses commensurate with the increase in sales volume and the geographic dispersion thereof. Despite the increase in spending, sales and marketing expense decreased as a percentage of total revenue to 22.2% in fiscal 1996 from 24.8% in fiscal 1995. Management expects sales and marketing expense to increase in fiscal 1997, while decreasing as a percentage of planned revenue. Research and development expense increased $2.5 million in fiscal 1996 due to an increase in direct project funding, primarily salary-related expenses and purchases of hardware and software tools to support product development. The expense as a percentage of total revenue decreased to 10.8% in fiscal 1996 from 12.0% in fiscal 1995. In fiscal 1996, $1.9 million of software costs were capitalized as compared to $2.0 million in fiscal 1995. Management plans to continue funding research and development efforts at levels necessary to advance product programs and expects research and development spending to increase in fiscal 1997, while remaining fairly constant as a percentage of planned revenue. General and administrative expense increased $.5 million in fiscal 1996, but decreased to 3.5% of total revenue as compared to 4.0% in fiscal 1995. Management expects general and administrative expense to increase moderately in fiscal 1997. NON-OPERATING ITEMS Interest income in fiscal 1996 increased $3.4 million from fiscal 1995 due to higher cash balances and higher interest rates. Interest expense, primarily related to the 7-1/4% convertible subordinated debentures, decreased $.5 million to $4.7 million for fiscal 1996 compared to $5.2 million for fiscal 1995 as a result of the partial call of the Company's convertible debentures. The decrease consists of $1.0 million in interest savings offset by $.5 million of one-time costs associated with the redemption. Other expense increased $.4 million in fiscal 1996 from $.1 million in fiscal 1995. For the fiscal year ended March 31, 1996, the Company recorded income tax expense of $16.9 million at an effective rate of 35% as compared to a tax benefit of $3.8 million for fiscal 1995. As a result of the significant increase in profitability during fiscal 1995 and in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes"("SFAS 109"), the Company recorded a tax benefit in the fourth quarter of fiscal 1995 of $9.9 million. See Note 11 to the Consolidated Financial Statements. RECENTLY ISSUED ACCOUNTING STANDARD In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This standard defines a fair value method of accounting for stock-based employee compensation plans. The Company plans to adopt the disclosure-only alternative, and, accordingly, SFAS 123 will have no impact on the Company's results of operations or financial position. COMPARISON OF 1995 AND 1994 REVENUE Total revenue in fiscal 1995 increased $46.4 million or 19.5% from fiscal 1994. Product revenue and service and other revenue increased $27.1 million and $19.3 million, respectively, over the same period. The 16.3% increase in product revenue was principally due to increased IDNX sales in the international and U.S. federal channels. International product sales increased 52.9% to 35.9% of product revenue in fiscal 1995. Contributing to the growth in international product sales was the Asia Pacific/Latin American region which grew 102.0%. Product sales in the U.S. federal channel increased 15.5% to 23.2% of product revenue in fiscal 1995. STM sales increased 44.9% in fiscal 1995. Service and other revenue increased 26.9% from fiscal 1994. This increase was attributable to increases in systems integration services in support of product sales to the U.S. government, and, to a lesser extent, to continued growth in the installed base of the Company's products. Overall, international sales increased 52.7% from fiscal 1994 and in fiscal 1995 represented 28.1% of the Company's total revenue as compared to 22.0% in the prior year. Sales to the U.S. government grew 19.7% from fiscal 1994 and represented 27.5% of total revenue in both fiscal 1995 and fiscal 1994. GROSS MARGIN Total gross margin as a percentage of total revenue increased to 49.9% in fiscal 1995 from 48.7% in fiscal 1994. Product gross margin increased to 58.9% in fiscal 1995 from 56.2% in fiscal 1994. Fiscal 1994's product margin was negatively impacted by a $3.8 million charge to cost of product revenue related to a writedown of excess ATMX inventory and fixed assets. Excluding this writedown, product gross margin in fiscal 1994 would have been 58.5%. The increase in fiscal 1995, excluding the fiscal 1994 writedown, was primarily due to favorable manufacturing variances from higher production volumes. This was partially offset by a higher volume of lower margin sales to new customers in the Asia Pacific/Latin American sales channel. The gross margin for service and other revenue declined to 30.7% in fiscal 1995 from 31.4% in fiscal 1994 due to a significantly higher mix of lower margin systems integration services provided under a U.S. government contract. The gross margin on these systems integration services increased to 11.5% in fiscal 1995 from 9.9% in fiscal 1994 due to a change in the mix of OEM products and services provided. OPERATING EXPENSES Operating expenses decreased $2.4 million in fiscal 1995 from the prior year. Operating expenses as a percentage of total revenue decreased to 40.8% in fiscal 1995 from 49.7% in fiscal 1994. This decrease was the result of management's continuing focus on cost control and increased operating efficiencies. Sales and marketing expense decreased $.7 million in fiscal 1995 due to lower operating costs as a result of increased operating efficiencies offset by an increase in advertising expense. Sales and marketing expense decreased as a percentage of total revenue to 24.8% in fiscal 1995 from 29.9% in fiscal 1994. Research and development expense increased $.2 million in fiscal 1995 due to an increase in direct project funding, including salary related expenses, offset by a decrease in other operating expenses. The expense as a percentage of total revenue decreased to 12.0% in fiscal 1995 from 14.2% in fiscal 1994. In fiscal 1995, $2.0 million of software costs were capitalized as compared to $2.7 million in fiscal 1994. General and administrative expense in fiscal 1995 decreased to 4.0% of total revenue as compared to 5.6% in fiscal 1994. The decrease was primarily due to lower personnel costs realized as a result of consolidating and streamlining the Company's operations. NON-OPERATING ITEMS Interest income in fiscal 1995 increased $1.2 million from fiscal 1994 due to higher cash balances and higher interest rates. Interest expense, primarily related to the 7 1/4% convertible subordinated debentures, remained relatively unchanged at $5.2 million for fiscal 1995 compared to $5.3 million for fiscal 1994. Other expense decreased $.1 million in fiscal 1995 as compared to fiscal 1994. For the fiscal year ended March 31, 1995, the Company recorded an income tax benefit of $3.8 million. As a result of the significant increase in profitability during fiscal 1995 and in accordance with SFAS 109, the Company recorded a tax benefit in the fourth quarter of fiscal 1995 of $9.9 million. Due to the net loss in fiscal 1994, no income taxes were provided. See Note 11 to the Consolidated Financial Statements. BUSINESS ENVIRONMENT AND RISK FACTORS When used in this annual report, including Management's Discussion and Analysis, the President's letter to shareholders and elsewhere, the words "believes," "anticipates," "future," "expects," "will" and similar words identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties. 