UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 19982000
OR
[ ]|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-23970
NETWORK PERIPHERALS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0216135
(State or other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
Identification Number)
1371 McCarthy Boulevard
Milpitas,2859 Bayview Drive
Fremont, California 9503594538
(Address, including zip code of principal executive offices)
(408) 321-7300(510) 897-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Common Stock
Indicate by checkmark 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 the filing
requirements for the past 90 days. Yes [X]|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 the 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 as of March 5, 199927, 2001 was $82,541,679$89,931,499 based upon the closing price of
the Registrant's Common Stock on the Nasdaq National Market System on that date.
The number of shares of the Registrant's Common Stock outstanding as of
March 5,
199927, 2001 was 12,342,681.12,847,357.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting of
stockholders to be held on April 29, 1999in 2001 are incorporated by reference into Part III of this Annual
Report on Form 10-K.
1
NETWORK PERIPHERALS INC.
FORM 10-K
TABLE OF CONTENTS
PART I Page
ITEM 1. Business............................................................Business....................................................... 3
ITEM 2. Properties..........................................................Properties..................................................... 9
ITEM 3. Legal Proceedings...................................................Proceedings.............................................. 9
ITEM 4. Submission of Matters to a Vote of Security Holders.................Holders............ 9
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.............................................Matters........................................ 10
ITEM 6. Selected Consolidated Financial Data.............................................Data........................... 11
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................Operations........................ 12
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.......... 16Risk..... 22
ITEM 8. Financial Statements and Supplementary Data......................... 17Data.................... 23
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................ 33Disclosure................................... 39
PART III
ITEM 10. Directors and Executive Officers of the Registrant.................. 34Registrant............. 39
ITEM 11. Executive Compensation.............................................. 34Compensation......................................... 39
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management...... 34Management............................................. 39
ITEM 13. Certain Relationships and Related Transactions...................... 34Transactions................. 39
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K..... 35
Signatures.......................................................... 378-K................................................ 40
Signatures..................................................... 42
Supplemental Schedule............................................... 38Schedule.......................................... 43
2
PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
On March 30, 2001, NPI entered into a series of related agreements with
privately held FalconStor, Inc. pursuant to which NPI purchased Series C
Preferred Stock of FalconStor having an aggregate purchase price of $25.0
million and obtained an exclusive option to merge with FalconStor. FalconStor
develops and markets network storage infrastructure software that enables
storage over IP using standard industry components such as Gigabit Ethernet,
Fibre Channel and SCSI, with planned support for iSCSI and Infiniband. The
investment agreements provide that NPI has the right to designate one member of
FalconStor's board of directors and entitle NPI to liquidation, registration,
voting and preemptive rights customary for venture capital style investments.
The option agreement gives NPI the right to merge with FalconStor pursuant to
the terms of the form of merger agreement attached to the option agreement. The
form of merger agreement provides that, as consideration for all outstanding
shares of FalconStor stock, NPI would issue a number of newly issued shares of
NPI common stock determined in accordance with a formula. The number of shares
issuable in the merger would depend upon a number of variable factors, including
the trading price per share of NPI's common stock at the time of the merger,
NPI's assets at the time of the merger and other factors. The actual number of
shares is expected to result in NPI's current stockholders having a one-third
interest in the combined entity. All shares issued to FalconStor stockholders in
the merger, as well as shares held by NPI officers and directors at the time of
the merger, would be subject to a one-year lock-up agreement, subject to early
release in the discretion of the NPI board following the merger. In addition,
NPI would assume all outstanding options to acquire shares of FalconStor common
stock, which would result in the potential issuance of approximately 4.5 million
shares if those options vested and were exercised. The holders of a majority of
each class of FalconStor's capital stock have agreed that they will vote in
favor of the merger if it is presented to such stockholders for a vote. The
merger would be structured as a tax free reorganization and would be accounted
for as a purchase. Completion of the merger would be subject to the expiration
of the applicable Hart-Scott-Rodino waiting period, NPI stockholder approval and
other customary closing conditions. In the event that NPI does not exercise the
option, and under certain other circumstances, NPI may be required to pay
FalconStor a $3.0 million penalty.
NPI has also engaged Lehman Brothers to advise NPI regarding strategic
alternatives with respect to its hardware business that would allow NPI to focus
its resources on the storage software opportunity presented by the FalconStor
transactions.
OVERVIEW
We design and sell Fast Ethernet and Gigabit Ethernet switching solutions for
local area networks, or LANs. All of our switches are based on our highly
flexible NuWaveArchitecture, built with our proprietary Application-Specific
Integrated Circuits, or ASICs. This architecture is designed to enable us to
deliver standards-based switches that can work with a variety of existing LAN
infrastructures and technologies. We are directing our sales and marketing
resources evenly toward original equipment manufacturers, or OEMs, and
value-added resellers, or VARs.
As the Internet and complex applications, such as storage area networks (SAN),
network attached storage (NAS), enterprise resource planning and data backup,
have become pervasive, the volume of data traffic over LANs has increased
dramatically, often creating bottlenecks on LANs that degrade network
performance. Enterprises have historically implemented Layer 2 switches and
software-based Layer 3 routers to manage increased traffic and to provide the
intelligence necessary to process increasingly complex multi-protocol traffic.
However, increasing bandwidth requirements and transmission speeds combined with
multiple traffic types, such as voice, data and video, have strained the
performance capabilities of software-based Layer 3 routers. In response to these
developments, LAN managers have begun to implement hardware-based Layer 3
switches in their networks to replace both Layer 2 switches and software-based
Layer 3 multi-protocol routers.
Despite the performance improvements of Layer 3 switches versus Layer 3 routers,
many of today's Layer 3 switching solutions still have limitations, such as
traffic blocking. We address this issue and others through our proprietary
NuWaveArchitecture, which enables us to deliver the following benefits to our
customers and end-users:
o High performance at low cost. We believe our architecture and
modular design enable us to deliver products with
price/performance advantages regardless of scale or configuration.
3
o Scalability. Our wire-speed, non-blocking Layer 3 switching
solutions enable enterprises to expand their LANs without creating
bottlenecks or impacting network performance. Modular expansion units
can connect to master units via internal high bandwidth channels that
do not block traffic or reduce switching resources.
o Flexibility. Our proprietary technology enables us to create new
product configurations using the proprietary ASICs that form the
core of our switches. In addition, our architecture enables us to
add software-based Layer 4-7 capabilities or port third-party
software to our switches to develop new products.
o Manageability. We believe our products reduce the complexity of
network management, thereby lowering overall cost of ownership.
As used in this annual report, the terms "we," "us," "our" and "NPI" mean
Network Peripherals Inc. (the "Company") wasand its subsidiaries (unless the context indicates
another meaning), and the term "common stock" means our common stock, par value
$0.001 per share.
We were incorporated in California in March 1989 and were reincorporated in
Delaware in June 1994. The Company's principal office
is located at 1371 McCarthy Boulevard, Milpitas, California 95035,We initially focused on networking products based on fiber
distributed data interface, or FDDI, technology, and its
telephone number is (408) 321-7300.
BUSINESS
The Company designs, manufactures, markets and supportswe obtained a full rangesignificant
share of 10/100/1000 Layer 2 and Layer 3 Ethernet switching productsthe market for workgroups,
wiring closets and network backbones, and a full range of high performance FDDI
adapters and switches. These products are designed to increase the available
bandwidth and enhance the performance of corporate and departmental networks.
The Company delivers the most advanced high-speed network technologies to
preserve its customer's existing Ethernet investments.
The Company introduced its first FDDI network adapter products in 1990 and has
since established a leading share of the installed FDDI adapter market. The
Company also introduced its first FDDI concentrator product in 1991 and began
commercial shipments of its first FDDI LAN (local area network) switching
product,early 1990s. Because the EIFO series, in the first quarter of 1994. In 1995, the Company
announced its Fast Ethernet product line and made initial shipments of its Fast
Ethernet LAN switching products in early 1996. In 1997, the Company introduced
switches designed to interconnect workgroups to enterprise backbone networks,
switches with 10/100 auto-sensing features, and standard and custom OEM adapters
based on the industry standard PCI bus architecture. In the price-sensitive
market for Layer 2 switches, the CompanyFDDI-based products declined significantly beginning in 19981995, we
developed and shipped a full
rangenew line of 12-port, 16-port and 24-port Fast Ethernet hubs and switches with
advanced management features.
In March 1996, the Company acquired NuCom Systems, Inc. ("NuCom"), a
Taiwan-based networking company focused on Fast Ethernet switching products.
This acquisition enabled the Company to introduce a number of new Layer 2 Fast Ethernet switching products during that year. A majoritywe first
shipped in early 1996. By 1998, the market for our FDDI-based products and our
Layer 2 Fast Ethernet products (together, our "legacy products") declined
substantially, and we committed nearly all our resources to the development of a
new line of Layer 3 Gigabit Ethernet switches founded on our NuWaveArchitecture.
We commenced limited commercial shipments of the Company's
current Fastfirst product in this line, the
Keystone24g in December 1999, followed by the remainder of the product line in
2000. Because the life cycle of our legacy products reached maturity, we ceased
production of these products during 2000 in accordance with the decreasing
demand and profitability in this market.
PRODUCTS AND TECHNOLOGY
All of our Gigabit Ethernet product offeringsswitches are based on our flexible
NuWaveArchitecture, which combines advanced design and proprietary ASICs to
deliver standards-based switches that are intended to work seamlessly with
existing LANs. This architecture offers a 64 Gigabit per second, or Gbps,
crosspoint switching fabric. In addition, the NuWaveArchitecture is designed to
eliminate blocking with multiple input buffers, separate queues for unicast and
multicast traffic and other special queuing and buffering techniques. Further,
our architectural approach gives us the capability to increase functionality and
reduce cost in future generations of NuWaveArchitecture.
Standalone LAN Switching Solutions
Keystone24g. The Keystone24g was the first commercially available Gigabit
Ethernet switch architecture
developed by the researchbased on our NuWaveArchitecture. It is a fully managed
standalone switch with 24 fixed Fast Ethernet ports and development activities in Taiwan.
In April 1997, the Company acquired NetVision Corporation ("NetVision"),two optional Gigabit
uplinks. The Keystone24g features advanced, traffic-enhancing capabilities, such
as wire-speed IP routing and protocol-based virtual LANs.
Stacking LAN Switching Solutions
Keystone24mg Stack Master. The Keystone24mg Stack Master is a privately held company located in Long Island, New York. NetVision specialized
in the development of very high bandwidthhighly scalable,
fully managed Layer 3 LAN switching and gigabit
Ethernet technologies. This acquisition positioned the Company to develop its
next generation of Ethernet switching products to be introduced in mid-1999.
The Company markets its products worldwide through OEMs, distributors, VARs and
system integrators.
PRODUCTS
The Company's current line of products consists of a range of Fast Ethernet and
FDDI LAN switches and hubs, FDDI to Fast Ethernet bridges, FDDI Network
Interface Cards, and network management software. Most of these products are
based on core technology and proprietary ASIC components designed by the
Company. The products are offered in a variety of models, configurations and
forms.
