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EX-31.2 - EXHIBIT 31.2 - NETWORK EQUIPMENT TECHNOLOGIES INCex31_2.htm
EX-32.2 - EXHIBIT 32.2 - NETWORK EQUIPMENT TECHNOLOGIES INCex32_2.htm
EX-32.1 - EXHIBIT 32.1 - NETWORK EQUIPMENT TECHNOLOGIES INCex32_1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 29, 2012.
 
OR
 
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ___________________ to ___________________.
 
Commission File Number 001-10255
 
NETWORK EQUIPMENT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
94-2904044
(State of incorporation)
 
(I.R.S. Employer Identification Number)
 
6900 Paseo Padre Parkway Fremont, CA
 
94555-3660
(Address of principal executive office)
 
(ZIP Code)
 
(510) 713-7300
 
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
x Yes  o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
xYes  o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
o Yes  x No
 
The number of shares outstanding of the registrant's Common Stock, par value $0.01, as of July 27, 2012 was 30,587,000.
 


 
Page 1 of 24

 
 
NETWORK EQUIPMENT TECHNOLOGIES, INC.
 
INDEX
 
PART I.  FINANCIAL INFORMATION
 
   
 
   
3
   
4
   
5
   
6
   
15
   
21
   
22
   
PART II.  OTHER INFORMATION
 
   
22
   
22
   
23
   
23
   
23
   
24
   
24
   
24
 
Page 2 of 24

 
PART I - FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(Unaudited — in thousands, except par value)
 
   
June
29, 2012
   
March
30, 2012
 
Current assets:
               
Cash and cash equivalents
  $ 5,888     $ 6,897  
Short-term investments
    22,383       26,245  
Restricted cash
    1,941       1,940  
Accounts receivable, net of allowances of $263 at June 29, 2012 and $212 at March 30, 2012
    8,096       7,525  
Inventories
    2,263       3,093  
Prepaid expenses and other assets
    3,974       3,636  
Total current assets
    44,545       49,336  
Property and equipment, net
    3,047       3,344  
Other assets
    3,217       3,139  
Total assets
  $ 50,809     $ 55,819  
Current liabilities:
               
Accounts payable
  $ 4,763     $ 4,009  
Accrued liabilities
    8,996       9,462  
Current portion of 7¼% redeemable convertible subordinated debentures
    1,204        
Total current liabilities
    14,963       13,471  
Long-term liabilities:
               
3¾% convertible senior notes
    10,500       10,500  
7¼% redeemable convertible subordinated debentures
    22,500       23,704  
Capital lease obligation, less current portion
    63       73  
Other long-term liabilities
    1,089       1,129  
Total long-term liabilities
    34,152       35,406  
Commitments and contingencies – See Note 8
               
Stockholders’ equity:
               
Preferred stock ($0.01 par value; 5,000 shares authorized; none outstanding)
           
Common stock ($0.01 par value; 75,000 shares authorized; 30,587 and 30,550 shares outstanding at June 29, 2012 and March 30, 2012)
    306       305  
Additional paid-in capital
    262,246       261,563  
Treasury stock, at cost
    (11,811 )     (11,811 )
Accumulated other comprehensive loss
    (2,071 )     (2,145 )
Accumulated deficit
    (246,976 )     (240,970 )
Total stockholders’ equity
    1,694       6,942  
Total liabilities and stockholders’ equity
  $ 50,809     $ 55,819  
 
See accompanying notes to condensed consolidated financial statements
 
 
Page 3 of 24

 
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited — in thousands, except per share amounts)
 
    Three Months Ended  
   
June
29, 2012
   
June
24, 2011
 
Revenue:
           
Product
  $ 7,509     $ 7,699  
Service and other
    3,907       3,614  
Total revenue
    11,416       11,313  
Costs of revenue:
               
Cost of product
    5,118       5,353  
Cost of service and other
    1,556       2,112  
Total cost of revenue
    6,674       7,465  
Gross margin
    4,742       3,848  
Operating expenses:
               
Sales and marketing
    3,501       4,464  
Research and development
    3,601       4,821  
General and administrative
    2,972       2,498  
Restructure and other costs
    121        
Total operating expenses
    10,195       11,783  
Loss from operations
    (5,453 )     (7,935 )
Interest income
    42       106  
Interest expense
    (551 )     (553 )
Other income (expense), net
    (5 )     34  
Loss before taxes
    (5,967 )     (8,348 )
Income tax provision
    38       72  
Net loss
  $ (6,005 )   $ (8,420 )
Basic and diluted net loss per share
  $ (0.20 )   $ (0.28 )
Common and common equivalent shares, basic and diluted
    30,573       30,316  
Condensed Consolidated Statements of Comprehensive Loss:
               
Net loss
  $ (6,005 )   $ (8,420 )
Other comprehensive loss:
               
Foreign currency translation adjustments
    91       83  
Gross unrealized holding gains (losses) on available-for-sale securities
    (22 )     80  
Less: Reclassification adjustments for (gains) losses included in net loss
    5       (36 )
Comprehensive loss
  $ (5,931 )   $ (8,293 )

See accompanying notes to condensed consolidated financial statements
 
 
Page 4 of 24

NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited — in thousands)

   
Three Months Ended
   
June
29, 2012
 
June
24, 2011
Cash and cash equivalents at beginning of period
 
$
6,897
   
$
2,367
 
Cash flows from operating activities:
 
 
           
Net loss
   
(6,005
)
   
(8,420
)
Adjustments required to reconcile net loss to net cash used in operating activities:
 
 
           
Depreciation, amortization, and accretion
 
 
534
     
560
 
Stock-based compensation expense
   
703
     
883
 
Provision for deferred income taxes
   
28
     
62
 
Changes in assets and liabilities:
 
 
           
Accounts receivable
 
 
(571
)
   
1,333
 
Inventories
 
 
830
     
(257
)
Prepaid expenses and other assets
 
 
(533
)
   
885
 
Accounts payable
 
 
756
     
(862
)
Accrued liabilities
 
 
(480
)
   
(1,315
)
Net cash used in operating activities
 
 
(4,738
)
   
(7,131
)
Cash flows from investing activities:
 
 
           
Purchase of short-term investments
   
(2,774
)
   
(5,385
)
Proceeds from sales and maturities of short-term investments
   
6,619
     
15,499
 
Purchases of property and equipment
   
(134
)
   
(204
)
Changes in restricted cash
   
(1
)
   
 
Net cash provided by investing activities
 
 
3,710
     
9,910
 
Cash flows from financing activities:
 
 
           
Issuance of common stock
 
 
1
     
1
 
Repurchase of common stock
   
(21
)
   
(113
)
Payments under capital lease and note payable obligations
   
(35
)
   
(33
)
Net cash used in financing activities
 
 
(55
)
   
(145
)
Effect of exchange rate changes on cash
 
 
74
     
79
 
Net increase (decrease) in cash and cash equivalents
 
 
(1,009
)
   
2,713
 
Cash and cash equivalents at end of period
 
$
5,888
   
$
5,080
 
                 
Other cash flow information:
 
 
           
Cash paid during the period for:
 
 
           
Interest
 
$
1,058
   
$
1,060
 
Non-cash investing activities:
               
Net unrealized gain (loss) on available-for-sale securities
   
(17
)
   
44
 

See accompanying notes to condensed consolidated financial statements

 
Page 5 of 24

 
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
 
Note 1. 
Description of Business and Summary of Significant Accounting Policies
 
Nature of Business:    Network Equipment Technologies, Inc. (the Company or NET) provides network and VoIP solutions to enterprises and government agencies that seek to reduce the cost to deploy next generation unified and secure communications applications. For over a quarter of a century, NET has delivered solutions for multi-service networks requiring high degrees of versatility, security and performance. Today, the Company’s broad family of products enables interoperability and integration with existing networks for migration to secure IP-based communications. Broadening NET’s voice solutions, Quintum Technologies (Quintum), now a part of NET, is a VoIP innovator whose applications bring the reliability and clarity of public telephone networks to Internet telephony and unified communications. NET was founded in 1983.
 