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 periodic reports filed with the Securities and Exchange Commission. 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. Furthermore, if large orders do not close when forecasted or if near-term demand for the Company's products weakens, the Company's operating results for that or subsequent quarters would be adversely affected. Expense levels are relatively fixed and are set based on expectations regarding future revenue and margin levels. These expectations derive from making judgments on issues such as future technology trends, competitive products and services, pricing and customer requirements, a process that involves evaluation of information that is often unclear and in conflict. All markets for the Company's products are very competitive and dynamic and many are susceptible to changing regulations and political conditions. The Company has limited visibility into factors that could influence its revenue, mix of product and other revenue sources and margins, particularly in international markets that are served primarily by non-exclusive resellers. The Company's products incorporate intellectual property and technology owned by the Company or licensed from third parties. The Company's ability to maintain and enhance the value of its intellectual property and technology and third party licenses will affect future product and service offerings. Moreover, the Company believes that operating results will depend on successful development and introduction of new products and enhancements to existing products and service offerings. There can be no assurance that the Company will succeed in such efforts or that customers will accept new, enhanced and existing products and services in quantities and at prices an margins that are consistent with the Company's expectations. The Company's success also depends on its ability to attract and retain employees necessary to support planned growth. The Company's products include components, assemblies and subassemblies that are currently available from single sources and, in some cases, are in short supply. Testing and manufacturing is performed at the Company's Redwood City, California, facility. Availability limitations, price increases or business interruptions could adversely impact revenue, margins and earnings. The Company has distribution, product and technology relationships with a number of significant customers and entities that are considered by the Company to be strategic. Most of the Company's competitors have similar relationships with their respective customers and other parties. Changes in the Company's relationships or changes in similar relationships among competitors could have a material impact on competitive and other factors described above, including the Company's operating results. 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. A significant portion of the Company's revenue comes from contracts with the U.S. government, most of which do not include purchase commitments. There can be no assurance that orders from the U.S. government, or from other customers, will continue at historical levels, or that the Company will be able to obtain orders from new customers. Because of the factors described above, as well as others that may affect the Company's operating results, past financial results may not be an accurate indicator of future performance. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1996, the Company had cash, cash equivalents and temporary cash investments of $112.2 million, as compared to $86.6 million at the end of fiscal 1995. Cash provided from operations was $40.2 million in fiscal 1996, a $3.2 million decrease over the prior year. This decrease was principally due to an increase in accounts receivable partially offset by an increase in accrued liabilities. Accounts receivable increased $20.8 million during fiscal 1996 due to the increase in sales volume, particularly in the last month of the fiscal year. Net cash used for investing activities in fiscal 1996 consisted primarily of purchases of property and equipment of $17.2 million, which increased $8.9 million from fiscal 1995, most significantly for the purchase of R&D equipment. Cash used for investing activities also included net purchases of temporary cash investments of $7.2 million and additions to software production costs of $1.9 million. Net cash provided by financing activities in fiscal 1996 is composed of $12.7 million from the issuance of Common Stock relating to the employee stock benefit plans, partially offset by $10.1 million used to redeem a portion of the Company's 7 1/4% convertible subordinated debentures. In the third quarter of fiscal 1996, the Company completed a partial call of its outstanding 7 1/4% convertible subordinated debentures due May 15, 2014, reducing long-term debt by $35.1 million to $33.5 million. To redeem a portion of the debentures, $10.1 million in cash was used, $.3 million of which represents the premium paid in excess of principal. An additional $25.3 million of principal was converted into 802,078 shares of Common Stock at a conversion price of $31.50 per share. As of March 31, 1996, the Company had available an unsecured $10.0 million line of credit. Borrowings under this committed borrowing facility are available through May 1997 and bear interest at the bank's base rate (which approximates prime). At March 31, 1996, there were no outstanding borrowings under this facility. The Company believes that current cash and cash equivalents, temporary cash investments and cash flows from operations will be sufficient to fund operations, purchases of capital equipment and research and development programs currently planned at least