The information in the following paragraphs contains forward-looking statements
describing new productsswitch that are expected to be available for shipment to the
Company's customers during 1999. The successful completion and shipment of these
products is subject to a number of uncertainties, including verification testing
to confirm that the products meet the Company's standards for quality,
reliability and interoperability; availability of components; pricing actions by
competitors that may render it unprofitable to introduce the products; market
acceptance of the products; and the emergence or broad acceptance of new
technologies that may render the products obsolete.
In the early stages of 1999, the Company once again consolidated its product
development efforts to better leverage core competencies and to bring
consistency and continuity to these efforts. Although the Company will continue
its sustaining engineering efforts of its legacy products, especially support of
its OEM base, the bulk of its engineering resources will concentrate on
development efforts to bring the NuWave Architecture Layer 3 gigabit family of
switches to market. The Company intends to introduce gigabit Ethernet solutions
aimed at the small-to-medium enterprises (SME) in mid-1999.
3
NuSwitch Product Line
Network Adapter Products
The Company's line of FDDI network adapters connects high-performance servers or
desktop computers directly to 100 Mbps FDDI networks. The adapters support both
fiber and unshielded twisted pair (UTP) copper wiring and are available for
popular platform bus architectures, including SBus and PCI. Customized versions
have been developed for resale under OEM arrangements with Sun Microsystems and
Network Associates. The adapters and software developed for Sun Microsystems are
based on the Company's standard SBus architecture and PCI architecture. They
support Sun Microsystems' SPARC and UltraSPARC work station and server product
lines, including their current lines of PCI based workstations. The Network
Associates product is a customized version of the Company's PCI adapter with
enhanced features for use with the Network Associates Sniffer Network Analyzer.
The Company's adapters incorporate software drivers for leading network
operating systems including Novell NetWare, Microsoft NT, and Sun Microsystems'
Solaris. The Company provides a standard set of diagnostics, connection
management (CMT) and station management (SMT) software tools. CMT software
continuously monitors network connections for bit errors and network faults,
while SMT software provides network management and gathering of network
performance statistics.
LAN Switching Products
LAN Switches. In 1998, the Company added a number of new Fast Ethernet LAN
switching products to its NuSwitch product line that offers solutions ranging
from desktop to backbone connectivity, including the DS-12A and the DS-16, both
Layer 2 Ethernet switches. These two products are 10/100Mbps auto-sensing,
12-port and 16-port switches, with optional connections to either fiber or UTP.
They are designed to satisfy the requirements of mission critical networks
running high-demand applications in campus environments.
LAN Network Management Software. The Company believes that network management
software is an important tool for network administrators who need to manage,
maintain and control the operation of client/server remotely. The Company
provides standards-based network management software in all of its managed
products. The Company's LAN switching products come standard with SNMP and RMON
software that allows its switches to be configured and monitored from a
management station. In 1998, the Company introduced some revisions to its
NuSight SNMP management platform, which now provides RMON Manager tools for
network diagnostics and performance monitoring. NuSight 2.0 provides a graphical
view of the switching product to enable the network administrator to manage
network connections and configuration, gather statistics to monitor network
traffic and plan for future growth. It operates in a Microsoft Windows
environment, including Windows 95, Windows NT Workstation 4.0 and Windows NT
Server 4.0.
The Company intends to introduce a number of new products in 1999 based on its
revolutionary NuWave Architecture. NuWave products will be aimed at the rapidly
growing Layer 3 Fast Ethernet and gigabit switching markets. These products will
be high-density, low cost 10/100/1000 auto-sensing switches for use in
departmental networks and large corporate backbone networks.
NuWave Product Line
NuWave is an innovative line ofsupports high capacity Gigabit Ethernet, Fast
Ethernet and gigabitWAN interfaces. The Keystone24mg incorporates a powerful,
non-blocking 64-Gbps switching fabric. The Keystone24mg Stack Master has 24
fixed Fast Ethernet solutions being designed for the SME market based on technologyports and ASICs
developed primarily by the Company.
The NuWave product family is expected to consist of very high bandwidth
switching platforms in flexible, "building block" form that offer high-density
switched/hub ports that are stackable and scaleable in performance and
configurations for networksa stacked environment can provide up to 1,500 nodes with complex96 Fast
Ethernet ports without blocking. The use of dedicated, separate channels for
user data and stringent network
requirements. Networks of this scale require reliability, scalabilitymanagement and flexibility since as many as 30% of their nodes move or change annually. Thus,
the devices themselves need to be intelligent, fault-tolerant and flexible in
their configurations while being affordable and simple to use.
The NuWave family of 10/100 and gigabit Ethernet switching solutions is being
designed with a 64-Gbps switching fabric to deliver wire-speed Layer 2 and Layer
3 (IP/IPX) switching for 10/100/1000 Mbps Ethernet networks in a scaleable and
non-blocking stackable form factor. The new platformcontrol information is designed to accommodateensure
wire-speed performance even under sustained periods of high traffic volume while
maintaining network integrity.
Capstone24t Stack Slave. Commercial shipments of our Capstone24t Stack Slave
commenced in the first quarter of 2000. The Capstone24t connects to the
Keystone24mg over an advanced stacking interface that connects the Capstone24t
directly to the Keystone24mg's 64-Gbps switching fabric. The Capstone24t has 24
fixed, full-duplex, auto-negotiating Fast Ethernet ports. One Capstone24t and
one Keystone24mg create a 48-port stack, while a combination of one Keystone24mg
and three Capstone24t switches creates a 96-port stack. Two optional Gigabit
uplinks on the Keystone24mg can expand the stack functionality and extend
price/performance advantages.
4
Backbone Switching Solutions
Cornerstone Switches. The Cornerstone6g provides up to 12 Gigabit ports and 16
Fast Ethernet ports. The Cornerstone6g is a fully managed standalone switch that
supports high capacity Gigabit Ethernet and Fast Ethernet port configurations.
The base unit has six fixed Gigabit Ethernet ports. Customers can also choose an
additional six Gigabit Ethernet ports and a 16-port Fast Ethernet option.
Gigabit Ethernet ports on the Cornerstone6g are available in short-haul fiber
(SX) and long-haul fiber (LX).
The Cornerstone12g is identical to the Cornerstone6g except that the base unit
has 12 fixed Gigabit ports instead of only six. The same 16-port Faster Ethernet
option card is available on the Cornerstone12g as on the Cornerstone6g. This
combination of port options suchmakes our Cornerstone switches suitable for a range
of high performance applications, including data centers, network backbones and
power workgroups.
Problems encountered with our operating software resulted in unforeseen delays
in commercial shipments, as high-speed LAN/WAN uplinks, advanced web-based management
functions, with intuitive, policy-based networkwell as returns, beginning in the second quarter of
2000. Although we believe these problems have been corrected in subsequent
software releases, lost time and expense adversely affected our operating
results and market penetration throughout the year.
Management Software
NuSight GEMS is our Gigabit Ethernet management software redundant
power suppliesthat we bundle and flexible media connections --ship
with our NuWaveArchitecture products. The initial version was shipped with our
Keystone24g, followed by enhanced versions for each of our NuWaveArchitecture
products as they have been produced. NuSight GEMS provides advanced and
easy-to-use management capabilities that are found
currently only in expensive, large-scale enterprise systems.
4
The NuWave switching family,simplify user configuration of our
products as well as diagnostic and management tools. NuSight GEMS is based on
widely accepted industry standards and operates with a very high bandwidth architecture and
flexible configuration plus a comprehensive collectionvariety of advanced switching and
network management
functionalities, offers networking and system OEM customers a
next generation switching platform. The Company plans to use the NuWave
Architecture product line to penetrate the rapidly emerging gigabit and
stackable Layer 2/3 10/100 Ethernet switching market in 1999.software applications.
MARKETING, SALES AND SUPPORT
The Company sells its product worldwide throughWe focus our sales and marketing efforts on OEMs, VARs, distributorssystem integrators and
system integrators.distributors. As of December 31, 1998, the Company employed 242000, our worldwide sales and marketing
organization included 38 full-time technically trained marketing, sales and
support personnel located in the United States, the Netherlands Singapore and Taiwan. These personnel, in addition to
traditional marketing and sales functions, are responsible for initiating and
developing relationships with major end-user accounts and with OEM leaders in
the computer networking industry. The Company believes that such relationships
are crucial to early development and deployment of optimal solutions for network
applications.
The majority of the Company's historical and current sales are to OEM customers
with the balance of the sales to distributors and VARs. While the Company does
not generally obtain long-term purchase commitments from its OEM customers, it
does customarily enter into contracts with OEM customers to establish the terms
and conditions of sales made pursuant to orders from OEMs. The Company's
standard products are distributed globally through the reseller channels in
North America, Asia and Europe.
In addition to North America, the Company's products are currently distributed
internationally, primarily in Europe and Asia. The Company has internationalWe
have domestic sales offices located in the Netherlands, TaiwanFremont, Los Angeles, Boston, Chicago and
Singapore. Sales to customers
outside of North America represented 31% of the Company's net sales in 1998. The
geographic regions with the major portions of export sales in 1998, and the
approximate respective percentages represented by each, were Europe, 10% and
Asia, 21%. All payments for sales outside the United States are made in U.S.
dollars.
Sun Microsystems accounted for 35% of net sales in 1998. In the past, the
Company has experienced fluctuations in the volume of activity with individual
OEM customers and distributorsDenver, as well as changes in its OEM customerReston, Virginia and distributor base, and it expects such fluctuations and changes to continue in
the future. The loss of a major customer, reductions of a major order or delay
in a major shipment could adversely affect the Company's business and financial
performance.
OEM customers typically provide the Company with a rolling forecast placed two
to three months in advance of shipment, while resellers typically provide the
Company with orders placed 30 days or less in advance of shipment. However, due
to order cancellations and order changes and depending on the mix between OEM
and reseller orders and the ability or resources of the Company to meet demand
schedules, the Company's backlog may or may not be indicative of revenue in the
future periods.Sarasota, Florida.
The information in the following paragraph contains forward lookingforward-looking statements
describing the Company'sour sales and marketing strategy. There are a number of uncertainties
that could affect the success of the plan including the timely availability of
new products by the Company,us, reliability, price and performance characteristics of the
components, new and existing products, the introduction of similar products by
competitors, pricing actions by competitors and theour inability of the Company to recruit and
retain required sales and marketing staff with the needed skills.
OEMs. We intend to leverage the flexibility of the NuWaveArchitecture to
integrate our products into OEMs' product lines in traditional LAN markets and
emerging markets such as SAN/NAS, Video, Voice over IP and others. OEMs can
exercise significant influence in the development of our target markets because
they use our products to deliver complete, factory-configured solutions that are
installed and field-serviced by the OEM's technical support organizations. In
1999,2000, we entered into agreements with a number of OEMs to introduce new products
and develop new markets. Our sales personnel, in addition to traditional
marketing and sales functions, are responsible for initiating and developing
relationships with OEM leaders in the Company'scomputer networking industry. While we do
not generally obtain long-term purchase commitments from OEM customers, we enter
into contracts with OEM customers to establish the terms and conditions of sales
made pursuant to orders from OEMs. Further, the OEM customers typically provide
us with a rolling forecast up to three months in advance of shipment.