Merger Agreement with Sonus Networks, Inc.:
 
On June 18, 2012, Network Equipment Technologies, Inc. (“NET”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sonus Networks, Inc. (“Sonus”), and Navy Acquisition Subsidiary, Inc., a direct wholly-owned subsidiary of Sonus (“Merger Sub”), pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into NET and NET will become a direct wholly-owned subsidiary of Sonus (the “Merger”).
 
On the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock, par value $0.01 per share, of NET (the “NET Common Stock”) issued and outstanding immediately prior to the Effective Time (other than shares owned by (i) Sonus, Merger Sub or any other direct or indirect wholly-owned subsidiary of Sonus, (ii) NET or any direct or indirect wholly-owned subsidiary of NET or (iii) stockholders who have properly exercised and perfected appraisal rights under Delaware law) will be converted automatically into the right to receive $1.35 in cash (the “Merger Consideration”), without interest.
 
The Merger Agreement provides that, at the Effective Time, each (i) NET stock option that is unexpired, unexercised and outstanding as of the Effective Time, whether vested or unvested, and that has an exercise price per share that is less than the Merger Consideration, and (ii) NET restricted stock unit (“RSU”) that is outstanding as of the Effective Time, will be assumed by Sonus and will become exercisable to acquire Sonus stock. The vesting of such assumed options and RSUs will not be accelerated as a result of the consummation of the Merger, provided that if the service of the holder of such assumed option or RSU to the surviving corporation of the Merger, Sonus or any other affiliate of Sonus is terminated by such entity (and in connection therewith such holder does not thereafter commence service with Sonus or an affiliate of Sonus such that vesting of such assumed option or RSU would continue) on or before December 31, 2012 for a reason other than (i) a willful act by such holder that constitutes misconduct or fraud and has a material adverse effect on the entity terminating such holder or (ii) a conviction of such holder of a felony crime, such assumed option or RSU shall upon such termination vest and become exercisable in full. The Merger Agreement provides further that, immediately prior to the Effective Time, each NET stock option that is unexpired, unexercised and outstanding and that has an exercise price per share that is greater than or equal to the Merger Consideration shall vest and become exercisable in full and will, to the extent not exercised, terminate and cease to be outstanding without consideration at the Effective Time.
 
The Merger Agreement provides that, prior to the closing of the Merger, in accordance with the respective terms and requirements of the existing indentures referred to below, the Company will prepare supplemental indentures for each of (i) the 7 1/4 % Convertible Subordinated Debentures due 2014 issued by NET under the Indenture, dated as of May 15, 1989 (“1989 Debentures” and the “1989 Indenture,” respectively), between NET and U.S. Bank National Association (“U.S. Bank”), successor to Morgan Guaranty Trust Company of New York, and (ii) the 3 3/4% Convertible Senior Notes due 2014 issued by NET under the Indenture, dated as of December 17, 2007 (“2007 Notes” and the “2007 Indenture,” respectively), between NET and U.S. Bank, which supplemental indentures shall provide, among other things, that, from and after the Effective Time, in lieu of being convertible into shares of NET Common Stock, the 1989 Debentures and the 2007 Notes will be convertible into the kind and amount of Merger Consideration that would have been receivable upon the consummation of the Merger by a holder of the number of shares of NET Common Stock issuable on conversion of such 1989 Debentures or 2007 Notes, respectively, as of the Effective Time. At the closing of the Merger, the supplemental indentures will be executed and delivered to U.S. Bank.
 
 
Page 6 of 24

 
NET and Sonus’ respective obligations to complete the Merger are subject to customary conditions, including (i) the approval by the holders of a majority of the outstanding shares of the NET Common Stock entitled to vote on the Merger (the “Stockholder Approval”) and (ii) the absence of any injunction, judgment or ruling prohibiting the Merger. Moreover, each party’s obligation to consummate the Merger is subject to certain other conditions, including (i) the accuracy of the other party’s representations and warranties (subject to materiality exceptions) and (ii) the other party’s compliance with its covenants and agreements contained in the Merger Agreement (subject to materiality exceptions). The consummation of the Merger is not subject to a financing condition. NET has made customary representations and warranties and covenants in the Merger Agreement, including covenants regarding: (i) the conduct of NET’s business prior to the consummation of the Merger and (ii) the calling and holding of a meeting of NET’s stockholders for the purpose of obtaining the Stockholder Approval. In addition, under the terms of the Merger Agreement, NET agreed not to solicit or support any alternative acquisition proposals, subject to specified exceptions for the Company to respond to and support unsolicited proposals in the exercise of the fiduciary duties of the Board of Directors. NET will be obligated to pay a termination fee of $1,250,000 to Sonus upon termination of the Merger Agreement under specified circumstances, including if NET terminates the Merger Agreement in accordance with its terms to accept a unsolicited superior proposal.
 
The Merger is expected to close in the third quarter of calendar year 2012.
 
Liquidity:  With the exception of fiscal 2008, the Company has incurred net losses since fiscal 1998. The Company believes that existing cash, cash equivalents and short-term investments will be sufficient to fund operations for at least the next twelve months. However, if the effects of the restructuring that the Company commenced in January 2012 and continued in March 2012 are not materially consistent with management’s expectations, the Company may encounter cash flow and liquidity issues during that period, which may require the Company to evaluate alternatives and take appropriate steps to address such issues, either by further reducing cash consumption, raising additional capital, or a combination of measures. If such steps are needed the Company cannot be assured that it will be able either to sufficiently reduce cash consumption without adverse effects on its business or to obtain additional capital on acceptable terms, if at all.
 
Significant Accounting Policies:  The unaudited condensed consolidated financial statements of the Company included herein have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The condensed consolidated balance sheet as of March 30, 2012 was derived from the Company’s audited consolidated financial statements.
 
These financial statements should be read in conjunction with the March 30, 2012 audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for fiscal year 2012, as filed with the SEC. The results of operations for the three months ended June 29, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending March 29, 2013 or any future period.
 
The Company’s fiscal year ends on the last Friday in March. In most years, the fiscal year is 52 weeks, with each quarter comprised of thirteen weeks, which allows comparability of quarter over quarter results. Fiscal year 2012 included a 53rd week, with the extra week included in the three month period ended September 30, 2011. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial position as of June 29, 2012, the results of operations for the three months ended June 29, 2012 and June 24, 2011, respectively and the cash flows for the three months ended June 29, 2012 and June 24, 2011, respectively.
 
There have been no material changes to the Company’s significant accounting policies during the three months ended June 29, 2012, as compared to the significant accounting policies disclosed in Note 1 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K (as amended) for the year ended March 30, 2012.
 
Recently Issued Accounting Standards:  In June 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amends ASC 220 to allow an entity the option to present income and comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. In December 2011, the FASB issued guidance which indefinitely defers the guidance related to the presentation of reclassification adjustments. As the Company has historically presented a separate statement of comprehensive income (loss), the adoption of this ASU did not have any effect upon its financial statement presentation.
 