through fiscal 1997. CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) March 31, 1996 1995 - ----------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 52,319 $ 33,886 Temporary cash investments 59,892 52,734 Accounts receivable, net of allowances of $4,533 in 1996 and $2,514 in 1995 76,966 56,983 Inventories 31,705 32,314 Deferred income taxes 11,830 9,900 Prepaid expenses and other assets 5,714 4,625 - ----------------------------------------------------------------------------------- Total current assets 238,426 190,442 - ----------------------------------------------------------------------------------- Property and equipment: Machinery and equipment 92,653 98,969 Furniture and fixtures 5,874 6,863 Leasehold improvements 10,290 10,241 Construction in progress 438 1,694 - ----------------------------------------------------------------------------------- 109,255 117,767 Less accumulated depreciation and amortization (78,215) (90,618) - ----------------------------------------------------------------------------------- Property and equipment, net 31,040 27,149 Software production costs, net 4,146 4,691 Other assets 8,345 9,764 - ----------------------------------------------------------------------------------- $ 281,957 $ 232,046 - ----------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 21,559 $ 18,315 Accrued liabilities 42,442 43,444 - ----------------------------------------------------------------------------------- Total current liabilities 64,001 61,759 - ----------------------------------------------------------------------------------- 7 1/4% convertible subordinated debentures 33,526 68,625 Stockholders' equity: Preferred Stock, $.01 par value Authorized: 5,000,000 shares Outstanding: none - - Common Stock to be issued - 32 Common Stock, $.01 par value Authorized: 50,000,000 shares Outstanding: 20,839,000 shares in 1996 and 18,714,000 shares in 1995 208 187 Additional paid-in capital 165,414 113,846 Net unrealized loss on available-for-sale securities (12) (10) Accumulated translation adjustment (931) (794) Retained earnings (deficit) 19,751 (11,599) - ----------------------------------------------------------------------------------- Total stockholders' equity 184,430 101,662 - ----------------------------------------------------------------------------------- $ 281,957 $ 232,046 - ----------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts) Years Ended March 31, 1996 1995 1994 - -------------------------------------------------------------------------------------- Revenue: Product revenue $ 226,070 $ 192,901 $ 165,842 Service and other revenue 112,829 91,135 71,830 - -------------------------------------------------------------------------------------- Total revenue 338,899 284,036 237,672 - -------------------------------------------------------------------------------------- Cost of sales: Cost of product revenue 90,588 79,227 72,647 Cost of service and other revenue 77,150 63,193 49,277 - -------------------------------------------------------------------------------------- Total cost of sales 167,738 142,420 121,924 - -------------------------------------------------------------------------------------- Gross margin 171,161 141,616 115,748 - -------------------------------------------------------------------------------------- Operating expenses: Sales and marketing 75,432 70,348 71,064 Research and development 36,437 33,923 33,736 General and administrative 11,884 11,375 13,229 - -------------------------------------------------------------------------------------- Total operating expenses 123,753 115,646 118,029 - -------------------------------------------------------------------------------------- Income (loss) from operations 47,408 25,970 (2,281) Interest income 6,044 2,626 1,411 Interest expense (4,713) (5,213) (5,276) Other (508) (73) (178) - -------------------------------------------------------------------------------------- Income (loss) before income taxes 48,231 23,310 (6,324) Income tax (provision) benefit (16,881) 3,760 - - -------------------------------------------------------------------------------------- Net income (loss) $ 31,350 $ 27,070 $ (6,324) - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- Net income (loss) per share: Primary $ 1.50 $ 1.44 $ (.38) - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- Fully diluted $ 1.50 $ 1.37 $ (.38) - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- Shares used in per share computation: Primary 20,833 18,768 16,778 - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- Fully diluted 20,908 19,794 16,778 - -------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Years Ended March 31, 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year $ 33,886 $ 23,854 $ 30,080 - ---------------------------------------------------------------------------------------------- Net cash flows from operating activities: Net income (loss) 31,350 27,070 (6,324) Adjustments required to reconcile net income (loss) to cash provided by operations: Depreciation and amortization 15,481 17,591 19,469 Writedown of ATMX inventory and assets - - 3,764 Restricted stock compensation 368 10 391 Deferred income taxes (1,930) (9,900) - Changes in assets and liabilities: Accounts receivable (20,839) 2,077 (7,042) Inventories 506 2,280 (12,293) Prepaid expenses and other assets (1,185) (621) (81) Accounts payable 3,356 (2,092) 4,621 Accrued liabilities 13,099 6,941 (351) - ---------------------------------------------------------------------------------------------- Net cash provided by operations 40,206 43,356 2,154 - ---------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of temporary cash investments (85,960) (60,816) (30,414) Proceeds from maturities of temporary cash investments 78,800 25,786 34,722 Purchases of property and equipment (17,165) (8,258) (14,273) Additions to software production costs (1,875) (1,968) (2,681) Other 955 903 1,728 - ---------------------------------------------------------------------------------------------- Net cash used for investing activities (25,245) (44,353) (10,918) - ---------------------------------------------------------------------------------------------- Cash flows from financing activities: Sale of Common Stock 12,684 12,583 4,179 Repurchase of convertible subordinated debentures (10,117) - - Purchase of Common Stock - - (600) Repayments of borrowings - (26) (1,074) - ---------------------------------------------------------------------------------------------- Net cash provided by financing activities 2,567 12,557 2,505 - ---------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 905 (1,528) 33 - ---------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 18,433 