VARs, System Integrators and marketing strategyDistributors. We have existing relationships with a
number of distribution channel customers due to our experience with our legacy
products. Our technically trained staff is responsible for its Layer 3 Fast
Ethernetinitiating and
gigabit Ethernet switching products will emphasize on developing an
OEMrelationships with these customers by providing insight into the
evolution of the network environment and facilitating the development and
deployment of optimal network solutions, domestically and internationally.
In 2000, 74% of our sales were in North America, with the balance of the sales
to Asia and Europe representing 15% and 11%, respectively. We have experienced
fluctuations in the volume of activity with individual customers and changes in
our customer base and expect such fluctuations and changes to continue. The loss
of a potentially lucrative market. The Company will continue its
commitment to support its existing basemajor customer, reductions of resellersa major order or delay in a major shipment
could adversely affect our business and seek new opportunities
in its reseller channels.financial performance.
5
RESEARCH AND DEVELOPMENT
The information in this section contains forward-looking statements describing
the Company'sour product development plans for 19992001 and beyond. The successful development
and introduction of new products is subject to a number of uncertainties,
including theour ability of the organization to recruit, train and retain adequate numbers of
professional engineers, successful design of proprietary application specific integrated circuitsASICs and computer
software, design, development and verification testing to confirm that the
products meet the Company'sour standards for quality, reliability and interoperability,
availability of components, pricing actions by competitors that may render it
unprofitable to introduce the products, unanticipated technical obstacles or
delays, and the emergence or wide acceptance of new technologies that could
render theour products obsolete.
5
The Company has developed certain core competencies applicableOur future success is dependent on our ability to multiple
network technologies suchenhance current products and
to design and produce new products that are at the forefront of technological
advancements. We work closely with our OEM partners, reseller customers and
research organizations to identify new solutions to meet the current and future
needs of enterprises and Internet service providers. We design our products
consistent with industry standards to ensure interoperability, and we intend to
support emerging standards in accordance with our product strategy.
We designed the NuWaveArchitecture based on common ASICs and management software
to serve as FDDIthe foundation of all new models in our product line. This enables
us to reduce product design and Ethernet,development cycles providing for fast time to
market for new products and features.
As of December 31, 2000, we employed 51 personnel in research and development,
including ASIC design, software development and client/server
operating system driversquality assurance. We also
engage third party consultants to expedite development efforts of certain
projects when appropriate. In 2000, our research and development expenses were
$11.2 million.
In October 2000, we opened a new software modules. The Company believes its focus on
core competencies suchdevelopment center at Research
Triangle Park in Durham, North Carolina. This location enables us to tap into
the pool of software engineering talent in the Durham area and to extend our
abilities to deliver superior partner and customer care. Software as these has been, andwell as
hardware development will continue to be conducted at our research center in
Bohemia, New York, in close coordination with our new software development
center in North Carolina.
CUSTOMER SERVICE AND SUPPORT AND QUALITY ASSURANCE
Our customer service and support organization maintains and supports products
sold by our sales force to end users and provides technical support to our VARs
and OEMs. Generally, our VARs and OEMs provide installation, maintenance and
support services to their customers, and we assist them in providing such
support. Questions and problems from end users, VARs and OEMs can be handled via
telephone, e-mail and facsimile. Our website is continually updated to enable
our customers to download the latest technical information and tips, along with
firmware, software and product manuals. This same group also conducts new
product Beta testing to ensure that our new products will meet customer
requirements when those products reach the marketplace.
Our quality assurance organization is tied to our customer service and support
organization in order to maintain its focus on satisfaction of customer
requirements and expectations. This group conducts network testing, OEM and
third party testing, problem reproduction and resolution and validation of
manufacturing tools in order to ensure compliance with industry standards,
product performance and interoperability with our customer's existing equipment.
MANUFACTURING
Our manufacturing operations consist of procurement of components and the
assembly, testing and quality assurance of finished goods for shipment to
customers. We purchase the components of our products, including our proprietary
ASICs, circuit boards, integrated circuits and power supplies, from third
parties. NEC is the sole manufacturer of our ASICs. We monitor the quality of
the purchased components through quality assurance procedures at our
headquarters in Fremont, California.
In January 2000, we entered into an agreement with Solectron Corporation, a
major contract manufacturer with global capabilities, located in Milpitas,
California, to assume all manufacturing responsibilities for NPI. This
arrangement enables us to manufacture our products near our North American
customer base and accommodate significant factorincreases in its competitive abilityproduction volume, if
necessary. Under this contract, Solectron purchases the components for our
products and assembles them to bring emerging network solutionsour specifications. This further enables us to
leverage Solectron's established relationships with suppliers to procure
materials at reduced costs and mitigate potential supply constraints. We also
use Solectron's extensive resources and expertise to assist us in manufacturing
engineering, repair and product testing, and burn-in. We continue to perform all
component and supplier qualification, quality assurance and document control at
our facilities.
6
We select suppliers on the basis of technology, manufacturing capacity, quality
and cost. Our agreement with Solectron affords us the opportunity to have
redundant manufacturing locations for each component. Nevertheless, our reliance
on third party suppliers and manufacturers involves risks, including possible
limitations on availability of products due to market abnormalities, lack of
control over delivery schedules, fluctuating manufacturing yields, and high
production costs. The inability of our suppliers to deliver products of
acceptable quality and in a timely manner.
Network Bandwidth Switching. The majoritymanner, or our inability to procure adequate
supplies of the Company's research and
development efforts has been and will continue to be on developing its NuWave
family of products. The Company is designing a range of high-density ASICs that
provide the Company's NuWave architectural platform with a 64 Gbps switching
fabric for gigabit and stackable Layer 2 and 3 10/100/1000 Ethernet switches.
Through its acquisition of NetVision Corporation in April 1997, the Company
obtained a team of technologists experienced in very high bandwidth switching
architecture, specifically in Layer 3 gigabit Ethernet switching technology. The
Company has also implemented its Distributed Memory Switching Architecture and
ASIC expertise inour products based on both FDDI and Fast Ethernet. Semiconductor
foundries, such as NEC, UMC, MMC and ATMEL, manufacture the Company's ASIC
components.
System Architecture Interfaces and Network Protocol Software. Through the
development of its collection of 100 Mbps network adapters, the Company has
gained expertise in hardware and software support for a variety of standard and
proprietary system bus architectures and network operating systems.
Server Bandwidth Optimization. The Company has designed its network operating
system software to address the specific characteristics of each type of adapter
and server architecture. This design provides optimal network bandwidth to high
power servers. As new versions of network operating systems are introduced, the
Company plans to devote development efforts not only to maintain compatibility
with existing versions but also to take advantage of enhanced features and
performance improvements.
As of December 31, 1998, the Company employed 38 personnel in research and
development. The Company has developed products designed for integration in the
proprietary systems of major networking companies including Sun Microsystems,
Newbridge Networks, Network Associates, NetFRAME, NCR, and 3Com. The Company
believes that its relationships with these network technology leaders establish
credibility with end-user customers who demand interoperability of their
networking devices. The Company has active development relationships with
Novell, Microsoft and Sun Microsystems for advanced products for NetWare,
Windows NT and Solaris, respectively.
MANUFACTURING
Throughout 1998 and in the early stages of 1999, the Company partnered with an
established turnkey manufacturer in the Silicon Valley to produce and ship the
Company's FDDI products. The Company also has an in-house manufacturing team in
Taiwan with recently purchased state-of-the-art manufacturing equipment, which
produced its Ethernet products. In the first half of 1999, the Company intends
to transition its entire manufacturing operations to Taiwan. The team of 51
full-time personnel in this manufacturing facility is highly experienced in
advanced manufacturing and test engineering in ongoing reliability/quality
assurance. The manufacturing operation is ISO certified. Dependent upon volumes
in 1999, the Company expects to reduce the cost of products substantially as a
direct result of this transition.
Certain key components used in the Company's products such as ASICs,
microprocessors and controller chips, media interface components and power
supplies are currently available only from single or limited sources. The
Company also has developed proprietary ASICs used in existing products and in
the NuWave Architecture, which will be sourced from a single foundry. While the
Company believes it would be able to obtain alternative sources for key
components and for the ASICs, difficulty in obtaining these supplies could have a material adverse effect on the Company's results of operations.our business,
financial condition or operating results.
COMPETITION
The Company believesmarkets in which we compete are intensely competitive and are characterized
by frequent new product introductions, changing customer preferences and
evolving technology and industry standards. Our competitors continue to
introduce products with improved price/performance characteristics, and we must
do the same to remain competitive. Increased competition is likely to result in
significant price reductions and may result in lower than expected revenues or
profit margins, any of which could harm our business, financial condition or
operating results.
Many of our current and potential competitors have significantly broader product
offerings, greater financial, technical, marketing and other resources, and
larger installed bases of customers than we do. While the Layer 3 switching
market is still in the early stage of development, competition in this market
comes from companies such as Extreme Networks, Foundry Networks, Nortel
Networks, Cisco Systems, 3Com and others. We believe that this market will
consolidate over time and that this consolidation could adversely affect our
ability to compete effectively. A number of companies developing technologies
similar to ours have been acquired by our larger competitors. These acquisitions
are likely to permit our competitors to devote significantly greater resources
to the development and marketing of new competitive products and the marketing
of existing products to their customer bases. We expect that competition will
increase as a result of these and other industry consolidations and alliances.
Some of our current and potential OEM customers could develop products
internally that would replace our products. The resulting lost sales of our
products to any such OEMs, in addition to the increased competition presented by
these OEMs, could have a material adverse effect on our business, financial
condition and operating results.
We believe that the principal competitive factors in the networkingLAN equipment market
include the completeness of product offerings, product quality, price and
performance, adherence to industry standards, the degree of interoperability
with other networking equipment and time to market for new products. The computer networking industry is intensely competitive and is significantly
affected by product introductions and market activities of industry
participants. A number of competitors offer products whichWe believe
that we compete both in
price and functionality, favorably with one or more of the Company's products.
Many of the Company's current and potential competitors have significantly
broader product offerings, greater financial, technical, marketing and other
resources, and larger installed bases than the Company. Increased
competition could result in price reductions, reduced margins and loss
6
of market share, all of which would materially adversely affect the Company's
business, operating results and financial condition. In a declining market, the
Company's FDDI network adapters compete on a product-by-product basis with
products offered primarily from Interphase, SysKonnect and 3Com. In a maturing
market, the Company's Layer 2 Fast Ethernet switching solutions compete with
products offered by Cisco, 3Com, Nortel, Cabletron and others. A number of
companies developing similar technologies have been acquired by the Company's
larger competitors. These acquisitions are likelyrespect to permit the Company's
competitors to devote significantly greater resources to the development and
marketing of new competitive products and the marketing of existing products to
their installed bases. The Company expects that competition will increase as a
resulteach of these and other industry consolidations and alliances. These
competitive pressures could adversely affect the Company's business and
operating results. The Layer 3 Fast Ethernet and gigabit switching markets are
in the early stages of development with competition for these market coming from
relatively new market entrants such as Extreme Networks and Foundry Networks, as
well as from the more established companies such as Nortel, Cisco and 3Com. The
Company believes that this market will consolidate over time and that this
consolidation could adversely effect the Company's ability to compete
effectively with its larger competitors.