 
Page 7 of 24

 
Note 2.
Financial Instruments
 
Short-term investments at June 29, 2012 and March 30, 2012 consisted of the following:
 
(in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
June 29, 2012
                       
U.S. Treasury notes
  $ 3,003     $     $ (1   $ 3,002  
U.S. government agencies
    7,892       7       (1 )     7,898  
Corporate notes and bonds
    9,053       15       (2 )     9,066  
Asset backed securities
    1,914       3       (1 )     1,916  
Other debt securities
    501                   501  
    $ 22,363     $ 25     $ (5 )   $ 22,383  
March 30, 2012
                               
U.S. Treasury notes
  $ 3,953     $ 2     $ (3 )   $ 3,952  
U.S. government agencies
    7,465       10             7,475  
Corporate notes and bonds
    10,757       24       (3 )     10,778  
Asset backed securities
    3,530       9       (2 )     3,537  
Other debt securities
    503                   503  
    $ 26,208     $ 45     $ (8 )   $ 26,245  
 
The maturities of short-term investments at June 29, 2012 are as follows:
 
(in thousands)
 
Amortized
Cost
   
Estimated
Market Value
 
Maturing in one year
  $ 8,472     $ 8,480  
Maturing in one to five years
    13,890       13,903  
Total
  $ 22,362     $ 22,383  

 
Page 8 of 24

 
The following table summarizes the financial assets and liabilities of the Company measured at fair value on a recurring basis:
 
(in thousands)
       
Fair Value Measurements at
 June 29, 2012, using
 
   
Balance as of
June 29, 2012
   
Level 1
   
Level 2
 
Assets:
                 
U.S. Treasury notes
  $ 3,002     $ 3,002     $  
U.S. government agencies
    7,898             7,898  
Corporate notes and bonds
    9,066             9,066  
Asset backed securities
    1,916             1,916  
Other debt securities
    501             501  
Total(1)
  $ 22,383     $ 3,002     $ 19,381  
 
(in thousands)
       
Fair Value Measurements at
 March 30, 2012, using
 
   
Balance as of
March 30, 2012
   
Level 1
   
Level 2
 
Assets:
                 
U.S. Treasury notes
  $ 3,952     $ 3,952     $  
U.S. government agencies
    7,475             7,475  
Corporate notes and bonds
    10,778             10,778  
Asset backed securities
    3,537             3,537  
Other debt securities
    503             503  
Total(1)
  $ 26,245     $ 3,952     $ 22,293  
 
 
(1) 
Included in short-term investments on the Company’s condensed consolidated balance sheet.
 
The three levels of the fair value hierarchy are:
 
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
 
Level 2: Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means.
 
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
 
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
 
The valuation techniques used to measure the fair value of financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data.
 
Investments are classified within Level 1 if quoted prices are available in active markets.
 
 
Page 9 of 24

 
Items are classified in Level 2 if the investments are valued using quoted prices for identical assets in markets that are not active, using quoted prices for similar assets in an active market, or using model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets.
 
The Company did not hold financial assets or liabilities which were recorded at fair value using inputs in the Level 3 category as of June 29, 2012 and March 30, 2012.
 
Derivative financial instruments are limited to foreign exchange contracts which the Company enters into to hedge certain balance sheet exposures and intercompany balances against future movement in foreign exchange rates. The Company’s primary net foreign currency exposures are in Japanese yen, Euros, and British pounds. The fair value of the Company’s derivative instruments is determined using pricing models based on current market rates. Gains and losses on foreign exchange contracts are included in other income and expense, net, and were not material for any period presented. As of June 29, 2012, the Company had no outstanding foreign exchange contracts.
 
Note 3.
Inventories
 
Inventories consisted of the following:
 
(in thousands)
 
June
29, 2012
   
March
30, 2012
 
Purchased components
  $ 947     $ 1,811  
Finished goods
    1,316       1,282  
    $ 2,263     $ 3,093  

Certain inventories, not expected to be consumed within the next 12 months, are included in the condensed consolidated balance sheet as non-current assets. These inventories were $674,000 and $622,000, respectively, at June 29, 2012 and March 30, 2012.
 
Under the Company’s agreement with its primary contract manufacturer, Plexus Corp. (Plexus), the Company maintains a level of control over parts procurement, design, documentation, and selection of approved suppliers. The Company is generally liable for any termination or cancellation of product orders, as well as excess and obsolete material, which can result, for example, from an engineering change, product obsolescence, or inaccurate component forecasting. Under the agreement, Plexus is to procure raw materials and begin manufacturing of products in accordance with the Company’s forecasts. If certain purchased raw materials or certain work-in-process items are held for greater than 90 days, the Company must make deposits on the aging inventory, although Plexus must make efforts to minimize the Company’s liability for the aging inventory, including returning materials to suppliers, canceling orders with suppliers, or using materials to manufacture product for its other customers. If raw material or in-process inventories are still unused and have been held for more than nine months, the Company must take ownership and pay for the aged inventory. Alternatively, if there is forecasted demand for such inventory, the Company must pay a management fee for Plexus to retain such inventory. If the forecasted demand does not materialize the Company must take ownership and pay for such inventory. This activity may increase the Company’s owned inventories. The term of our agreement with Plexus currently runs to December 31, 2012, with automatic renewal for additional one-year terms unless either party gives notice of intent not to renew, and subject to either party’s right to terminate upon six months notice.
 
At June 29, 2012, the Company’s deposit on inventory held by Plexus was $2.7 million, of which $1.3 million had been charged to a reserve for excess inventory. The deposit, including the related reserve, is included in prepaid expenses and other assets in the condensed consolidated balance sheets.
 
The Company regularly performs evaluations of inventory for excess and obsolete items, and for lower of cost or market valuation. These evaluations are applied to inventory, inventory classified as non-current assets, and the amount of the Company’s deposit on inventory held by Plexus. As a result of these evaluations, the Company recorded charges of $628,000 and $247,000, respectively, to cost of revenue in the three months ended June 29, 2012 and June 24, 2011.
 
 
Page 10 of 24

 
Note 4.
Loss Per Share
 
The following table sets forth the computation of the numerator and denominator used in the computation of basic and diluted net loss per share:
 
(in thousands, except per share amounts)
 
Three Months Ended
   
June
29, 2012
 
June
 24, 2011
Numerator:
               
Net loss
 
$
(6,005
)
 
$
(8,420
)
Denominator-weighted average shares of common stock outstanding:
               
Shares used to compute basic and diluted  net loss per share
   
30,573
     
30,316
 
Basic and diluted net loss per share
 
$
(0.20
)
 
$
(0.28
)

The denominator for basic and diluted net loss per share is the weighted average number of unrestricted common shares outstanding for the periods presented. In periods of net income, the denominator for diluted net income per share also includes potentially dilutive shares, which consist of shares issuable upon the exercise of dilutive stock options and contingently issuable shares. These shares are excluded from the computations of diluted net loss per share for the three months ended June 29, 2012 and June 24, 2011 as they are anti-dilutive and would therefore reduce the loss per share. The total amount of such anti-dilutive shares was 255,000 and 132,000 for the three months ended June 29, 2012 and June 24, 2011, respectively.
 
At June 29, 2012, there are 770,000 shares of common stock issuable upon conversion of the 3¾% convertible senior notes and 753,000 shares of common stock issuable upon conversion of the 7¼% redeemable convertible subordinated debentures. For all periods presented, these shares and the related effect of the accrued interest are excluded from the calculation of diluted net loss per share, as their inclusion would be anti-dilutive.
 
 
Note 5.
Warranty Accruals
 
The warranty accrual, which is included in accrued liabilities in the accompanying consolidated balance sheets, was $174,000 at June 29, 2012, as shown in the table below. Components of the warranty accrual and changes in accrued amounts related to the warranty accrual during the three months ended June 29, 2012 and June 24, 2011 were as follows:
 
   
Three Months Ended
 
 (in thousands)
 
June
29, 2012
   
June
24, 2011
 
Balance at beginning of period
  $ 232     $ 85  
Charges to costs of revenue
    25       29  
Charges to warranty accrual
    (55 )     (64 )
Other adjustments (1)
    (28 )     53  
Balance at end of period
  $ 174     $ 103  
 
 
(1)
Adjustments resulted from changes in warranty cost estimates, relating primarily to hourly costs of labor to repair products and frequency of warranty claims.
 
 
Page 11 of 24

 
Note 6. 
Restructure and Other Costs
 
Restructuring costs for the three months ended June 29, 2012 reflected net charges for employee separation costs related to corporate restructuring activities and facility exit costs. There were no restructuring costs for the three months ended June 24, 2011.
 