10,032 (6,226) - ---------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 52,319 $ 33,886 $ 23,854 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Other cash flow information: Cash paid during the year for: Interest $ 4,136 $ 5,213 $ 5,276 Income taxes $ 5,496 $ 2,061 $ 65 Non-cash investing and financing activities: Conversion of convertible subordinated debentures into Common Stock (including accrued interest and debenture offering costs) $ 25,532 $ - $ - Income tax benefit arising from employee stock option plans $ 12,972 $ 2,718 $ 111 Net unrealized loss on available-for-sale securities $ 2 $ 10 $ - - ----------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Net Unrealized Common Gain (Loss) on Stock Additional Available- Accumulated Retained To Be Common Paid-In For-Sale Translation Earnings (Dollars in thousands) Issued Stock Capital Securities Adjustment (Deficit) - ------------------------------------------------------------------------------------------------------------------------------- Balances, March 31, 1993 $ 3,529 $ 160 $ 90,984 $ - $ (1,005) $ (32,345) - ------------------------------------------------------------------------------------------------------------------------------- Sale of 620,000 shares of Common Stock under employee stock benefit plans - 6 4,506 - - - Exercise of 6,000 warrants - - 58 - - - Stock issued in connection with merger (3,261) 6 3,255 - - - Purchase of 80,000 shares of Common Stock - (1) (599) - - - Income tax benefit arising from employee stock option plans - - 111 - - - Accumulated translation adjustment - - - - (152) - Net loss - - - - - (6,324) - ------------------------------------------------------------------------------------------------------------------------------- Balances, March 31, 1994 268 171 98,315 - (1,157) (38,669) - ------------------------------------------------------------------------------------------------------------------------------- Sale of 1,586,000 shares of Common Stock under employee stock benefit plans - 16 12,577 - - - Stock issued in connection with merger (236) - 236 - - - Income tax benefit arising from employee stock option plans - - 2,718 - - - Net unrealized gain on securities upon adoption of SFAS 115 - - - 64 - - Net unrealized loss on securities - - - (74) - - Accumulated translation adjustment - - - - 363 - Net income - - - - - 27,070 - ------------------------------------------------------------------------------------------------------------------------------- Balances, March 31, 1995 32 187 113,846 (10) (794) (11,599) - ------------------------------------------------------------------------------------------------------------------------------- Sale of 1,314,000 shares of Common Stock under employee stock benefit plans - 13 13,040 - - - Conversion of convertible subordinated debentures into 802,078 shares of Common Stock, including accrued interest and offering costs - 8 25,524 - - - Stock issued in connection with merger (32) - 32 - - - Income tax benefit arising from employee stock option plans - - 12,972 - - - Net unrealized loss on securities - - - (2) - - Accumulated translation adjustment - - - - (137) - Net income - - - - - 31,350 - ------------------------------------------------------------------------------------------------------------------------------- Balances, March 31, 1996 $ - $ 208 $ 165,414 $ (12) $ (931) $ 19,751 - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Network Equipment Technologies, Inc. ("N.E.T." or "the Company"), headquartered in Redwood City, California, is a leading designer, developer, manufacturer and supplier of multiservice backbone networks and associated services used by enterprises and carriers worldwide. PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION The Company recognizes product revenue and accrues related warranty expense upon shipment. At the time of sale, no material vendor or post contract support obligations remain outstanding. Revenue from service contracts is recognized ratably over the contract period. Revenue from other services, such as systems integration, installation and training, is recognized when the service is performed. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid investments with original maturities of three months or less at the time of acquisition. TEMPORARY CASH INVESTMENTS Temporary cash investments are primarily comprised of highly liquid investments with original maturities of greater than three months at the time of acquisition. INVENTORIES Inventories are stated at lower of cost (first-in, first-out) or market and include material, labor and manufacturing overhead costs. Inventories at March 31 consisted of the following: (Dollars in thousands) 1996 1995 - ---------------------------------------------------------------- Purchased components $ 14,381 $ 11,498 Work-in-process 15,533 17,175 Finished goods 1,791 3,641 - ---------------------------------------------------------------- $ 31,705 $ 32,314 - ---------------------------------------------------------------- PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of generally three to five years. Leasehold improvements are amortized over the shorter of the respective lease terms or estimated useful lives. SOFTWARE PRODUCTION COSTS Capitalization of software production costs begins upon the establishment of technological feasibility for the products, and amortization begins when the products are available for release to customers. The Company assesses the recoverability of capitalized software production costs in light of many factors, including anticipated future revenues, estimated economic useful lives and changes in software and hardware technologies. Capitalization of software production costs amounted to $1.9 million, $2.0 million and $2.7 million in fiscal 1996, 1995 and 1994, respectively. Software production costs are amortized over the lives of the products, generally three years. Amortization amounted to $2.4 million, $2.8 million and $3.3 million in fiscal 1996, 1995 and 1994, respectively. During fiscal 1996, the Company reduced fully amortized software production costs by 19.4 million, which had no effect on net balances. Accumulated amortization was $3.8 million and $20.8 million at March 31, 1996 and 1995, respectively. FOREIGN CURRENCY TRANSLATION The functional currency for the CompanyOs foreign subsidiaries is the local currency. Assets and liabilities of foreign subsidiaries are translated into dollars at the rates of exchange in effect at the end of the period. Revenues and expenses are translated at the average exchange rate during the period. Gains and losses from foreign currency translation are included in a separate account in