PROPRIETARY RIGHTS
The Company'sfactors.
INTELLECTUAL PROPERTY
Our success is dependent upon itsour proprietary technology. To date,The core of our
proprietary technology is the Company has reliedNuWaveArchitecture and our ASICs. We rely
principally upon patent, copyright, trademark and trade secret laws to protect itsour
proprietary technology. The CompanyWe generally entersenter into confidentiality or license
agreements with its employees, distributors,suppliers, customers and potential customers,
limiting or prohibiting their disclosure of our proprietary information.
Although we hold five U.S. patents covering technology of our legacy products,
we do not own any patents or have pending patent applications associated with
our NuWaveArchitecture.
We seek to protect our proprietary rights and limitsother intellectual property
through a combination of copyright, trademark and trade secret protection, as
well as through contractual protections such as proprietary information
agreements and nondisclosure agreements. We also believe that factors such as
the technological and creative skills of our personnel, new product
developments, frequent product enhancements and reliable product maintenance are
essential to establishing and maintaining a technology leadership position.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of the
source code to itsour software, documentation and other proprietary
information. The Company has
been issued one U.S. patentDespite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and has filed three additional U.S. patent
applications covering certain aspectsuse our products or
technology. Monitoring unauthorized use of its technology. The process of
obtaining patents can be expensive,our products is difficult, and there
can be no assurance that the patent applicationsteps taken by us will resultprevent misappropriation of
our technology, particularly in foreign countries where the issuancelaws may not protect
our proprietary rights as fully as do the laws of patents, that any issued
patents will provide the Company with meaningful competitive advantages, or that
challenges will not be issued against the validity or enforceability of any
patent issued to the Company.
The Company has entered into patent license agreements relating to certain
technologies used in FDDI networks. The Company believes that the terms of such
licenses are comparable to those made available to other companies in the
networking industry. In addition, certain technology used in the Company's
products is licensed from third parties, generally on a non-exclusive basis.
These licenses generally require the Company to pay royalties and to fulfill
confidentiality obligations. Termination of such licenses could adversely affect
the Company's business and operating results.
The Company has agreed in certain cases to indemnify its customers for liability
incurred in connection with the infringement of a third party's intellectual
property rights. Although the Company has not received notice from any of its
customers advising the Company of any alleged infringement of a third party's
intellectual property rights, there can be no assurance that such
indemnification of alleged liability will not be required from the Company in
the future.United States.
7
EXECUTIVE OFFICERS *OFFICERS*
The executive officers of the CompanyNPI and their ages are as follows:
Name Age Position
- --------------------------------------------------------------------------------
William Rosenberger 49 President, Chief Executive Officer, and
Director
Wilson Cheung 35
Name Age Position
- --------------------- --- ------------------------------------------------------------
James Regel 58 President, Chief Executive Officer and Director
James Baker 55 Senior Vice President, Engineering, Chief Technical Officer
Joseph Botta 61 Vice President, Operations
Ronald Rutherford 53 Vice President, Worldwide Sales
James Williams 57 Senior Vice President, - Finance and Administration, Secretary,
Treasurer and Chief Financial Officer
Jerry McDowell 53
James Regel joined NPI in August 2000 as President, Chief Operating Officer and
Director and became Chief Executive Officer in October 2000. From January 2000
to July 2000, Mr. Regel was Vice President - Marketing
James Sullivan 46of Worldwide Sales at Proxim, a
manufacturer of wireless networking products. Mr. Regel joined Proxim in January
2000 through Proxim's acquisition of Wavespan, a high speed wireless networking
company, where he served as Chief Executive Officer from June 1999 to January
2000 and Senior Vice President -of Sales Robert Zecha 41 Vice President - Researchfrom March 1997 to June 1999.
Previously, he held executive positions in sales and Development
Mr. Rosenbergermarketing at Verilink
Corporation, Network Equipment Technologies and Rolm Corporation.
James Baker has served as Senior Vice President of Engineering and Chief
Technical Officer of NPI since December 2000. Prior to joining NPI, Mr. Baker
was the Chief Operating Officer of a division of ParkerVision, Inc., a
manufacturer of RF products for wireless communications. From August 1997 to
April 1999, Mr. Baker was Vice President Chief Executive Officer andof Engineering at NetWave Technologies,
a director of the Company since July 1998.wireless local area network equipment manufacturer, which was acquired by Bay
Networks. From JanuaryJune 1996 to June 1998,July 1997, Mr. RosenbergerBaker was President and Chief
Executive OfficeOperating Officer of NetAccess,MediaWise Networks, an Ethernet switching company. Prior to
June 1996, Mr. Baker was President of Loral Data Systems, a manufacturer of
network switching products, which is a division of Loral Corporation.
Joseph Botta has been Vice President of Operations of NPI since June 1999.
Previously, Mr. Botta was the Principal Owner of Silver Creek Investments. From
March 1997 through November 1997, he was Vice President of Operations at ACT
Networks, Inc., a wide area networking equipmentnetwork access products manufacturer. From October 19951988 to
December 1995, Mr.
Rosenberger was Vice President of sales and business development for NetVision
Corporation, an Ethernet switching company. From March 1993 to June 1995, Mr.
Rosenberger was General Manager of ACSYS, Inc., a networking equipment
manufacturer. Prior to March 1993, Mr. Rosenberger was President and Chief
Executive Officer of Netronix, Inc., a networking hardware designer and
manufacturer.
Mr. Cheung has served as an executive officer since October 1998. Preceding the
appointment to this office, Mr. Cheung1997, he held various management positions since
joining the Company in July 1995. Prior to joining the Company, Mr. Cheung wasat Whittaker Corporation, a financial analyst at Sybase Inc. from July 1994 through June 1995. From 1992
through June 1994, Mr. Cheung held various senior financial analyst positions at
Raychem Corp. Mr. Cheung was also a senior auditor at Coopers & Lybrand.
Mr. McDowell has served in executive positions and Boards of Directors for
several data communications research and manufacturing firms prior to joining
the Company in November, 1998. He was a co-founder, President andnetwork
company, most recently serving as Executive
Director of Research of The Robert Frances Group, Vice President of Marketing
and Business Development at Objective Systems Integrators and Senior Director of
Marketing and Business Development at Boole & Babbage. Prior to those positions,
Mr. McDowell served in executive and management positions at Dataquest, The Meta
Group, Wang Laboratories Paradyne and others.
Mr. Sullivan has served as an executive officer since joining the Company in
July 1997. Prior to joining the Company, he was with Novell, Inc. from July 1995
to July 1997 where he held several sales management positions, including Vice
President of Worldwide OEM Sales and Senior Director of North American Channel
Sales. Prior to joining Novell, he held various sales positions with Arrow
Electronics, Canon and Lanier Business Products.
Mr. ZechaOperations.
Ronald Rutherford has served as Vice President of Research and DevelopmentWorldwide Sales since April
1997.October
2000. From JanuaryMarch 1997 to April 1997,May 2000, Mr. ZechaRutherford served as Vice President of
Sales and Customer Support for the Communications Products Division of Harris
Corporation, a communications equipment company. Prior to his service at Harris
Corporation, Mr. Rutherford held executive positions in sales at Netrix
Corporation and Siemens.
James Williams has served as Senior Vice President of Finance and
Administration, Secretary, Treasurer and Chief TechnologyFinancial Officer of NetVision Corporation, an Ethernet switching company.NPI since
December 2000. From March 1999 to September 2000, Mr. Williams was Vice
President of Finance, Technology, Operations and Business Integration for
E*TRADE Group, a provider of online personal financial services. From November
19931997 to January 1997,February 1999, Mr. ZechaWilliams was a Vice President and Chief
Technology Officerfinancial consultant serving in the
capacity of NetVision Corporation. Mr. Zecha co-founded and held a Boardchief financial officer for a number of Director position with NetVision Corporation from November 1993 through
April 1997.high-tech companies. Prior
to November 1993,1997, Mr. Zecha held engineering management
positions at Standard Microsystems Corporation,Williams was Executive Vice President of Finance and Chief
Financial Officer of Systems Integrators, Inc., a networking company.supplier of software products
and integration systems for newspaper agencies worldwide.
* As of December 31, 19982000
8
EMPLOYEES
As of December 31, 1998 the Company2000, we employed 133 persons118 people, including 3851 in research and
development, activities, 51 in manufacturing and support, 2438 in sales, marketing and technical support, nine in manufacturing
operations and 20 in finance and administration. Approximately 70Of those employees, 19 were in
international locations. None of the
Company'sour employees are currentlyis represented by a labor union.
The Company
considers itsWe consider our relations with itsour employees to be good. The Company attempts to
maintain competitive compensation benefits, equity participation and work
environment policies to assist in attracting and retaining qualified personnel.
Competition for
employees in the Company'sour industry and geographical areaareas is intense, and there can be no
assurance that the Companywe will be successful in attracting and retaining such personnel.
ITEM 2. PROPERTIES
The Company'sOur principal executive offices are located in Milpitas,Fremont, California, and consist
of approximately 18,00022,500 square feet under a lease that will expireexpiring in October 2000. Additionally, the Company has2004. Our research and
development facilitiesfacility is located in Taiwan and Long Island, New York. The Company hasYork, whereby we occupy
approximately 24,100 square feet under a lease expiring in October 2007. In
addition, we also have a software development center at Research Triangle Park
in Durham, North Carolina. We have international sales offices in the
Netherlands Singapore, and Taiwan. The Company believesTaiwan, as well as domestic sales offices in various states,
including California, Colorado, Illinois, Massachusetts, Virginia and Florida.
We believe that itsthese existing facilities and equipment are generally adequate to meet its immediate
and foreseeable needs.for the purposes for
which they are currently used.
ITEM 3. LEGAL PROCEEDINGS
ThereFrom time to time, we may be involved in litigation relating to claims arising
out of our operations. As of the date of this Annual Report, we are nonot a party
to any legal proceedings that are expected, individually or in the aggregate, to
have a material pending legal proceedings.adverse effect on our business, 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 year ended December 31, 1998.2000.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company'sOur Common Stock is traded in the over-the-counter market on the Nasdaq National
Market. As of March 5, 1999,27, 2001, there were approximately 4,000120 stockholders of
record. The following table sets forth, for the fiscal periods indicated, the
high and low closing prices for the Common Stock, all as reported by Nasdaq.