In the fourth quarter of fiscal 2012, the Company announced implementation of a restructuring plan to reduce operating expenses, and preserve capital resources. The combined total of restructure and other cost of $1.5 million recognized in fiscal 2012 and in the first quarter of fiscal 2013 represents the total expected cost of the fiscal 2012 restructuring plan and consists principally of costs relating to severance and termination benefits. The Company anticipates payments of amounts relating to the fiscal 2012 restructuring will be substantially completed by the end of the second quarter of fiscal 2013.
 
The liability for restructuring was $70,000 at June 29, 2012 and consisted solely of accrued costs relating to employee separations. Changes in accrued amounts related to restructuring during fiscal 2013 were as follows:
 
(in thousands)
 
Restructure
Accrual
Balance at March 30, 2012
 
$
837
 
Provision
   
121
 
Payments
   
(790
)
Other(1)
   
(98
)
Balance at June 29, 2012
 
$
70
 
 
 
(1)
Consists primarily of adjustments to employee separation costs and facility exit costs which are reflected in general and administrative expense in the condensed consolidated statement of operations and comprehensive loss.
 
Note 7.
Income Taxes
 
The Company recorded tax provisions of $38,000 and $72,000 respectively, for the three months ended June 29, 2012 and June 24, 2011. Provisions for income tax are primarily related to the Company’s international operations.
 
Note 8.
  Contractual Obligations and Commercial Contingencies
 
3¾% Convertible Senior Notes:  In December 2007, the Company issued $85.0 million of 3¾% convertible senior notes (the “2007 Notes”) due December 15, 2014, in a private placement, of which $10.5 million remained outstanding at June 24, 2011. A 2007 Note may be converted by a holder, at its option, into shares of the Company’s common stock initially at a conversion rate of 73.3689 shares of common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $13.63 per share of common stock (subject to adjustment in certain events), at any time on or prior to December 15, 2014, unless the 2007 Notes were previously repurchased. If a holder elects to convert its 2007 Notes in connection with certain fundamental changes, in certain circumstances the conversion rate will increase by a number of additional shares of common stock upon conversion. Upon conversion, a holder generally will not receive any cash payment representing accrued and unpaid interest, if any. The 2007 Notes are not redeemable by the Company prior to the stated maturity.
 
Upon the occurrence of certain fundamental changes including, without limitation, an acquisition of voting control of the Company, the liquidation or dissolution of the Company, or the Company’s common stock ceasing to be traded on a U.S. national securities exchange, a holder may require the Company to purchase for cash all or any part of its 2007 Notes at a purchase price equal to 100% of the principal amount plus any accrued and unpaid interest (including additional interest, if any) up until, but not including, the fundamental change purchase date. The 2007 Notes are unsecured senior obligations, ranking equal in right of payment to all existing and future senior indebtedness, and senior in right of payment to any existing and future subordinated indebtedness. The 2007 Notes are effectively subordinated to existing and future secured indebtedness to the extent of the assets securing such indebtedness and structurally subordinated to the claims of all existing and future indebtedness and other liabilities of the Company’s subsidiaries.
 
The consummation of the Merger will constitute a “fundamental change” under the 2007 Indenture. As required by the 2007 Indenture and as provided in the merger agreement, within 10 business days after the closing date of the Merger, Sonus will deliver, or cause to be delivered, a fundamental change notice to each holder of 2007 Notes indicating that each such holder has the right to have all or a portion of its 2007 Notes purchased at a price in cash equal to 100% of the principal amount of the 2007 Notes (or portion thereof), plus any accrued and unpaid interest. Any 2007 Notes tendered for purchase in response to the fundamental change notice will be purchased on a date to be selected by Sonus that shall be no later than 35 business days after the date of the fundamental change notice.
 
In accordance with the 2007 Indenture, on August 3, 2012 the Company notified the registered holders of the 2007 Notes of the proposed Merger, the supplemental indenture to be entered into in connection with the Merger, and the anticipated fundamental change notice to be delivered by Sonus.
 
 
Page 12 of 24

 
7¼% Redeemable Convertible Subordinated Debentures:  In May 1989, the Company issued $75.0 million of 7¼% redeemable convertible subordinated debentures due May 15, 2014 (the “1989 Debentures”), of which $23.7 million remained outstanding at June 24, 2011. Each 1989 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. The 1989 Debenture holders are entitled to a sinking fund which began May 15, 2000, of 14 annual payments of 5% of the aggregate principal amount of 1989 Debentures issued ($3.8 million annually), reduced by any redemption or conversion of the 1989 Debentures. As a result of previous redemptions, the total remaining sinking fund requirement is $1.2 million, which, assuming no further redemptions, will be due as a final sinking fund payment on May 15, 2013.
 
In accordance with the 1989 Indenture, on August 3, 2012 the Company notified the registered holders of the 1989 Debentures of the proposed Merger and the supplemental indenture to be entered into in connection with the Merger.
 
License and Development Agreement: The Company is a party to a license and development agreement with a third-party technology supplier, under which the Company acquired a license to manufacture and distribute the supplier’s high-speed networking platform. The Company agreed to pay an additional $5.0 million in four equal installments to the supplier for the advanced platform and an extended exclusive right to market. The first two installments were paid in fiscal 2008 and the remaining two will be due at separate future dates dependent upon the supplier’s delivery of future enhancements of the advanced platform. The Company believes it is unlikely the remaining two installments will become due or be paid.
 
Unearned income:  Deferred revenue, relating to both product and service revenues, was $3.9 million and $3.8 million, respectively at June 29, 2012 and March 30, 2012.
 
Contingencies:  In the normal course of business, the Company enters into contractual commitments to purchase services, materials, components, and finished goods from suppliers, mainly its primary contract manufacturer, Plexus. Under the agreement with Plexus, the Company may incur certain liabilities, as described in Note 3.
 
Contractual obligations and contingencies decreased from $46.7 million at March 30, 2012 to $45.1 million at June 29, 2012. This decrease resulted principally as a result of ongoing interest and operating lease payments.
 
Note 9.
Stock-based Compensation
 
Stock Option and Award Plans:  The Company grants options to purchase shares of its common stock and is authorized to award restricted shares of common stock pursuant to the terms of its 2008 Equity Incentive Plan, its 1993 Stock Option Plan and its 1997 Stock Option Program. Upon stockholder approval of the 2008 Equity Incentive Plan in August 2008, the 1993 Stock Option Plan and the 1997 Stock Option Program were terminated, and all shares available for future grants of awards under the 1993 Stock Option Plan and the 1997 Stock Option Program were terminated.
 
Stock options generally become exercisable ratably over a four-year period and expire after seven to ten years. Options may be granted to officers, employees, directors and independent contractors to purchase common stock at a price not less than 100% of the fair market value at the date of grant. There were no stock option grants or stock option exercises in the three months ended June 29, 2012.
 
Restricted stock awards (“RSAs”) granted under the equity plans are independent of option grants and are subject to restrictions. RSAs, which have been issued since fiscal 2007, are subject to forfeiture if employment or services are terminated prior to the release of restrictions, which generally occurs on a ratable basis over one to two years from the date of grant. Until the restriction is released, the shares cannot be transferred. These shares have the same cash dividend and voting rights as other common stock and are considered as issued and outstanding. The cost of the awards, determined to be the fair market value of the shares at the date of grant, is expensed ratably over the period the restrictions lapse.
 
Restricted stock unit awards (“RSUs”) granted under the 2008 Equity Incentive Plan are also independent of option grants and are subject to restrictions. RSUs are subject to forfeiture if employment or services are terminated prior to the release of restrictions, which generally occurs on a ratable basis over periods ranging from one day to two years from the date of grant. Until the restriction is released, the shares cannot be transferred. These shares are not considered as issued and outstanding until the release of restrictions. The cost of the awards, determined to be the fair market value of the shares at the date of grant, is expensed ratably over the period the restrictions lapse.
 