stockholders' equity in the Consolidated Balance Sheets. Foreign currency transaction gains or losses are included in the Consolidated Statements of Operations. The Company enters into foreign exchange contracts to hedge certain intercompany balances and balance sheet exposures against future movements in foreign exchange rates. Gains and losses on the foreign exchange contracts are included in other income and expense, which offset foreign exchange gains or losses from revaluation of foreign currency-denominated intercompany balances and balance sheet exposure items. At March 31, 1996, the Company had outstanding foreign exchange contracts of $5.0 million. The contracts require the Company to exchange foreign currencies for U.S. dollars and generally mature in one month. EARNINGS PER SHARE Net income (loss) per share has been computed based upon the weighted average number of common and common equivalent shares outstanding. For primary earnings per share, common equivalent shares consist of the incremental shares issuable upon the assumed exercise of dilutive stock options. For fully diluted earnings per share, common equivalent shares also include, if dilutive, the effect of incremental shares issuable upon the conversion of the 7 1/4% convertible subordinated debentures, and net income is adjusted for the interest expense (net of income taxes) related to the debentures. SIGNIFICANT RISKS AND UNCERTAINTIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such management estimates include the allowance for doubtful accounts receivable, the valuation of inventory, the valuation allowance on deferred tax assets and certain reserves and accruals. Actual results could differ from those estimates. The Company sells its products primarily to large organizations in diversified industries worldwide. Credit risk is further mitigated by the Company's credit evaluation process and the reasonably short collection terms. The Company does not require collateral or other security to support accounts receivable. While the Company does maintain allowances for potential credit losses, actual bad debt losses have not been material or outside of management's expectations. The Company participates in a very dynamic high technology telecommunications industry and believes that changes in any of the following areas could have a material adverse effect on the Company's future financial position or results of operations: advances and trends in new technologies; competitive pressures in the form of new products or price reductions on current products; changes in product mix; changes in the overall demand for products and services offered by the Company; changes in certain strategic partnerships or customer relationships; litigation or claims against the Company based on securities, intellectual property, patent, product, regulatory or other factors; risks associated with changes in domestic and international economic and/or political conditions or regulations; availability of necessary components; and the Company's ability to attract and retain employees necessary to support its growth. RECENTLY ISSUED ACCOUNTING STANDARD In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This standard defines a fair value method of accounting for stock-based employee compensation plans. Under this method, compensation cost is measured based on the fair value of the stock award when granted and is recognized as an expense over the service period. This standard will be effective for the Company beginning in fiscal 1997 and requires measurement of awards made throughout fiscal 1996. The Company will adopt the disclosure-only alternative, and, accordingly, SFAS 123 will have no impact on the Company's results of operations or financial position. NOTE 2: TEMPORARY CASH INVESTMENTS The Company classifies its temporary cash investments as available-for-sale securities. The carrying value of such securities is adjusted to fair market value, with unrealized gains and losses, net of deferred taxes, being excluded from earnings and reported as a separate component of stockholders' equity. Temporary cash investments at March 31 consisted of the following:
1996 ----------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market (Dollars in thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------ Corporate notes and bonds $ 36,495 $ 17 $ 35 $ 36,477 Commercial paper and banker's acceptances 2,986 - 1 2,985 Certificates of deposit 6,000 - 1 5,999 Foreign debt issues 11,430 6 8 11,428 U.S. government and municipalities 3,000 3 - 3,003 $ 59,911 $ 26 $ 45 $ 59,892
1995 ----------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market (Dollars in thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------ Corporate notes and bonds $ 22,839 $ 40 $ 40 $ 22,839 Commercial paper and banker's acceptances 9,208 5 10 9,203 Certificates of deposit 8,008 - 14 7,994 Foreign debt issues 5,588 6 2 5,592 U.S. government and municipalities 5,107 11 12 5,106 Equity securities 2,000 - - 2,000 - ------------------------------------------------------------------------------------ $ 52,750 $ 62 $ 78 $ 52,734 - ------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------
At March 31, 1996, all available-for-sale securities mature within thirteen months. Any gains or losses on sales of securities are computed on a specific identification basis. There were no realized gains or losses from the sale of securities in fiscal years 1996, 1995 and 1994. NOTE 3: SIGNIFICANT CUSTOMERS Sales to the U.S. government and its agencies amounted to 34%, 28% and 28% of revenue for fiscal years 1996, 1995 and 1994, respectively. 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 the Company. The Company had one other customer that accounted for 11% of sales in fiscal 1994 and no other customer accounted for more than 10% in fiscal 1996 and 1995. NOTE 4: SEGMENT INFORMATION
(DOLLARS IN THOUSANDS) UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED - ----------------------------------------------------------------------------------------------- Year Ended March 31, 1996 Sales to unaffiliated customers $ 286,842 $ 52,057 $ - $ 338,899 Sales to foreign affiliates 21,409 4,316 (25,725) - Total revenue $ 308,251 $ 56,373 $ (25,725) $ 338,899 Operating income $ 43,607 $ 2,560 $ 1,241 $ 47,408 Identifiable assets at year end $ 283,453 $ 27,801 $ (29,297) $ 281,957 Year Ended March 31, 1995 Sales to unaffiliated customers $ 236,535 $ 47,501 $ - $ 284,036 Sales to foreign affiliates 24,409 3,624 (28,033) - Total revenue $ 260,944 $ 51,125 $ (28,033) $ 284,036 Operating income $ 23,601 $ 2,938 $ (569) $ 25,970 Identifiable assets at year end $ 235,910 $ 32,146 $ (36,010) $ 232,046 Year Ended March 31, 1994 Sales to unaffiliated customers $ 207,482 $ 30,190 $ - $ 237,672 Sales to foreign affiliates 17,848 3,775 (21,623) - Total revenue $ 225,330 $ 33,965 $ (21,623) $ 237,672 Operating income (loss) $ 2,563 $ (3,648) $ (1,196) $ (2,281) Identifiable assets at year end $ 193,804 $ 22,805 $ (29,594) $ 187,015