19961998 High Low
----------------------------------------------------------------
First Quarter $ 14.75 $ 10.25
Second Quarter 18.63 13.00
Third Quarter 16.63 12.25
Fourth Quarter 17.75 14.63
1997
----------------------------------------------------------------
First Quarter $ 20.88 $ 8.63
Second Quarter 10.94 6.50
Third Quarter 7.94 5.38
Fourth Quarter 7.25 4.94
1998
----------------------------------------------------------------- ----------------------------- ------------------------ ------------------
First Quarter $ 8.69 $ 6.25
Second Quarter 6.94 3.75
Third Quarter 4.88 3.00
Fourth Quarter 4.88 2.31
The Company has1999
- ----------------------------- ------------------------ ------------------
First Quarter $ 7.25 $ 3.69
Second Quarter 19.38 5.75
Third Quarter 19.94 16.00
Fourth Quarter 47.75 18.88
2000
- ----------------------------- ------------------------ ------------------
First Quarter $78.50 $35.50
Second Quarter 30.75 14.06
Third Quarter 19.63 11.56
Fourth Quarter 16.44 6.00
We have never paid or declared any cash dividends. It is theour present policy of the Company to
retain earnings to finance the growth and development of the business and,
therefore, the Company doeswe do not anticipate paying cash dividends on itsour Common Stock in the
foreseeable future.
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31,
2000 1999 1998 1997 1996
1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------ ------------ ------------- ------------ ------------
(in thousands, except per share amounts)
Consolidated Statement of Operations Data:
Net sales $ 7,514 $ 10,231 $ 28,585 $ 34,798 $ 53,080
$ 47,144 $ 33,463
Cost of sales 9,144 9,410 17,250 25,341 28,590
24,690 17,507
------------------------------------------------------------------------------- -------- -------- -------- --------
Gross profit (loss) (1,630) 821 11,335 9,457 24,490
22,454 15,956
------------------------------------------------------------------------------- -------- -------- -------- --------
Operating expenses:
Research and development 11,233 7,803 11,485 9,757 8,570
4,811 3,473
Marketing and selling 10,672 6,437 6,010 13,242 11,849
7,319 4,361
General and administrative 4,749 3,503 3,234 3,982 3,378
2,226 1,618Restructuring expense 600 - - 3,662 -
Loss (gain) on sale of assets 620 (1,055) - - -
Acquired research and development in
process and product integration costs --- - - 6,462 13,732
-- --
Restructuring expense -- 3,662 -- -- --
------------------------------------------------------------------------------- -------- -------- -------- --------
Total operating expenses 27,874 16,688 20,729 37,105 37,529
14,356 9,452
-----------------------------------------------------------------------
Income (loss)-------- -------- -------- -------- --------
Loss from operations (29,504) (15,867) (9,394) (27,648) (13,039)
8,098 6,504
Interest income net7,262 908 1,505 1,680 1,745
2,236 577
-----------------------------------------------------------------------
Income (loss)-------- -------- -------- -------- --------
Loss before income taxes (22,242) (14,959) (7,889) (25,968) (11,294) 10,334 7,081
Provision for (benefit from) income taxes --- - - (3,526) 608
3,617 1,416
------------------------------------------------------------------------------- -------- -------- -------- --------
Net income (loss)loss $(22,242) $(14,959) $ (7,889) $(22,442) $(11,902)
$ 6,717 $ 5,665
=============================================================================== ======== ======== ======== ========
Net income (loss)loss per share:
Basic and diluted $ (1.56) $ (1.19) $ (0.64) $ (1.85) $ (1.01)
$ 0.60 $ 1.72
=======================================================================
Diluted $ (0.64) $ (1.85) $ (1.01) $ 0.57 $ 0.64
=============================================================================== ======== ======== ======== ========
Weighted average common shares:
Basic and diluted 14,224 12,584 12,281 12,154 11,760
11,147 3,302
=======================================================================
Diluted 12,281 12,154 11,760 11,736 8,906
=======================================================================
December 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
Balance Sheet Data:
Working capital $26,070 $34,439 $54,997 $63,269 $55,720======== ======== ======== ======== ========
December 31,
2000 1999 1998 1997 1996
- ---------------------------------------------- ------------ ------------ ------------- ------------ -------------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and
short-term investments $ 96,001 $ 9,715 $ 23,351 $ 30,465 $ 45,873
Working capital 105,072 12,565 26,070 34,439 54,997
Total assets 115,714 20,852 35,549 45,889 71,434 70,111 65,209
Stockholders' equity 110,904 17,909 30,972 38,679 59,857
65,709 57,758
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following forward-looking statements are made in reliance upon the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
future events described in such statements involve risks and uncertainties,
including:
o the timely development and market acceptance of our new products;
o our ability to develop and deliver products free from undetected hardware
and software errors;
o the market demand by customers for the Company'sour new and existing products,
including demand by OEM customers for custom products;
o competitive actions, including pricing actions and the introduction of new
competitive products, that may affect the volume of sales of the Company'sour products;
o uninterrupted supply of key components, including semiconductor devices and
other materials, some of which may be sourced from a single supplier;
o uninterrupted service by subcontractors;contract manufacturers;
o theour ability of the Company to recruit, train and retain key personnel, including engineers
and other technical professionals;
o the development of new technologies rendering our existing technologies and
products obsolete;
o the economies of countries where the Company'sour products are distributed; and
o general market conditions.
In evaluating these forward-looking statements, consideration should also be
given to the Business Risks discussed in a subsequent section of this annual
report.
OVERVIEW
We were incorporated in California in March 1989 and were reincorporated in
Delaware in 1994. Our initial business focus was on networking products based on
fiber distributed data interface, or FDDI, technology, and we obtained a
significant share of the market for FDDI adapter products in the early 1990s.
Because the market for FDDI-based products declined significantly beginning in
1995, we developed a new line of Layer 2 Fast Ethernet switching products that
we first shipped in early 1996. By 1998, the market for our FDDI-based products
and our Layer 2 Fast Ethernet products (together, our "legacy products")
declined substantially, and we committed nearly all of our resources to the
development of a new line of Layer 3 Gigabit Ethernet switches (collectively
"NuWave products") founded on our NuWaveArchitecture, which combines our
advanced design and our proprietary application specific integrated circuits, or
ASICs. We commenced limited commercial shipments of our first NuWave product in
December 1999 and volume shipments of all NuWave products in 2000. We anticipate
that substantially all of our revenues in future periods will be derived from
sales of NuWave products.
Cost of revenue is comprised principally of payments to our materials suppliers
and contract manufacturers, final assembly costs, costs associated with
manufacturing and quality functions, inventory management costs and certain
other product costs. We expect our gross profit to be affected by many factors,
including:
o declines in the average selling price of our products;
o fluctuations in demand for our products;
o the volume of products sold;
o the mix of products sold;
o the mix of sales channels through which our products are sold; and
o new product introductions both by us and our competitors.
Generally, we realize higher margins on sales to the reseller channel than on
sales to OEMs. Any change in the mix between the channels or the loss of a major
customer could adversely affect our gross margin, operating results and
financial condition. We experienced significant erosion in the average selling
prices of our legacy products. The average selling prices of our NuWave products
have decreased from their levels at introduction, and we anticipate that they
will decline in the future. Therefore, to improve our gross margins, we must
develop and introduce new products and enhancements on a timely basis. We must
also continually reduce our costs of production. As our average selling prices
decline, we must also increase our unit sales volume to maintain or increase our
revenue.
In transitioning from our legacy business to our NuWave business, we have
incurred significant losses in the past three years primarily reflecting
declining revenues of legacy products in conjunction with substantial
investments in research and development to bring NuWave products to market. The
losses continued through 2000 due to the failure of our NuWave products to
achieve significant market penetration and continuing high levels of research
and development expenses.
12
Although we expect revenues to increase to the extent that we broaden the
customer base for our NuWave family of products, we cannot assure you that such
revenues will exceed production costs and operating expenses in the same
periods.
See details of recent developments in Part I, Item 1.
RESULTS OF OPERATIONS
Net Sales
Net sales were $28.6, $34.8$7.5, $10.2 and $53.1$28.6 million in 1998, 19972000, 1999 and 1996,1998,
respectively. The sequential decrease in net sales from 1996 to 1998 was primarily attributed to decreasedthe winding
down of the legacy business throughout 1999 and 2000, as the demand for our
legacy products experienced rapid decline. The decrease in net sales in 2000 was
partially offset by volume shipments of NuWave products based onstarted in early 2000.
During the FDDI technology.second quarter of 2000, the software used in our NuWave products
displayed instability in certain network environments. This software instability
problem caused delay in shipments and product acceptance testing, reduced orders
from customers in the second quarter and negatively impacted our customer demand
in the third quarter and, to a lesser extent, the fourth quarter of 2000.
Consequently, total net sales in 2000 were substantially lower than originally
estimated.
We believe that the software instability issue we experienced during the second
quarter of 2000 has been resolved. However, software and hardware errors may
occur from time to time in new or enhanced products after commencement of
commercial shipments. These potential problems may adversely affect our future
operating results by causing delays in recognition of revenue and causing us to
incur significant warranty and repair costs, diverting the attention of our
engineering personnel from our product development efforts and causing delay or
loss of market acceptance of our products.
Net sales of FDDI products totaled $17.5 million in 1998, compared to $22.9 million
in 1997. Net sales of Fast Ethernet switching products remained relatively
consistent: net sales totaled $11.1 million in 1998 and $11.9 million in 1997.
Unit shipments of Fast Ethernet switching products increased slightly in 1998
primarily due to the introduction of the Fast Ethernet commodity-like products
in 1998. However, the increase was offset by the declining average unit sales
price due to price competition in the commodity-like products market.
Sales to OEM customers were $19.4, $22.0 and $30.5decreased to $4.8 million in 1998, 19972000 from $5.2 and 1996, respectively. As a percentage of net sales, shipments to OEM customers
represented 68%, 63% and 57% in 1998, 1997 and 1996, respectively. The balance
of sales was made to distribution channels. Distribution sales were $9.2, $12.8
and $22.6$19.4
million in 1999 and 1998, 1997respectively. Net sales to the reseller channel,
following the same trend, decreased to $2.7 million in 2000 from $5.0 and 1996,$9.2
million in 1999 and 1998, respectively. SalesWe expect to have a more evenly
proportioned mix of revenues from OEM and resellers in the future periods. Net
sales to customers in North America were $19.7, $25.8$5.6, $5.7 and $42.0$19.7 million in 1998, 19972000,
1999 and 1996,1998, respectively. The balance of net sales of $1.9, $4.5 and $8.9
million in 2000, 1999 and 1998, respectively, were to customers in Asia and Europe totaled $8.9,
$9.0Europe.
Gross Profit/Margin
We had a negative gross margin in 2000, compared to 8% and $11.1 million40% in 1998, 19971999 and 1996,1998,
respectively. The decreasenegative gross margin in sales to OEM customers and customers in North America in 1998
and 1997 reflected decreased shipments of FDDI products as discussed above. The
decrease in distribution sales as well as international sales2000 was primarily attributed to the
Company's refocusing its effortlower than expected sales volume and a one-time charge of $1.5 million to
strengthen OEM
relationships, weaknessprovide reserves for potential excess inventory. We expect our gross margin in
the Asian economies andfuture periods to improve from the maturity ofcurrent level to the extent sales volume
increases. The decrease in gross margin in 1999 compared to 1998 primarily
reflected the competitive pricing pressures on the Fast Ethernet products as
this market reached the commodity stage. In addition, the decline in general.