Upon the release of restriction, a portion of the released shares are repurchased from employees by the Company to satisfy withholding-tax obligations arising from the vesting of restricted stock awards. The Company repurchased 21,232 shares from employees in the three months ended June 29, 2012 for a total price of $21,000.
 
 
Page 13 of 24

 
Stock Compensation Expense: Stock-based compensation expense for the three months ended June 29, 2012 and June 24, 2011, was as follows:
 
(in thousands)
 
Three Months Ended
   
June
29, 2012
 
June
24, 2011
Cost of revenue
 
$
135
   
$
125
 
Sales and marketing
   
177
     
227
 
Research and development
   
217
     
317
 
General and administrative
   
174
     
214
 
   
$
703
   
$
883
 
 
Note 10.
 Financial Instruments Fair Value Disclosure
 
The estimated fair values of the Company’s financial instruments at June 29, 2012 and March 30, 2012 were as follows:
 
(in thousands)
 
June
29, 2012
 
March
30, 2012
   
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Assets:
                               
Short-term investments
 
$
22,383
   
$
22,383
   
$
26,245
   
$
26,245
 
Liabilities:
                               
3¾% Convertible senior notes
 
$
10,500
   
$
2,560
   
$
10,500
   
$
1,537
 
7¼% Redeemable convertible subordinated debentures
 
$
23,704
   
$
11,852
   
$
23,704
   
$
8,178
 

The gross unrealized holding gains (losses) on available-for-sale securities for short term investments recorded in accumulated other comprehensive loss were not material as of June 29, 2012 and March 30, 2012 respectively.
 
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 due to their short maturities.
 
Short-term investments:   Fair values are based on quoted market prices and observable prices that are based on inputs not quoted on active markets, but corroborated by market data. See Note 2.
 
Restricted cash:  The carrying value approximates fair value.
 
Accounts receivable:  The carrying value approximates fair value.
 
Accounts payable:  The carrying value approximates fair value.
 
Accrued liabilities:  The carrying value approximates fair value.
 
Convertible debt: The Company has estimated the approximate fair value of these securities using quoted market prices or trades closest to June 29, 2012. The Company has determined that its convertible debt should be classified as Level 2 within the fair value hierarchy (see Note 2).
 
 
Page 14 of 24

 
Note 11.
 Litigation
 
On June 21, 2012, a purported shareholder of the Company filed a class action complaint against the Company, our directors and an executive officer of the Company, Sonus and Sonus Merger Subsidiary in connection with the proposed merger. The action is captioned Bruno v. Network Equipment Technologies, Inc., et al., Case No. 7643, and is pending in the Court of Chancery of the State of Delaware. On July 10, 2012, a purported shareholder of the company filed a class action complaint against our company, our directors, Sonus and Sonus Merger Subsidiary in connection with the proposed merger. The action is captioned Rogers v. Keating, et al., Case No. RG12638516, and is pending in the Superior Court of California for Alameda County. The Bruno and Rogers complaints allege that the defendants breached and/or aided and abetted the breach of their fiduciary duties to our shareholders, by seeking to sell the company through an allegedly unfair process and allegedly for an unfair price and on unfair terms. The complaints seek, among other things, equitable relief that would enjoin the merger, damages, and attorney’s fees and costs. As is common in this type of litigation, additional lawsuits based upon similar allegations concerning the proposed merger may be filed in the future, in the same or other courts. The Company believes the complaints’ allegations have no merit, and intends to defend against them vigorously. However, all litigation is inherently uncertain, and there can be no assurance that the Company’s defense of these or similar actions will be successful. The Company has not accrued any amounts related to these complaints, as it believes that a negative outcome is not probable.
 
A subsidiary of the Company, Quintum Technologies, LLC (Quintum), was party, by interpleader, to three related lawsuits in Greece filed by Lexis SA, a former distributor of Quintum products in Greece. The underlying lawsuits, the first of which was filed in 2006, were cancelled due to the fact that the originating plaintiffs waived their rights against Lexis. Since a negative outcome is therefore not probable, the Company has not accrued any amounts related to this matter.  As Lexis has not yet formally waived its rights against Quintum, hearings on the matter between Lexis and Quintum remain on calendar and are scheduled for January 2015, but the Company believes the scheduled hearings may not ever occur.
 
The Company is the subject of a complaint filed on June 7, 2012, by AIM-IP LLC in the U.S. District Court for the Central District of California. The complaint alleges infringement of a patent relating to the G.729 audio data compression algorithm. The Company believes that it has various defenses to the complaint, although legal proceedings are subject to inherent uncertainties and unfavorable rulings could occur. The Company has not accrued an amount relating to this matter as the amount of loss cannot be reasonably estimated. 
 
In addition to the above, the Company is involved in various legal proceedings from time to time in the normal course of its business.
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This discussion and analysis should be read in conjunction with the condensed consolidated financial statements included in this Form 10-Q and Part II of our Form 10-K for the fiscal year ended March 30, 2012 (as amended). Statements contained in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. A forward-looking statement may contain words such as “plans,” “hopes,” “believes,” “estimates,” “will,” “continue to,” “expect to,” “anticipate that,” “to be,” or “can affect.” Forward-looking statements are based upon management expectations, forecasts and assumptions that involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. Many factors may cause actual results to vary including, but not limited to, the factors discussed in this Form 10-Q and our most recently filed Form 10-K (as amended). The Company expressly disclaims any obligation or undertaking to revise or publicly release any updates or revisions to any forward-looking statement contained in this Form 10-Q except as required by law. Investors should carefully review any risk factors described in this Form 10-Q and our most recently filed Form 10-K (as amended), along with other documents the Company files from time to time with the Securities and Exchange Commission.
 
References to “fiscal 2013” or “fiscal 2012” generally refer to the specific periods presented in this discussion.
 
Merger Agreement with Sonus Inc.
 
On June 18, 2012, Network Equipment Technologies, Inc. (“NET”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sonus Networks, Inc. (“Sonus”), and Navy Acquisition Subsidiary, Inc., a direct wholly-owned subsidiary of Sonus (“Merger Sub”), pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into NET and NET will become a direct wholly-owned subsidiary of Sonus (the “Merger”). See Note 1 to the Condensed Consolidated Financial Statements.
 
Our Business
 
Network Equipment Technologies, Inc. (NET), founded in 1983, develops and sells high performance networking equipment optimized for real-time communications. For more than a quarter of a century, NET has delivered solutions for multi-service networks requiring high degrees of versatility, security and performance. Today, the company is focused on providing secure real-time communications for unified communications (UC), session-initiation protocol (SIP) trunking, enterprise mobility, and IP-based multi-service networking. In 2007, in order to enhance our lineup of voice over IP (VoIP) offerings, we acquired Quintum Technologies and its Tenor product line.
 
Our enterprise customer base includes large enterprises adopting UC and small to mid-sized businesses (SMBs) implementing real-time communications. Our government customers include a variety of federal and international agencies and organizations, including civilian and defense agencies and resellers to such entities. In addition to our direct sales capabilities, we have developed relationships with integrators, resellers, and vendors of related technologies in order to help drive our enterprise business. Our global support and service organization, along with third-party service organizations, provides installation and other professional services, a variety of maintenance programs, technical assistance, and customer training.
 
 
Page 15 of 24

 
Today, our solutions are focused on enabling our enterprise and government customers to cost-effectively migrate to next-generation IP networks utilizing real-time communications, including unified communications platforms, cloud-based voice, secure voice applications, and high-speed multiservice wide area networking (WAN) transport networks. Our newest product offering, the UX Series, was purpose-built for the unified communications and enterprise session border controller (E-SBC) markets to enable adoption of new communication technologies and services. Our voice solutions include the VX Series and the Tenor product lines of switching media gateways. Our legacy multi-service solutions include the Promina platform and the NX Series high speed multi-service network exchange platform.
 