Sales to foreign affiliates represent products which are transferred on a basis intended to approximate arms-length prices as negotiated by unrelated entities. Domestic sales to unaffiliated customers include $39.9 million, $32.3 million and $22.0 million of export sales in fiscal years 1996, 1995 and 1994, respectively. NOTE 5: ACCRUED LIABILITIES Accrued liabilities at March 31 were as follows: (Dollars in thousands) 1996 1995 - ----------------------------------------------------------------- Accrued compensation $ 18,585 $ 19,512 Unearned income 6,082 7,272 Other 17,775 16,660 - ----------------------------------------------------------------- $ 42,442 $ 43,444 - ----------------------------------------------------------------- - ----------------------------------------------------------------- NOTE 6: FINANCING ARRANGEMENTS The Company maintains an unsecured $10.0 million line of credit. Borrowings under this committed facility are available through May 1997 and bear interest at the bank's base rate (which approximates prime). The terms of the agreement require that the Company maintain certain financial covenants including a minimum of $25.0 million in cash and short term highly liquid investments, net of any bank borrowings, no quarterly operating or net losses greater than 10% of tangible net worth and no operating or net losses in any two consecutive quarters of the fiscal year. The Company was in compliance with these covenants at March 31, 1996. There were no outstanding borrowings under the line of credit agreement at March 31, 1996. NOTE 7: LEASE COMMITMENTS The Company leases its facilities under operating leases. The minimum future lease commitments under these leases as of March 31, 1996, were as follows: (Dollars in thousands) - ---------------------------------------------------------------- 1997 $ 7,005 1998 6,337 1999 4,110 2000 1,681 2001 1,243 After 2001 3,380 - ---------------------------------------------------------------- $23,756 - ---------------------------------------------------------------- - ---------------------------------------------------------------- Rental expense under operating leases was $7.2 million, $6.4 million and $6.9 million for fiscal years 1996, 1995 and 1994, respectively. NOTE 8: CONVERTIBLE SUBORDINATED DEBENTURES In May 1989, the Company issued $75.0 million of 7 1/4% convertible subordinated debentures due May 15, 2014, in an underwritten public offering, with net proceeds of $72.8 million. In September 1990, the Company repurchased debentures in the face amount of $6.4 million. Each debenture is convertible at the option of the holder into Common Stock at $31.50 per share and is redeemable at the option of the Company at prices that decline from 102.175% of face value on May 15, 1996, to 100% of face value on May 15, 1999. The debentures are entitled to a sinking fund beginning May 15, 2000, of $3.8 million annually, calculated to retire 70% of the debentures prior to maturity. Such required sinking fund payments will be reduced by any redemption or conversion of debentures prior to the date of the sinking fund payment. In the third quarter of fiscal 1996, the Company completed a partial call of its outstanding 7 1/4% convertible subordinated debentures, reducing long-term debt by $35.1 million to $33.5 million. To redeem the debentures, $10.1 million in cash was used, $.3 million of which represents the premium paid in excess of principal. An additional $25.3 million of principal was converted into 802,078 shares of Common Stock at a conversion price of $31.50 per share. NOTE 9: CAPITAL STOCK The Company's Board of Directors has approved a plan to protect stockholders' rights in the event of a proposed takeover of the Company. Under the plan, as amended in June 1990, a preferred share purchase right ("Right") is attached to each share of Common Stock. The Rights are exercisable only after a person or group acquires beneficial ownership of 15% or more of the Company's Common Stock or commences a tender or exchange offer that would result in 20% or more of Common Stock ownership. Each Right initially entitles stockholders to buy one one-hundredth of a share of a new series of participating Preferred Stock at an exercise price of $120. If the Company is acquired in a merger or other transaction with a person or group, or sells 50% or more of its assets or earning power to such a person or group, each Right not owned by such acquiring person will entitle its holder to obtain on exercise of the Right a number of the acquiring company's common shares having a market value at the time of twice the Right's then-current exercise price. If a person or group acquires 15% or more of the Company's outstanding Common Stock, each Right will entitle its holder to obtain on exercise of the Right a number of shares of Common Stock (or equivalent) having a market value of twice the Right's then-current exercise price. After a person or group has acquired 15% of the outstanding shares of Common Stock but before their acquisition of 50% or more of the Common Stock, the Board of Directors may exchange one share of Common Stock or equivalent fractions of Preferred Stock for each Right. The Company can redeem the Rights at $.01 per Right at any time until the tenth day following the acquisition by a person or group of 15% of the Company's Common Stock. The Rights are also redeemable thereafter in certain circumstances. The Rights expire on August 24, 1999, unless earlier redeemed or exchanged. As of March 31, 1996, the Company had reserved shares of its Common Stock for the following purposes: Reserved - ----------------------------------------------------------------- Stock option plans: Outstanding (at $5.25 to $40.50 per share) 2,634,688 Available for grant 1,964,171 Convertible subordinated debentures 1,064,317 Employee Stock Purchase Plan 441,069 - ----------------------------------------------------------------- Under the Employee Stock Purchase Plan, the Company's employees, subject to certain restrictions, may purchase shares of Common Stock at a price equal to at least 85% of the fair market value. Under the Restricted Stock Award Plan, the Company may issue up to 750,000 shares of Common Stock to key employees at $.01 per share. Shares awarded under the Plan carry certain restrictions on transferability, which lapse over the vesting period (generally two to four