As the factors attributable to the decreaseproduction
volume of all legacy products resulted in sales continue to exist, the
Company does not expect noticeable growth in sales until the volume shipmentunder-utilization of the next generation Layer 3 gigabit-class switches, NuWave, commences in
mid-1999. The majority of the NuWave products are expected to be sold to OEM
customers.
Gross Profit/Margin
The gross margin in 1998 was 40%, compared to gross margins of 27%our manufacturing
facilities and 46% in
1997 and 1996, respectively. The gross margin in 1998 improved from 1997 due to
the absence of significant inventory charges recorded in 1997. However, the 1998
gross margin was below the historical level (prior to 1997) due to decreased
sales of higher-margin FDDI products, competitive pricing on the Fast Ethernet
switching products, and the introduction of the lower-priced Fast
Ethernet commodity-like products in 1998. The gross margin in 1997
was exceptionally low, which reflected a write-off of slow-
12
moving and obsolete inventories totaling $5.1 million and one-time charges
associated with the transfer of production of FDDI products to turnkey
manufacturers.
The Company expects that, prior to the introduction of the NuWave products in
mid-1999, the gross margin may decrease slightly from the 1998 level primarily
due to the declining sales of FDDI products and continued price competition. To
reduce manufacturing costs, the Company intends to terminate its turnkey
manufacturing model in the U.S. and relocate all manufacturing operations to its
facilities in Taiwan during the first half of 1999. This transition, in
conjunction with potentially higher margins of the NuWave products commencing
shipment in mid-year, is expected to yield a higher gross margin in 1999.excess overhead charges.
Research and Development
Research and development expenses were $11.5, $9.8$11.2, $7.8 and $8.6$11.5 million in 2000,
1999 and 1998, 1997 and 1996, respectively. As a percentage of the respective net sales,
expenses were 40%, 28% and 16%. Expenses in 1997 and 1996 were net of contract
funding of $217,000 and $556,000, respectively. No contract funding was received
in 1998. The increase in expenses in 1998 and 1997 was primarily attributed to
increased resources expended in the development of the Company's next generation
Layer 3 gigabit-class switches, NuWave. Significant expenditures, including
outside consultant fees and non-recurring engineering charges, were incurred to
develop the NuWave ASICs (Application-Specific Integration Circuits). In
addition, the Company incurred a one-time charge of approximately $500,000 in
the third quarter of 1998 in connection with the elimination of certain
non-critical personnel in research and development expenses
in an effort2000 compared to further
streamline operations.
The Company continues1999 was primarily due to invest a substantial amountthe hiring of its resourcesadditional engineers
and increased spending in professional fees and prototype expenses related to
enhancing existing products based on the NuWaveArchitecture and developing the NuWave products. However, the Company expectsnew
products and technologies. We expect that the research and development expenses will
gradually declinecontinue to increase in the future periods, as we believe that continued
investment in research and development activities is essential to achieve our
strategic objectives. The decrease in research and development expenses in 1999
from 1998 primarily reflected reduction in compensation, overhead costs and
project costs associated with the current level aftertermination of legacy product development,
including the divestiture of our research and development of the ASICs is completed and the volume shipment of the NuWave
products commencesoffice in mid-1999.Taiwan in
June 1999.
Marketing and Selling
Marketing and selling expenses were $6.0, $13.2$10.7, $6.4 and $11.8$6.0 million in 2000, 1999
and 1998, 1997respectively. The increase in marketing and 1996, respectively. As a percentage of the respective net sales, expenses
were 21%, 38% and 22%. The decrease inselling expenses in 19982000
compared to 1999 was attributedprimarily due to the
reductionincreased spending in staffadvertising, trade
shows and closure of regional sales officesother marketing activities in conjunction with the Company's restructuringlaunch of its businessNuWave
products. In addition, during the second half of 2000, we rapidly expanded our
sales organization by adding sales personnel across the U.S., in 1997. The restructuring effort wasorder to
effectively penetrate the reseller channel and seek additional OEM customers.
Beginning in alliance with the Company's strategylatter part of 1998 and continuing throughout 1999, we added
staff to focus on the broadening of its OEM
customer base, which required less sales and marketing resources. The increasegroup, including technicians and senior
management, and launched advertising campaigns to draw OEM interest, which was
reflected in expenses in 1997 primarily reflected an overall increase in payroll and
overhead costs as a result of the acquisition of NuCom and an escalated effort
to expand the existing distribution channel through mid-1997.
The Company expects to increaseincreased spending in marketing and selling activities in
1999 in ordercompared to launch the NuWave product line and to establish a leadership
presence within the industry through various advertising campaigns, direct
mailings and trade show exhibitions.1998.
13
General and Administrative
General and administrative expenses were $3.2, $4.0$4.7, $3.5 and $3.4$3.2 million in 2000,
1999 and 1998, 1997 and 1996, respectively. As a percentage of net sales, expenses were 11% for
both 1998 and 1997 and 6% for 1996. The decrease in expenses in 1998 reflected a
reduction in payroll costs as a result of the restructuring in 1997 and a
diminished utilization of outside consultants. The increase in expenses in 1997
from 1996 reflected additional payroll and other overhead costs associated with
the acquisition of NuCom. The Company expects general and administrative expenses
in 2000 compared to 1999 was primarily attributed to remain relatively consistent with 1998.
Acquired Researchincreased professional fees
incurred for recruiting activities, investor relations and Developmentinformation
technology related services. In Process and Product Integration Costs
In April 1997,addition, we incurred higher insurance expenses
starting the Company acquired NetVision Corporation, a company
specializing in LAN switching and gigabit Ethernet technologies. The Company
expensed $6.5 millionfourth quarter of acquired research and development in process2000 as a result of the acquisition. In March 1996, the Company acquired NuCom Systems,
Inc., a Taiwan-based company developing Fast Ethernet LAN switching products.
The Company expensed $13.7 million of acquired research and development in
process and product integration costs as a resultan overall tightening of the
acquisition. See Note 8liability insurance market. In 1999, we incurred higher professional fees, which
was the primary factor resulting in increased expenses in 1999 compared to 1998.
These professional fees included the engagement of Notesan investor relations firm
and increased fees paid to Consolidated Financial Statementsinformation system consultants to prepare our systems
for more detailsyear 2000 issues.
Restructuring
In August 2000, we approved and announced a plan to divest our manufacturing
facility in Taiwan. Solectron, our contract manufacturer, has agreed to
manufacture all of our products after the divestiture. The objective of this
divestiture is to reduce manufacturing overhead and improve gross margins by
utilizing Solectron's advantages in materials procurement and production
capacity. The divestiture plan consisted of terminating 57 employees in the
manufacturing and the general and administrative functions, selling
manufacturing equipment and closing the manufacturing facility. These actions
resulted in a restructuring expense of $600,000, which included $550,000 for
severance and $50,000 for facility related charges. As of December 31, 2000, we
have paid $410,000 in total for severance and facility related charges. We
completed the divestiture in the first quarter of 2001.
Loss (gain) on Sale of Assets
During the fourth quarter of 2000, we recorded a net loss on sale of assets of
$620,000 in connection with the acquisitionsclosure of the manufacturing facility in Taiwan
discussed above. 13
Restructuring
In the third quarter of 1997, the Company incurred a charge of $3.7 million for
the restructuring of its business. The restructuring included a reduction in
work force, closure of certain sales and manufacturing facilities, retirement of
impaired assets and write-off of goodwill associated with the acquisition of
NuCom. The CompanyJune 1999, we completed the restructuringsale of our research and
development facilities in Hsin-chu, Taiwan, and recorded a gain of $1,055,000,
net of payments of broker fees and severance of $216,000. We divested this
research and development facility to reduce our investment in the second quarterlegacy
products and to focus our resources on the commercialization of 1998.
See Note 9 of Notes to Consolidated Financial Statements.NuWave products.
Interest Income
Interest income was $7.3 million in 2000, compared to $908,000 and $1.5 million
in 1998, compared to $1.7 million1999 and 1998. The increase in 1997 and
1996. The decreaseinterest income in 2000 was primarily due to a lowernet
increase in the aggregate balance of cash, cash equivalents and short-term
investments, of which approximately $165 million was received in 1998.March 2000 from
our follow-on public offering. The Company maintained a
comparable return on investmentdecrease in interest income in 1999 from 1998
was primarily due to the declining balance of $1.7 million in 1997 compared to 1996,
despite a lower invested fund balance in 1997. This higher rate of return
reflected a shift fromcash, cash equivalents and
short-term investments in tax-exempt securities to
taxable corporate securities in mid-1997.throughout 1999 and 1998.
Income Taxes
The CompanyWe did not record a tax benefit associated with the net loss incurred in 2000,
1999 and 1998, as we deemed that it was more likely than not that the realization of deferred
tax assets is deemed uncertainwill not be realized based on evidence currently available and, accordingly, a
full valuation allowance has
beenwas provided. During 1998, the Companywe received an income tax
refund of $4 million as a result of the carryback claim of the 1997 net
operating loss to offset net income recognized in 1995 and 1994. The related tax
benefit was fully recognized in 1997.
Recent Accounting Pronouncement
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires an entity to recognize all derivatives
as either assets or liabilities on the balance sheet and measure those
instruments at fair value. In June 2000, SFAS No.133 was amended by SFAS No.
138, which amended or modified certain issues discussed in SFAS No. 133. We will
adopt SFAS No. 133 and SFAS No. 138 during the year ending December 31, 2001. To
date, we have not engaged in derivative or hedging activities. The Company's effective tax rate for 1997adoption of
SFAS No. 133 and 1996 was a benefitSFAS No. 138 will have no material impact on our results of
13.6% and a
provision of 5.4%, respectively. The effective tax rate for 1997 reflected a net
loss and was reduced by a full valuation allowance provided against deferred tax
assets. The effective tax rates for 1997 and 1996 excluded the charges of
acquired research and development in process, which are non-deductible for
income tax purposes.operations or financial condition.
14
Euro Conversion
The Company hasWe have a wholly ownedwholly-owned subsidiary in the Netherlands, which is one of the 11
European countries participating in the adoption of a common currency, the Euro,
on January 1, 1999. Following the introduction of the Euro, the legacy currency
in each participating country remains as legal tender until January 1, 2002.
During the transition period, either the Euro or the legacy currency may be used
to pay for goods and services. Beginning January 1, 2002, participating
countries will issue new Euro-denominated bills and coins, and the legacy
currency will no longer be the legal tender for any transactions after July 1,
2002.
The Company'sOur subsidiary in the Netherlands is a sales office for the entire European
region. Sales made to all European countries are denominated in US dollars.
Expenses incurred by this subsidiary are currently paid in guilders, the legacy
currency. In 1998, salesSales to all European customers accounted for 11%, 14% and 10% of the Company'sour
total sales in 2000, 1999 and 1998, respectively; and 6% of the Company'sour total operating
expenses in 2000, 1999 and 1998 were attributableattributed to this subsidiary. Due to the
immateriality of expenses of the Netherlands subsidiary relative to the Company'sour
operations as a whole, the
Company believeswe believe the Euro conversion will not have any
significant impact to the
Company'sour results of operations during and after the transition
period.