The UX Series is an enhanced gateway with an embedded server that acts as a survivable branch appliance (SBA), which is a key component for remote-site survivability. The UX Series interoperates with our VX Series and Tenor products and was specifically designed to support upstream deployments with advanced features that give customers high levels of flexibility, scalability, quality of experience, and investment protection through interoperability. The VX Series and Tenor product lines provide enterprise customers with voice interoperability solutions that enable existing private branch exchange (PBX) and IP-PBX systems to work together with new UC platforms and IP-based service provider networks offering SIP trunking services. The VX Series also provides IP-based solutions to government agencies requiring high bandwidth efficiency and call performance for secure voice communications. The Tenor product line also provides traditional VoIP switching gateway solutions for SMBs and smaller branch offices within large enterprises.
 
Our legacy multi-service solutions include the Promina, NX1000 and NX5010 platforms. The Promina product line has been serving government agencies and large enterprises for many years, providing industry-leading network reliability and security. The NX Series products are high-performance networking platforms that provide high-grade data transfer and enable secure grid computing. Our NX1000 platform provides an extensive, compact, wide-area network (WAN) switching solution that enables applications to integrate and aggregate into IP-based networks. The NX5010 platform enables high-speed, secure interconnection and extension of geographically distributed grid computing clusters and SANs.
 
Critical Accounting Policies and Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that we 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 revenue and expenses during the reporting period. Such estimates and assumptions, which we evaluate on an on-going basis, include, but are not limited to: assumptions related to contracts that have multiple elements, the allowances for sales returns and potentially uncollectible accounts receivable, the valuation of inventory, warranty costs, the valuation allowance on deferred tax assets, certain reserves and accruals, estimated lives of depreciable assets, and assumptions related to stock-based compensation. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Actual results could differ from those estimates.
 
There have been no significant changes to our policies and estimates, as discussed in our Annual Report on Form 10-K for the fiscal year ended March 30, 2012.
 
Recent Accounting Pronouncements
 
See Note 1 of our Notes to Condensed Consolidated Financial Statements for recent accounting pronouncements, including the expected dates of adoption and estimated effects on our consolidated financial statements.
 
 
Page 16 of 24

 
Results of Operations
 
The following table sets forth selected data derived from our condensed consolidated statements of operations expressed as a percentage of revenue for the periods presented:
 
   
Three Months Ended
 
   
June
29, 2012
   
June
24, 2011
 
Percent of revenue
           
Product
    65.8 %     68.1 %
Service and other
    34.2       31.9  
Total revenue
    100.0       100.0  
                 
Product gross margin
    31.8       30.5  
Service and other gross margin
    60.2       41.6  
Total gross margin
    41.5       34.0  
                 
Sales and marketing
    30.7       39.5  
Research and development
    31.5       42.6  
General and administrative
    26.0       22.0  
Restructure and other costs
    1.1        
Total operating expenses
    89.3       104.1  
Loss from operations
    (47.8 )     (70.1 )
                 
Interest expense, net
    (4.5 )     (4.0 )
Other income (expense), net
          0.3  
Loss before taxes
    (52.3 )     (73.8 )
Income tax provision
    0.3       0.6  
Net loss
    (52.6 ) %     (74.4 ) %

Overview and Highlights
 
 
·
Total revenue increased slightly in the first quarter of fiscal 2013 due to higher service revenues. Product revenue declined, as increased sales to commercial customers were offset by reduced sales to government customers. Our legacy products have seen sales declines and our newer products are targeted for different solutions and will require marketing and further development towards these new solutions in order to achieve broader adoption in the government sector.
 
 
·
We are transitioning our product line to address unified communications and other new telecommunications opportunities. Sales of our UX Series product, which was introduced in the third quarter of fiscal 2011, are increasing, but sales have declined for our Promina and other multi-service products, as well as for our VoIP-based VX Series product.
 
 
·
Our sector mix and our mix of product sales fluctuate quarter to quarter. Our newer products have not achieved broad market acceptance, so large individual sales can have a significant effect on our mix of product sales. Also, spending by government customers fluctuates based on budget allocations, the timely passage of the annual federal budget, and the timing of specific programs and purchasing for those programs. The following table shows elements of our sector mix and our mix of product sales:
 
 
Page 17 of 24

 
(in thousands, except percentages)
 
Three Months Ended
 
   
June
29, 2012
   
June
24, 2011
 
Sector mix:
           
Revenue from government customers
  $ 4,664     $ 5,965  
% of total revenue
    40.9 %     52.7 %
Revenue from commercial customers
  $ 6,752     $ 5,348  
% of total revenue
    59.1 %     47.3 %
Mix of product sales:
               
Promina product revenue
  $ 1,405     $ 1,936  
% of product revenue
    18.7 %     25.1 %
VoIP-based product revenue
  $ 5,878     $ 4,825  
% of product revenue
    78.3 %     62.7 %
Other product revenue
  $ 174     $ 863  
% of product revenue
    2.3 %     11.2 %

 
·
Product margin and service margin both increased. The increase in product margin was a result of reduced employee compensation costs, due to lower headcount and related costs allocated to cost of products, partially offset by reserve charges for legacy products. The increase in service margin was also a result of reduced employee compensation costs, due to lower headcount and related costs allocated to cost of service.
 
 
·
Expense levels were lower than in prior periods. Operating expense in the first quarter of fiscal 2013 decreased 13.5% from the prior year, despite substantial expenses for outside services relating the pending acquisition by Sonus. This decrease was achieved largely as a result of reduced employee compensation costs following organizational restructurings in the fourth quarter of fiscal 2012.
 
Revenue
 
   
Three Months Ended
     
(in thousands, except percentages)
 
June
29, 2012
 
June
24, 2011
   
Change
Product
 
$
7,509
   
$
7,699
     
(2.5
)%
Service and other
   
3,907
     
3,614
     
8.1
 
Total revenue
 
$
11,416
   
$
11,313
     
0.9
%

Total revenue increased in fiscal 2013, due to an increase in service revenue, partially offset by a decline in product revenue.
 
On a sector basis, product revenue from commercial customers increased by $942,000, while product revenue from government customers declined by $1.1 million.
 
We expect our mix of product sales and our sector mix to fluctuate quarter to quarter, and we expect commercial sales to continue to increase as a percentage of our total sales. Sales to our government customers can fluctuate based upon passage of the annual budget and the timing of specific government programs.
 
Service and other revenue increased slightly in fiscal 2013, due to increased service activities. Significant fluctuations in our service and other revenue can occur as a result of factors affecting the timing of the recognition of revenue, including customer deployment schedules, contractual acceptance provisions and renewal of annual support agreements.
 
 
Page 18 of 24

 
Gross Margin
 
   
Three Months Ended
   
June
29, 2012
 
June
24, 2011
Product gross margin
   
31.8
%
   
30.5
%
Service and other gross margin
   
60.2
     
41.6
 
Total gross margin
   
41.5
%
   
34.0
%

Total gross margin increased in fiscal 2013 due principally to higher service and other margin.
 
Product margin was slightly higher in fiscal 2013. This increase was primarily due to the effect of lower employee compensation costs resulting from the restructurings.
 
Service and other gross margin improved due largely to reduced employee compensation and facilities costs resulting from the restructurings and cost savings resulting from closures of service facilities.
 
Operating Expenses
 
   
Three Months Ended
       
(in thousands, except percentages)
 
June
29, 2012
   
June
24, 2011
   
Change
 
Sales and marketing
  $ 3,501     $ 4,464       (21.6 )%
Research and development
    3,601       4,821       (25.3 )
General and administrative
    2,972       2,498       19.0  
Restructure costs
    121             100.0  
Total operating expenses
  $ 10,195     $ 11,783       (13.5 )%
 
Operating expense in fiscal 2013 decreased due principally to the effect of the restructurings. In the fourth quarter of fiscal 2012, the Company reduced headcount by approximately 90 employees. Employee compensation costs were significantly lower in fiscal 2013 and other operating expenses were also generally lower in fiscal 2013 reflecting the reduced headcount.
 