years). As of March 31, 1996, 230,500 shares at $.01 per share have been awarded and issued under the Plan. As of March 31, 1996, the Company had the right to repurchase 60,500 shares from certain officers at the original purchase price. Such right expires ratably over the respective vesting periods. Related compensation expense totaled $368 thousand, $10 thousand and $391 thousand for the years ended March 31, 1996, 1995 and 1994, respectively. The Company has authorized 5,000,000 shares of $.01 par value Preferred Stock. This stock, if issued, will carry liquidation preferences and other rights, as determined by the Board of Directors. As of March 31, 1996, no preferred shares were outstanding. NOTE 10: EMPLOYEE STOCK OPTION PLANS Under the Company's stock option plans, options generally become exercisable ratably over a four year period and expire after seven to ten years. Options may be granted to officers, key employees, directors and independent contractors to purchase Common Stock at a price not less than 100% of fair market value at the date of grant. Activity in the Company's option plans is summarized below: Shares Option Prices - ------------------------------------------------------------------------------ Options outstanding at March 31, 1993 3,644,506 Granted 1,579,450 $ 6.00 - $10.63 Exercised (364,468) 6.75 - 11.00 Canceled (684,753) 5.75 - 26.50 --------- Options outstanding at March 31, 1994 4,174,735 Granted 654,862 7.50 - 27.38 Exercised (1,352,107) 5.25 - 16.25 Canceled (465,028) 5.75 - 26.33 --------- Options outstanding at March 31, 1995 3,012,462 Granted 996,066 21.50 - 40.50 Exercised (1,114,819) 4.00 - 29.88 Canceled (259,021) 6.63 - 40.50 --------- Options outstanding at March 31, 1996 2,634,688 $ 5.25 - $40.50 --------- ---------------- --------- ---------------- - ------------------------------------------------------------------------------ On March 31, 1996, options for 1,080,002 shares were exercisable at prices ranging from $5.25 to $27.38 per share. NOTE 11: INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, which prescribes an asset and liability method of income tax accounting. Income (loss) before income taxes and the provision (benefit) for income taxes consist of the following: (Dollars in thousands) 1996 1995 1994 - ------------------------------------------------------------------------- Income (loss) before income taxes: Domestic $ 46,674 $ 20,563 $ (2,333) Foreign 1,557 2,747 (3,991) - ------------------------------------------------------------------------- $ 48,231 $ 23,310 $ (6,324) - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Provision (benefit) for income taxes: Current: Federal $ 16,595 $ 6,140 $ - State 2,216 - - Foreign - - - - ------------------------------------------------------------------------- 18,811 6,140 - - ------------------------------------------------------------------------- Deferred: Federal (1,643) (8,227) - State (287) (1,673) - Foreign - - - - ------------------------------------------------------------------------- (1,930) (9,900) - - ------------------------------------------------------------------------- $ 16,881 $ (3,760) $ - - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- The provision (benefit) for income taxes reconciles to the amount computed by applying the statutory U.S. federal rate of 35% to income (loss) before income taxes as follows: (Dollars in thousands) 1996 1995 1994 - ----------------------------------------------------------------------------- Statutory federal tax provision (benefit) $ 16,881 $ 8,159 $ (2,150) State taxes net of federal income tax benefit 1,929 1,399 (126) Change in valuation allowance (3,504) (14,341) 1,671 Other 1,575 1,023 605 - ----------------------------------------------------------------------------- Provision (benefit) for income taxes $ 16,881 $ (3,760) $ - - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Deferred tax assets (liabilities) are comprised of the following at March 31: (Dollars in thousands) 1996 1995 - ------------------------------------------------------------------------- Reserves not currently deductible for tax purposes $ 7,866 $ 8,670 Depreciation 942 2,403 Loss carryforwards 1,159 1,664 Credit carryforwards 6,431 5,458 - ------------------------------------------------------------------------- Gross deferred tax assets 16,398 18,195 Gross deferred tax liabilities-- Capitalized software production costs (3,409) (3,632) Valuation allowance (1,159) (4,663) - ------------------------------------------------------------------------- Net deferred tax assets $ 11,830 $ 9,900 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- The valuation allowance decreased $3.5 million in fiscal 1996 due to the realization of the benefit of certain tax loss and credit carryforwards. A valuation allowance of $1.2 million remains at March 31, 1996, and is attributable to foreign loss carryforwards. The net change in the total valuation allowance for the year ended March 31, 1995, was a decrease of $15.8 million. Of this amount, $5.9 million resulted from the realization of tax benefits of temporary differences and loss carryforwards which reversed during the year ended March 31, 1995. The remaining $9.9 million decrease resulted from the Company's reevaluation during the fourth quarter of fiscal 1995 that was more likely than not that it would generate taxable income sufficient to realize a portion of the tax benefit associated with future deductible temporary differences and related loss and credit carryforwards prior to their expiration. The net reduction in the valuation allowance for fiscal 1995 differs from that recorded as a reduction to income tax expense by an amount attributable to the tax benefit associated with deductible employee stock option compensation. As of March 31, 1996, the Company has available federal research tax credit carryforwards of $2.8 million, expiring in 2006 through 2011, alternative minimum tax credit carryforwards of $2.3 million available indefinitely and state tax credit carryforwards of $1.3 million. Foreign tax loss carryforwards of $3.3 million are available for use in reducing future taxable income in certain foreign jurisdictions. 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. NOTE 12: EMPLOYEE BENEFIT PLAN The Company has established a 401(k) tax-deferred savings plan, whereby eligible employees may contribute a percentage of their eligible compensation (presently from 1% to 17% to a maximum of approximately $9 thousand per year). Company contributions are discretionary and were $1.0 million, $846 thousand and $750 thousand for fiscal 1996, 1995 and 1994, respectively. NOTE 13: FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE The estimated fair values of the Company's financial instruments at March 31 were as follows:
1996 1995 ---------------------- ---------------------- Carrying Estimated Carrying Estimated (Dollars in thousands) Amount Fair Value Amount Fair Value - ---------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 52,319 $ 52,319 $ 33,886 $ 33,886 Temporary cash investments $ 59,892 $ 59,892 $ 52,734 $ 52,734 Liabilities Foreign exchange contracts $ 4,969 $ 4,924 $ 13,052 $ 13,399 Convertible subordinated debentures $ 33,526 $ 36,669 $ 68,625 $ 60,304 - ----------------------------------------------------------------------------------------
The following methods and assumptions were used in estimating the fair values of financial instruments: Cash and cash equivalents--the carrying amounts reported in the balance sheets for cash and cash equivalents approximate their estimated fair values. Temporary cash investments, foreign exchange contracts and convertible subordinated debentures--fair values are based on quoted market prices. INDEPENDENT AUDITORS' REPORT TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF NETWORK EQUIPMENT TECHNOLOGIES, INC. We have audited the accompanying consolidated balance sheets of Network Equipment Technologies, Inc. and subsidiaries as of March 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Network Equipment Technologies, Inc. and subsidiaries at March 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1996 in conformity with generally accepted accounting principles. (signature) DELOITTE & TOUCHE LLP San Jose, California April 15, 1996 COMMON STOCK DIVIDENDS AND PRICE RANGE DIVIDENDS The Company has not paid cash dividends on its Common Stock, and it presently intends to continue this policy for the foreseeable future in order to retain earnings for the development of the Company's business. MARKET PRICE The Common Stock is traded on the New York Stock Exchange under the symbol NWK. The following table sets forth, for the periods indicated, the range of high and low sale prices. Fiscal 1996 High Low - ---------------------------------------------------------------- First quarter $25.25 $19.75 Second quarter 39.75 22.38 Third quarter 42.00 27.75 Fourth quarter 36.00 21.00 - ---------------------------------------------------------------- Fiscal 1995 High Low - ---------------------------------------------------------------- First quarter $10.00 $ 7.38 Second quarter 14.88 8.25 Third quarter 24.00 12.50 Fourth quarter 27.88 22.38 - ---------------------------------------------------------------- In addition, the Company's 7 1/4% convertible subordinated debentures trade in the over-the-counter market. CORPORATE DIRECTORY CORPORATE OFFICERS Joseph J. Francesconi PRESIDENT AND CHIEF EXECUTIVE OFFICER Roger A. Barney VICE PRESIDENT, HUMAN RESOURCES AND CORPORATE SERVICES Jerry L. Davis VICE PRESIDENT, CLIENT SUPPORT James B. De Golia VICE PRESIDENT, GENERAL COUNSEL AND ASSISTANT SECRETARY Samuel H. Ezekiel VICE PRESIDENT, MARKETING J. Robert Forkish VICE PRESIDENT AND CHIEF TECHNOLOGY OFFICER Craig M. Gentner SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND CORPORATE SECRETARY David P. Owen VICE PRESIDENT, CORPORATE DEVELOPMENT AND STRATEGY Raymond E. Peverell SENIOR VICE PRESIDENT, SALES AND SUPPORT G. Michael Schumacher SENIOR VICE PRESIDENT, ENGINEERING AND OPERATIONS Charles S. Shiverick VICE PRESIDENT, INFORMATION SERVICES AND REENGINEERING DIRECTORS John B. Arnold CHAIRMAN OF THE BOARD, N.E.T. Dixon R. Doll INDEPENDENT VENTURE CAPITALIST, CHAIRMAN OF THE DMW GROUP James K. Dutton DIRECTOR, CAERE CORPORATION AND ECCS, INC. Joseph J. Francesconi PRESIDENT AND CHIEF EXECUTIVE OFFICER, N.E.T. Walter J. Gill VICE PRESIDENT AND CHIEF TECHNOLOGY OFFICER (RETIRED), N.E.T. Frank S. Vigilante SENIOR VICE PRESIDENT (RETIRED), AT&T Hans A. Wolf VICE CHAIRMAN OF THE BOARD (RETIRED), SYNTEX CORPORATION CORPORATE INFORMATION ANNUAL MEETING The annual meeting of shareholders will be held at 10:00 a.m. on August 13, 1996, at the Company's headquarters in Redwood City, California. INVESTOR RELATIONS N.E.T. welcomes inquiries from its shareholders and other interested investors. To receive the Company's Annual Report, Form 10-K, quarterly financial results and other corporate information, please dial our hotline at 1-800-234-4-NET, or write to Investor Relations at N.E.T., 800 Saginaw Drive, Redwood City, CA 94063, or visit our World Wide Web site. N.E.T. ON THE INTERNET N.E.T.'s home page on the World Wide Web contains background on the Company and its products, financials, and other useful information. Our Web site is located at http://www.net.com TRANSFER AGENT First National Bank of Boston Boston, Massachusetts INDEPENDENT AUDITORS Deloitte & Touche LLP San Jose, California IDNX is a registered trademark, and N.E.T., the N.E.T. logo, and STM are trademarks of Network Equipment Technologies, Inc. - -C-1996 Network Equipment Technologies, Inc. All rights reserved. (Back Cover) N.E.T. Logo N.E.T., 800 Saginaw Drive, Redwood City, CA 94063 Tel 415.366.4400 Fax 415.366.5675 EX-21.1 16 EXHIBIT 21.1 EXHIBIT 21.1 NETWORK EQUIPMENT TECHNOLOGIES, INC. SUBSIDIARIES OF REGISTRANT AS OF JUNE 1, 1996 N.E.T. APLA, Inc. ..................... (State of Incorporation: Delaware) N.E.T. China, Inc. .................... (Incorporated Under the Laws of China) N.E.T. Credit Corporation.............. (State of Incorporation: California) N.E.T. Europe GmbH..................... (Incorporated Under the Laws of Germany) N.E.T. Europe Ltd. .................... (Incorporated Under the Laws of England) N.E.T. Europe SA ...................... (Incorporated Under the Laws of France) N.E.T. Federal, Inc. .................. (State of Incorporation: Delaware) N.E.T. International, Inc. ............ (Incorporated Under the Laws of Barbados) ComDesign International, Inc. ......... (Incorporated Under the Laws of U.S. Virgin Islands)
EX-23.1 17 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-33013, No. 33-33063, and No. 33-65157, and No. 33-68860 on Forms S-8 and Registration Statement No. 33-45815 on Form S-3 of our reports dated April 15, 1996, appearing and incorporated by reference in this Annual Report on Form 10-K of Network Equipment Technologies, Inc. for the year ended March 31, 1996. DELOITTE & TOUCHE LLP San Jose, California June 21, 1996 EX-27 18 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT. 1,000 YEAR MAR-31-1996 APR-01-1995 MAR-31-1996 52,319 59,892 76,966 4,533 31,705 238,426 31,040 78,215 281,957 64,001 33,526 0 0 208 184,222 281,957 226,070 338,899 90,588 167,738 123,753 0 4,713 48,231 16,881 31,350 0 0 0 31,350 1.50 1.50
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