Year 2000 Compliance
Many computer systems were designed using two digits rather than four digits to
define a specific year. Thus as the Year 2000 approaches, the improper
identification of the year could result in system failures or erroneous
calculations. To address this issue, the Company is conducting a program (the
Program) to assess and address Year 2000 issues for its products, information
systems, operational infrastructure, and suppliers.
The Company has completed an assessment of its current and installed base of
products. The Company believes that substantially all products manufactured on
or after August 1, 1997 are Year 2000 compliant, with the exception of the EIFO
family of switches, which sold minimally in 1997 and 1998. For the older
products and the EIFO products, which are deemed not in compliance, the Company
believes they will continue to perform all essential and material functions
after the year 2000; but in limited circumstances, they may incorrectly display
or report the date within the network management software. Given that the
installed base of non-compliant products has diminished as time elapsed and that
the non-compliant products will perform their standard functions, the Company
expects most of its end-users will not have issue with the Company's products in
the year 2000.
14
The Company has substantially completed its assessment and remediation of its
information systems. With the recent implementation of an ERP (enterprise
resource planning) and standardization of its network and desktop applications
completed in 1998, the Company believes its information systems in its
headquarters are in compliance with year 2000. Similarly, the Company's remote
locations, in New York and in the Netherlands, have completed an update of its
information systems and are also believed to be in compliance. The Company's
manufacturing facility in Taiwan is in its final stages of upgrading its
information systems, including ERP, and is expected to be in compliance by June
1999.
In 1998, the Company purchased and put into operation a new SMT (surface mount
technology) line in its manufacturing facility where substantially all of its
manufacturing will be performed in 2000 and beyond. Certification from the
manufacturer of the equipment has not yet been received. However, due to the
newness of the equipment, the Company believes that embedded chips in this
equipment are likely to be year 2000 compliant. The Company's telecommunication
systems, security system, electrical power system and other mission critical
systems in its operational infrastructure in all locations are currently being
assessed for compliance. Completion of this phase of the Program is expected in
June 1999.
The Company is conducting a survey of all its suppliers and third parties for
their year 2000 readiness and is expected to complete this assessment by June
1999. The Company is currently developing a plan to address circumstances of
non-compliance of a supplier or third party.
A contingency plan is being established and is expected to be completed by June
1999. As the Company's Program is substantially complete, the incremental cost
to fully complete the Program in 1999 is expected to be less than $100,000.
Despite the Company's efforts (1) to identify the Year 2000 compliance of its
products and the effects of any non-compliance, (2) to assess and mitigate
non-compliance of its information systems and its operational infrastructure,
and (3) to address suppliers readiness, the Company cannot be certain that all
areas have been identified or that the solutions implemented to address
non-compliance will be successful. There remains a risk that the failures and
difficulties encounter in the Program may disrupt operations and cause material
adverse effects on the Company's result of operations and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $26.1 million and $34.4 million at December
31, 1998 and December 31, 1997, respectively, and the current ratio (ratio of
current assets to current liabilities) was 6.7 to 1 and 5.8 to 1, respectively.
The aggregate balance of cash, cash equivalents and short-term investments which decreased to $23.4was
$96 million at December 31, 1998 from $30.52000, compared to $9.7 million at December 31, 1997,1999.
The increase of $86.3 million was primarily due to the net proceeds of $165
million received from our follow-on public offering of 2,875,000 shares of
common stock completed in March 2000, partially offset by cash used in financing
our operations, capital expenditures and the common stock repurchase program.
Net cash used in operating activities in 2000 was $26 million, which was
primarily attributed to finance the Company'sour net loss of $22.2 million and increases in accounts
receivable and inventories of $1.1 million and $6.8 million, respectively,
partially offset by depreciation and amortization of $2.5 million and increases
in accounts payable and accrued liabilities of $1.9 million in total. We expect
negative cash flows from operations and
capital expenditures.to continue until we realize operating
income. In 1998,1999, net cash used in operating activities was $4.2$13.7 million, which
was principally attributed to the net loss for the year of $7.9$15.0 million, partially offset by
an income tax refund of $4 million. In 1997, net
cash used in operating activities was $6.9 million, which was attributed to the
net loss for the year of $22.4 million, partially offset by non-cash charges of
$12.1 million in total and a decrease in inventoriesaccounts receivable of $6.8$3 million.
Our capital expenditures totaled $3.8 million in 2000, which included
approximately $640,000 of leasehold improvements and furniture and fixtures
added to the new research and development facility in Long Island, New York. The
Company expects the deficiencyrelocation to this new research and development facility was completed in
cash flow from operations to continue until
after the volume shipmentNovember 2000. The balance of the NuWave products startscapital expenditures in mid-19992000 was primarily
related to purchases of test equipment and overall
sales begin to improve.
The Company'srelated software for research and
development activities. In 1999, capital expenditures totaled $2.6 million, and $2.3 million in 1998
and 1997, respectively, and wereof
which approximately $650,000 was related to purchases of equipment used in
production and development activities and other computer software and equipmentcapital expenditures for the
upgradecorporate headquarters in Fremont, California.
In 2000, our Board of Directors approved a common stock repurchase program,
pursuant to which we are authorized to repurchase up to five million shares of
our common stock. As of December 31, 2000, we have repurchased 3,485,000 shares
of our common stock with a total purchase price of approximately $53.7 million.
The common stock repurchase program may take up to one year to complete, and enhancementwe
expect to use our capital resources in such repurchase.
On March 31, 2001 we entered into a series of the information systems. In 1999,related agreements with
FalconStor, Inc. ("FalconStor"), a privately held company, pursuant to which the
Company planspurchased Series C Preferred Stock of FalconStor having an aggregate
price of $25,000,000 and obtained an exclusive option to incur capital expendituresmerge with FalconStor.
See more details in Part I, Item 1 of approximately $1.3 million.
The Company'sthis report.
Our principal sources of liquidity are itsour cash, cash equivalents and short-term
investments that are expected to be used for general corporate purposes,
including expansion of operations and capital expenditures. We may also use
these capital resources to acquire or invest in businesses, technologies,
products or services that are complementary to our business. From time to time
we have discussed potential strategic acquisitions and investments in third
parties. Other than as disclosed in this Report, we currently have no agreements
or commitments regarding any acquisitions or investments. The CompanyIn addition to our
cash, cash equivalents and short-term investments, we also hashave a $5 million
revolving bank line of credit, agreement, which provides for borrowings up to $5 million, none of which has
been drawn down. The Company was in compliance with all financial covenantsexpires on June 1, 2001, and is renewable
on an annual basis. Borrowings under the line-of-credit agreement. The Company believesline of credit bear interest at the
bank's prime rate. There were no borrowings under the line of credit as of
December 31, 2000.
We believe that itsour current balance of cash, cash equivalents and short-term
investments and its borrowing
capacity arewill be sufficient to satisfy the Company'sour working capital and capital
expenditure requirements for at least the next 12 months.
15
BUSINESS RISKS
If any of the following risks actually occurs, our business, financial condition
or operating results could be materially adversely affected. The risks set forth
below are not the only risks facing us. Additional risks and uncertainties not
presently known to us, or that we currently see as immaterial, may also harm our
business.
If we fail to complete the proposed merger with FalconStor, our stock price may
decline and our business and operating results may suffer.
We have entered into an Option Agreement dated March 30, 2001 with FalconStor,
Inc. pursuant to which we have the right to merge with FalconStor on the terms
set forth in the form of merger agreement attached to the Option Agreement. The
merger agreement contains conditions which we and/or FalconStor must meet in
order to consummate the merger. In addition, the merger agreement may be
terminated by either FalconStor or us under specified circumstances. If the
merger is not completed for any reason, we may be subject to a number of risks,
including the following:
o depending on the reasons for termination, we may be required to pay a
termination fee of $3,000,000 in cash to FalconStor;
o the market price of our common stock may decline to the factors addressedextent that the
relevant market price reflects a market assumption that the merger will
be completed;
o many costs related to the merger, such as legal, accounting, financial
advisor and financial printing fees, have to be paid regardless of
whether the merger is completed; and
o there will be substantial disruption to our business and distraction of
our workforce and management team.
In addition, in response to the announcement of the merger, our customers may
delay or defer product purchase or other decisions. Any delay or deferral in
product purchase or other decisions by customers could harm our business,
regardless of whether the merger is completed. Similarly, our current and
prospective employees may experience uncertainty about their future roles with
our company until the merger is completed and our strategies with respect to our
employees are announced or executed. As a result, our ability to attract and
retain key management, sales, marketing and technical personnel may suffer.
Further, because the exchange ratio in the preceding sections, certain
characteristics and dynamicsmerger agreement fluctuates depending
on our assets at closing, we may be required to take actions designed to
preserve the value of our assets that could significantly hinder our ability to
continue our current business. In particular, we are evaluating strategic
alternatives with respect to the continuation of our Ethernet switch business
that could result in our exit from this business. We anticipate that the
announcement of the Company's markets, technologiestransactions with FalconStor and operations create risks toour potential exit from the
Company's long-term successswitch business will adversely affect our average selling prices. If such an
exit occurred, and to predictable
quarterly results. These risksif the proposed merger were not completed, there would be
substantial uncertainty about the nature of our future business.
We have a history of losses, expect future losses and cannot assure you that we
will also affectachieve profitability.
We have experienced net losses in each of the Company's abilitylast four fiscal years, and we
cannot be certain that we will realize sufficient revenue to achieve
the results anticipated by the forward-looking statements containedprofitability. We expect that we will continue to incur significant sales and
marketing and product development costs associated with our NuWave products.
Consequently, we will need to generate significantly higher revenue to achieve
and sustain profitability. To date, due in this report. The Company's quarterly results havelarge part to software instability
problem identified in the past variedsecond quarter of 2000, sales of our NuWave products
have not increased in accordance with our expectations. If we do not increase
sales of our NuWave products, we will continue to experience losses
indefinitely. In addition, we have discontinued production of the Layer 2 Fast
Ethernet and are expectedFDDI products that accounted for our historical revenues. We cannot
assure you that we will be able to sell all remaining inventories relating to
these products.
Substantially all of our future revenue depends on the commercial success of
products based on our NuWaveArchitecture, and if these products do not achieve
market acceptance, our business will be seriously harmed.
Substantially all of our future revenue depends on the commercial success of
products based on our NuWaveArchitecture. If these products fail to meet the
needs of our target customers, or if they do not compare favorably in the futureprice and
performance to vary
15
significantlycompeting solutions, our revenue will not grow. We cannot assure
you that these products will achieve market acceptance. Partly as a result of
software instability problems, we have made only limited sales of these
products, and it is possible that sales will not increase to levels necessary
for profitable operations. If products based on our NuWaveArchitecture do not
satisfy our customers' requirements or our target customers do not widely adopt,
purchase and successfully deploy our new products, our revenue will not grow
significantly, or possibly at all, and our business, financial condition and
results of operations will be seriously harmed.