Sales and marketing expense was lower in fiscal 2013 by $1.0 million. This decrease was due principally to the effect of headcount reductions, and related expense reductions, that have occurred since the fourth fiscal quarter of fiscal 2012.
 
Research and development expense was lower in fiscal 2013 by $1.2 million. This decrease was due principally to the effect of headcount reductions that have occurred since the fourth fiscal quarter of fiscal 2012.
 
General and administrative expense was higher in fiscal 2013 by $472,000. Acquisition-related activities were principally responsible for increases in legal costs of $479,000 and increases in outside services costs of $309,000. These increases were partially offset by lower employee compensation costs, reflecting headcount reductions, and by lower audit fees.
 
Restructure and other costs of $121,000 for fiscal 2013 reflected charges for employee separation costs related to corporate restructuring activities and a change in our estimate of the cost to vacate certain facilities.
 
Non-Operating Items
 
(in thousands, except percentages)
 
Three Months Ended
     
   
June
 29, 2012
 
June
 24, 2011
   
Change
Interest income
 
$
42
   
$
106
     
(60.4
)%
Interest expense
 
$
(551
)
 
$
(553
)
   
(0.4
)
Other income (expense), net
 
$
(5
)
 
$
34
     
823.5
%

Interest income was lower in fiscal 2013 due to lower average cash and investment balances, and to a lesser extent, lower average interest earned on investments. Average cash and investment balances were lower primarily due to the effect of operating losses throughout fiscal 2012 and in the first three months of fiscal 2013.
 
 
Page 19 of 24

 
Interest expense in the first quarter of fiscal 2013 and the first quarter of fiscal 2012 was virtually equivalent, as the balance of long-term debt was identical throughout each of the two periods.
 
Other income (expense), net, consisted of:
 
(in thousands)
 
Three Months Ended
   
June
 29, 2012
 
June 24, 2011
Gain (loss) on foreign exchange
 
$
(125
)
 
$
2
 
Realized gain on investments
   
6
     
36
 
Other
   
114
     
(4
)
   
$
(5
)
 
$
34
 

Income Tax Provision
 
Income tax provisions were $38,000 and $72,000, respectively, in the first quarter of fiscal 2013 and 2012. Provisions for income tax are primarily related to our international operations.
 
Liquidity and Capital Resources
 
Historically, our primary sources of liquidity and capital resources have been our cash and investment balances, cash provided by operating activities and debt financing activities.
 
Cash balances:  As of June 29, 2012, cash and cash equivalents, short-term investments and restricted cash were $30.2 million, as compared to $35.1 million as of March 30, 2012. At June 29, 2012, these amounts were invested 62% in U.S. Treasury notes and government agency investments and cash equivalents.
 
Cash flow from operating activities:
 
Net cash used by operating activities was $4.7 million in fiscal 2013 compared to $7.1 million in fiscal 2012. The decrease in net cash used in operating activities in fiscal 2013 resulted principally from the reduction in net loss in fiscal 2013 of $2.4 million, compared to fiscal 2012.
 
Cash flow from investing activities:
 
Net cash provided by investing activities was $3.7 million in fiscal 2013 compared to $9.9 million in fiscal 2012. The principal reason for this change was the net effect upon cash of purchases, sales and maturities of short-term investments. These activities provided net cash of $3.8 million and $10.1 million in fiscal 2013 and 2012, respectively.
 
We used the cash provided by investing activities in fiscal 2013 principally to fund operating activities.
 
Cash flow from financing activities:
 
Net cash used in financing activities was $55,000 in fiscal 2013 compared to $145,000 in fiscal 2012.
 
Financing activities in fiscal 2013 consisted of payments for leased equipment as well as repurchases of common stock from employees to satisfy withholding tax requirements. The principal financing activity in fiscal 2012 was repurchases of common stock from employees to satisfy withholding-tax requirements.
 
Our contractual obligations and contingencies decreased by $1.7 million from March 30, 2012. This decrease was principally due to ongoing interest and operating lease payments. The following table provides a summary of our contractual obligations and other commercial commitments as of June 29, 2012:
 
 
Page 20 of 24

 
Contractual obligations
(in thousands)
 
Total
 
2013
 
2014
to
2015
 
2016
to
2017
 
After
2017
Current portion of long-term debt
 
$
1,204
   
$
   
$
1,204
   
$
   
$
 
Long-term debt
   
33,000
     
     
33,000
     
     
 
Interest on long-term debt
   
4,421
     
1,056
     
3,365
     
     
 
Operating leases
   
6,350
     
1,501
     
2,588
     
2,261
     
 
Capital leases
   
121
     
45
     
55
     
21
     
 
Total contractual obligations
 
$
45,096
   
$
2,602
   
$
40,212
   
$
2,282
   
$
 

We have a contract with a third-party technology supplier that calls for payments by us totaling $2.5 million upon receipt of deliverables meeting certain conditions. We believe it is unlikely these payments will become due or be paid.
 
We have a long-term income tax liability for uncertain tax positions amounting to $371,000 at June 29, 2012. We cannot currently predict the date of settlement or payment, as the timing of resolution of our liability is highly uncertain.
 
In the normal course of business, we enter into contractual commitments to purchase services, materials, components, and finished goods from suppliers, mainly our primary contract manufacturer, Plexus. Under our agreement with Plexus, we maintain a level of control over parts procurement, design, documentation, and selection of approved suppliers. We are generally liable for any termination or cancellation of product orders, as well as excess and obsolete material, which can result, for example, from an engineering change, product obsolescence, or inaccurate component forecasting. Under the agreement, Plexus is to procure raw materials and begin manufacturing of products in accordance with our forecasts. If certain purchased raw materials or certain work-in-process items are held for greater than 90 days, we must make deposits on the aging inventory, although Plexus must make efforts to minimize our liability for the aging inventory, including returning materials to suppliers, canceling orders with suppliers, or using materials to manufacture product for its other customers. If raw material or in-process inventories are still unused and have been held for more than nine months, we must take ownership and pay for the aged inventory. Alternatively, if there is forecasted demand for such inventory, we must pay a management fee for Plexus to retain such inventory. If the forecasted demand does not materialize we must take ownership and pay for such inventory. This activity may increase our owned inventories. The term of our agreement with Plexus currently runs to December 31, 2012, with automatic renewal for additional one-year terms unless either party gives notice of intent not to renew, and subject to either party’s right to terminate upon six months notice.
 
At June 29, 2012, Plexus held inventory related to our products. Our deposit relating to this inventory was $2.7 million and reserves relating to this deposit were $1.3 million. Both the deposit and the related reserves are included in prepaid expenses and other assets on the condensed consolidated balance sheets. Additional deposits may be required under the terms of the agreement.
 
Liquidity: We believe that our existing cash, cash equivalents and short-term investments will be sufficient to fund operations for at least the next twelve months. However, if the effects of our restructuring commenced in January 2012 and continued in March 2012 are not materially consistent with our expectations, we may encounter cash flow and liquidity issues during that period. We will continue to assess our cash consumption, and our liquidity position. At any time, if we determine that it is necessary, we will evaluate our alternatives and take appropriate steps to address liquidity issues, either by further reducing cash consumption, raising additional capital, or a combination of measures. If additional capital is needed we cannot be assured that it will be available to us and, if we are unable to raise it or raise it on acceptable terms, we may have to delay, reduce the scope of, or eliminate some or all of our research and development programs or other operations, which may include delaying further development of our products; or reduce marketing, customer support or other resources devoted to our products or operations. Any of these developments could harm our business, results of operations, or financial condition.
 
Off-balance sheet arrangements: Other than the commitments described above, there are no other off-balance sheet arrangements that are reasonably likely to materially affect our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The following are the material changes for the three months ended June 29, 2012 from the information reported under Part II, Item 7A of our Form 10-K for the fiscal year ended March 30, 2012:
 
 
Page 21 of 24

 
A 10% change in market interest rates would change the fair value of our investment portfolio by $6,000, as compared to a change of $15,000 as of March 30, 2012.
 
The fair market values of our 3¾% convertible senior notes and our 7¼% redeemable convertible subordinated debentures are sensitive to changes in interest rates and to the price of our common stock into which they can be converted, as well as our financial stability. The yield to maturity on the notes and the debentures is fixed, therefore the interest expense on our debt does not fluctuate with interest rates.
 
The fair value of the 3¾% convertible senior notes was $2.6 million at June 29, 2012 and $1.5 million at March 30, 2012. The fair value of the 7¼% redeemable convertible subordinated debentures was $11.9 million at June 29, 2012 and $8.2 million at March 30, 2012.
 
ITEM 4.  CONTROLS AND PROCEDURES
 
In accordance with Section 302 of the Sarbanes-Oxley Act of 2002 and Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, management, under the supervision and with the participation of the chief executive officer (“CEO”) and chief financial officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) at the end of the period covered by this report as well as any changes in disclosure controls and procedures that occurred during the period covered by this report. Our management, including our CEO and CFO, has concluded that our disclosure controls and procedures are effective as of June 29, 2012.
 
No changes in our internal control over financial reporting occurred during the quarter ended June 29, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and correct any deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to significantly modify our disclosure controls and procedures.
 
PART II - OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
On June 21, 2012, a purported shareholder of the Company filed a class action complaint against the Company, our directors and an executive officer of the Company, Sonus and Sonus Merger Subsidiary in connection with the proposed merger. The action is captioned Bruno v. Network Equipment Technologies, Inc., et al., Case No. 7643, and is pending in the Court of Chancery of the State of Delaware. On July 10, 2012, a purported shareholder of the company filed a class action complaint against our company, our directors, Sonus and Sonus Merger Subsidiary in connection with the proposed merger. The action is captioned Rogers v. Keating, et al., Case No. RG12638516, and is pending in the Superior Court of California for Alameda County. The Bruno and Rogers complaints allege that the defendants breached and/or aided and abetted the breach of their fiduciary duties to our shareholders, by seeking to sell the company through an allegedly unfair process and allegedly for an unfair price and on unfair terms. The complaints seek, among other things, equitable relief that would enjoin the merger, damages, and attorney’s fees and costs. As is common in this type of litigation, additional lawsuits based upon similar allegations concerning the proposed merger may be filed in the future, in the same or other courts. The Company believes the complaints’ allegations have no merit, and intends to defend against them vigorously. However, all litigation is inherently uncertain, and there can be no assurance that the Company’s defense of these or similar actions will be successful. We have not accrued any amounts related to these complaints, as we believe that a negative outcome is not probable.
 
A subsidiary of the Company, Quintum Technologies, LLC (Quintum), was party, by interpleader, to three related lawsuits in Greece filed by Lexis SA, a former distributor of Quintum products in Greece. The underlying lawsuits, the first of which was filed in 2006, were cancelled due to the fact that the originating plaintiffs waived their rights against Lexis. Since a negative outcome is therefore not probable, we have not accrued any amounts related to this matter.  As Lexis has not yet formally waived its rights against Quintum, hearings on the matter between Lexis and Quintum remain on calendar and are scheduled for January 2015, but we believe the scheduled hearings may not ever occur.
 
The Company is the subject of a complaint filed on June 7, 2012, by AIM-IP LLC in the U.S. District Court for the Central District of California. The complaint alleges infringement of a patent relating to the G.729 audio data compression algorithm. We believe that we have various defenses to the complaint, although legal proceedings are subject to inherent uncertainties and unfavorable rulings could occur. We have not accrued an amount relating to this matter as the amount of loss cannot be reasonably estimated. 
 
ITEM 1A. RISK FACTORS
 
Our business is subject to the risks and uncertainties described in our most recent annual report on Form 10-K (as amended) and as set forth below. There may be additional risks that have not yet been identified and risks that are not material now but could become material. Any one of these risks could hurt our business, results of operations or financial condition. Investors should carefully review the risk factors described in our most recent Annual Report on Form 10-K and any amendments thereto, and the following:
 
 
Page 22 of 24

 
The potential merger with Sonus subjects us to a number of potential material risks.
 
Our entrance into the merger agreement with Sonus subjects us to a number of potential material risks. In particular, we have incurred and will incur significant costs in connection with the merger. In addition, the announcement and pursuit of the merger may have a negative effect upon our management and other resources available for the continued operation of our business in the ordinary course, our ability to attract and retain key personnel, and our ability to retain and attract customers and to maintain and grow sales, any of which could negatively impact our operating results and stock price. The merger agreement contains restrictions on the conduct of our business prior to the consummation of the acquisition, generally requiring us to conduct our business in the ordinary course and preventing us from taking certain specified actions, subject to specific limitations, all of which may delay or prevent us from undertaking business opportunities that may arise pending completion of the merger and could adversely affect us if the merger is not completed and we remain independent.
 
If the merger with Sonus is not consummated for any reason, including the failure of our stockholders to adopt the merger agreement or the failure to receive the required regulatory approvals, or if there is a delay in the consummation of the merger, we could be subject to a number of material risks, including potentially negative effects on our operating results and stock price, our ability to attract and retain key personnel, our ability to retain and attract customers and to maintain and grow sales, and the progress of certain projects under development. In addition, under certain circumstances, we could be required to pay a termination fee of $1.25 million to Sonus in order to terminate our merger agreement with Sonus and accept a superior acquisition proposal from a third party, which may discourage third parties from making a competing proposal to acquire NET and could negatively impact our operating results and stock price.
 
If the merger with Sonus is consummated, our stockholders will cease to participate in our future earnings growth or benefit from any future increase in our value following the merger, and will not be able to realize any benefit from possibility that the price of the shares might have increased in the future to a price greater than $1.35 per share.
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
(c) Issuer Purchases of Equity Securities
 
Common Stock
 
The following table reflects purchases made by the Company of its common stock during the quarter ended June 29, 2012:
 
Fiscal Period
 
Total
Number of
Shares
Purchased (1)
   
Average
Price
Paid Per
Share
   
Total
Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
   
Approximate
Dollar Value of
Shares That
May Yet Be
Purchased
Under the
Publicly
Announced
Plans or
Programs
 
                                 
March 31 – April 27, 2012
                    $  
April 28 – May 25, 2012
    21,232     $ 1.00           $  
May 26 – June 29, 2012
                    $  
      21,232     $ 1.00           $  

 
(1)
During the quarter ended June 29, 2012, 21,232 shares were acquired directly from employees as payment of tax withholding obligations upon vesting of restricted stock awards.
 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
Not applicable.
 
 
Page 23 of 24

 
ITEM 4.  MINE SAFETY DISCLOSURES
 
Not applicable.
 
ITEM 5.  OTHER INFORMATION
 
Not applicable.
 
ITEM 6.  EXHIBITS
 
 
(a)
Exhibits
 
 
Rule 13a-14(a) Certification (CEO).
 
Rule 13a-14(a) Certification (CFO).
 
Section 1350 Certification (CEO).
 
Section 1350 Certification (CFO).
 
101**
The following materials from Network Equipment Technologies, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.
     
 
 
*
Filed herewith
 
 
**
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 
SIGNATURES
 
Pursuant to the requirements 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.
 
Dated:  August 10, 2012
NETWORK EQUIPMENT TECHNOLOGIES, INC.
 
       
  By: /s/DAVID WAGENSELLER  
  David Wagenseller  
  Chief Executive Officer  
       
  By: /s/ KAREN C. CARTE  
  Karen C. Carte  
  Vice President and Chief Financial Officer  
  (Principal Financial and Accounting Officer)  
 
 
Page 24 of 24