16
If our products contain undetected software or hardware errors, we could incur
significant unexpected expenses and lost sales.
When LAN equipment is first released, it frequently contains undetected software
or hardware errors. We have experienced these errors in the past, including the
software instability issue that adversely affected our operating results in the
second quarter of 2000, our competitive position in the marketplace and our
customer relations, and we expect that errors will be found from time to time in
new or enhanced products after commencement of commercial shipments. The
software instability issue resulted in delayed shipments and lost sales, and any
future problems of this nature may materially adversely affect our business by
causing us to incur significant warranty and repair costs, diverting the
attention of our engineering personnel from our product development efforts,
causing significant customer relations problems or causing shipment delays as
the errors are corrected.
A number of factors could cause our quarterly and annual financial results to be
worse than expected, which could result in a decline in our stock price.
To support anticipated sales of our NuWaveArchitecture products, we plan to
increase our operating expenses to expand our sales and marketing activities,
broaden our customer support capabilities, develop new distribution channels and
fund increased levels of research and development. We base our operating
expenses on anticipated revenue trends, and a high percentage of our expenses
are fixed in the short term. Consequently, any delay or failure in generating
revenue could cause our quarterly and annual operating results to be below the
expectations of public market analysts or investors, which could cause the price
of our common stock to decline.
We may fail or experience a delay in generating revenue for a number of reasons.
Our customer agreements typically provide that the customer may delay scheduled
delivery dates and cancel orders within specified time frames without
significant penalty. Accordingly, we may incur significant expenses without
meeting corresponding anticipated revenue levels for a given period. In
addition, the timing of product releases, purchase orders and product
availability could result in significant product shipments scheduled for the end
of a quarter. Failure to ship these products by the end of a quarter may
adversely affect our operating results.
Our periodic revenue and operating results have varied significantly in the past
and may vary significantly in the future due to a number of factors, including:
o quality and reliability issues with our NuWaveArchitecture products such
as the timingsoftware instability problem that adversely affected our
operating results in the second quarter of 2000;
o market acceptance of and shipmentdemand for our NuWaveArchitecture products;
o decreased average selling prices of our products;
o unexpected product returns or the cancellation or rescheduling of
significant orders,orders;
o our ability to develop, introduce, ship and support new products and
product enhancements and manage product transitions;
o announcements and new product introductions or technological advances by the
Company and its competitors, market acceptance of new or enhanced versions of
the Company's products, changes in pricing policies by the Company and its
competitors, the mix of distribution channels through which the Company's
products are sold, the mix of products sold, the accuracy of resellers' and
OEM's forecast of end-user demand, theour competitors;
o our ability of the Companyto achieve cost reductions;
o our ability to obtain sufficient supplies of components for our products
for which we rely on sole or limited source components for the Company's
products, the ability of turnkey manufacturers to meet the Company's demand, and
general economic conditions. In response to competitive pressures or new product
introductions, the Company may take certain pricing or marketing actions that
could materially and adversely affect the Company's operating results. In the
event of a reduction in thesuppliers;
o increased prices of its products, the Company has committedcomponents we purchase;
o our ability to providing retroactive price adjustments on inventories held by its distributors,
which could have the effect of reducing marginsattain and operating results. In
addition, changes inmaintain production volumes and quality levels
for our products;
o the mix of products sold and the mix of distribution channels through
which the Company's productsthey are sold may cause fluctuations in
the Company's gross margins. The Company's expense levels are based, in part, on
its expectationssold; and
o costs relating to possible acquisitions and integration of its future revenue and, as a result, net income would be
disproportionately affected by a reduction in revenue.technologies
or businesses.
Due to the potential
quarterly fluctuation inforegoing factors, we believe that period-to-period comparisons of
our operating results the Company believes that
quarter-to-quarter comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indicatorsan indicator of our future
performance.
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards, frequent new product introductions and
short product life cycles. These changes can adversely affect the business and
operating results of industry participants. The Company's success will depend
upon its ability to enhance its existing products and to develop and introduce,
on a timely and cost-effective basis, new products that keep pace with
technological developments and emerging industry standards and address
increasingly sophisticated customer requirements. The inability to develop and
manufacture new products in a timely manner, the existence of reliability,
quality or availability problemsIntense competition in the productsmarket for LAN equipment could prevent us from
increasing revenue or their component parts,
failure by its foundry to fabricateachieving or sustaining profitability.
The market for local area network, or LAN, equipment is intensely competitive.
Our principal competitors include Alcatel, Bay Networks, Cabletron Systems,
Cisco Systems, Ericsson, Extreme Networks, Foundry Networks, Lucent
Technologies, Nortel Networks, Siemens, and supply proprietary ASICs, the failure to
obtain reliable subcontractors for volume production3Com. Many of our current and
testing of mature
products, or the failure to achieve market acceptance would have a material
adverse effect on the Company's business and operating results.
The markets in which the Company competes are also characterized by intense
competition. Several of the Company'spotential competitors have significantly broader
product offerings andsubstantially greater financial, technical, sales,
marketing and other resources, as well as greater name recognition and finishedlarger
installed customer bases, than we do. These competitors have developed or could
in the Company. These larger
competitors may also be ablefuture develop new technologies that compete with our products or render
our products obsolete. We believe that this market will consolidate over time
and that this consolidation could
17
adversely affect our ability to obtain higher priority for their products from
distributors and other resellers that carry products of many companies.compete effectively. A number of the Company's competitors were recentlycompanies
developing technologies similar to ours have been acquired which isby our larger
competitors. These acquisitions are likely to permit theseour competitors to devote
significantly greater resources to the development and marketing of new
competitive products and the marketing of existing products to their installed
bases. We expect that competition will increase as a result of these and other
industry consolidations and alliances.
To remain competitive, we must, among other things, invest significant resources
in developing new products with superior performance at competitive prices,
enhance our NuWaveArchitecture products and maintain customer satisfaction. If
we fail to do so, our products may not compete favorably, and our revenue and
future profitability could suffer.
The average selling prices of our products may decrease rapidly, which may
reduce gross margins or revenue if we are unable to reduce our cost of goods
sold.
The enterprise LAN equipment industry has experienced rapid erosion of average
selling prices due to a number of factors, including competitive pricing
pressures and rapid technological change. We may experience substantial
period-to-period fluctuations in future operating results due to the erosion of
our average selling prices. We anticipate that the average selling prices of our
products will decrease in the future in response to competitive pricing
pressures, increased sales discounts, new product introductions by us or our
competitors or other factors. Therefore, to maintain our gross margins, we must
develop and introduce on a timely basis new products and product enhancements
and continually reduce our product costs. As the average selling prices for our
products are expected to decline, we will need to reduce our product costs,
particularly the cost of our ASICs. To reduce the cost of ASICs, we intend to
integrate chips and reduce die sizes. However, we cannot be certain when or if
such price reductions will occur. If we fail to achieve cost reductions, our
revenue and gross margins will decline which will affect our operating results.
We must develop and expand our OEM relationships and other indirect distribution
channels to increase revenue and improve our operating results.
Our distribution strategy focuses primarily on developing and expanding indirect
distribution channels through original equipment manufacturers, or OEMs and
resellers, as well as expanding our field sales organization. If we fail to
develop and cultivate relationships with OEMs and resellers, or if these parties
are not successful in their sales efforts, sales of our products may fail to
increase and may even decrease. The ability and willingness of OEM and reseller
customers to promote our products is based upon a number of factors beyond our
control. In addition, some of our current and potential OEM and reseller
customers may begin to offer products that will compete with or replace our
products. The resulting lost sales of our products to any such customers, in
addition to the increased competition presented by the products offered by our
OEM and reseller customers, will harm our business, financial condition and
operating results.
Although we have secured a limited number of OEM customers for our
NuWaveArchitecture products, nearly all of these customers are still at the
early stages of initial commercial shipments. If our OEM customers are unable to
or otherwise do not ship systems that are based on our products, or if their
shipped systems are not commercially successful, our business, operating results
or financial condition could suffer.
In order to support our indirect distribution channels, we plan to expand our
field sales and support staff. We cannot assure you that this internal expansion
will be successfully completed, that the cost of this expansion will not exceed
the revenue generated or that our expanded sales and support staff will be able
to compete successfully against the significantly more extensive and well-funded
sales and marketing operations of many of our current or potential competitors.
Our inability to effectively establish our distribution channels or manage the
expansion of our sales and support staff could limit our ability to grow and
increase revenue.
If we do not keep pace with technological changes, our products may become
obsolete and our business may suffer.
The LAN equipment market is characterized by rapid technological change,
frequent new product introductions, changes in customer requirements and
evolving industry standards. If we do not address these changes by regularly
introducing new products, our product line will become obsolete. Alternative
technologies could achieve widespread market acceptance and displace the
Ethernet technology on which our product lines and architecture are based. For
example, developments in routers and routing software could also significantly
reduce demand for our products. We cannot assure you that our technological
approach will achieve broad market acceptance or that other technologies or
devices will not supplant our approach.
When we announce new products or product enhancements that have the potential to
replace or shorten the life cycle of our existing products, customers may not
purchase our existing products. These actions could harm our operating results
by decreasing sales, increasing our inventory levels of older products and
exposing us to greater risk of product obsolescence.
18
The market for enterprise LAN switching products is evolving, and we believe our
ability to compete successfully in this market is dependent upon the continued
compatibility and interoperability of our products with products offered by
other vendors. In particular, the networking industry has been characterized by
the successive introduction of new technologies and standards that have
dramatically reduced the price and increased the performance of enterprise LAN
equipment. To remain competitive, pressureswe need to introduce products in a timely
manner that incorporate or are compatible with these new technologies as they
emerge. We may experience delays in product development in the future, and any
delay in product introduction could adversely affect our ability to compete and
cause our operating results to be below our expectations or the Company'sexpectations of
public market analysts or investors.
Since we depend on a small number of OEM and distribution channel customers for
a significant portion of our revenue in any period, the loss of any of these
customers or any cancellation or delay of a large purchase by any of these
customers could significantly reduce our revenue.
We anticipate that, although our largest customers may vary from
period-to-period, a small number of key OEM and reseller customers will account
for a significant portion of our revenues in each fiscal period. We cannot
assure you that we will be able to obtain new OEM and reseller customers or
maintain relations with existing OEM and reseller customers. The loss of any key
customers, or a significant reduction in sales to those customers, could
significantly reduce our revenue. Because our expense levels are based on our
expectations as to future revenue and to a large extent are fixed in the short
term, a substantial reduction or delay in sales of our products to, or the loss
of any significant OEM, reseller or other customer, or unexpected returns from
resellers could harm our business, operating results and financial condition.
While we expect that our financial performance in any given period will depend
on orders from a small number of OEMs, resellers and other significant
customers, we do not have contracts with customers binding them to minimum
purchase quantities, except as set forth in a particular purchase orders. For
example:
o our customers can stop purchasing, and our OEMs and resellers can stop
marketing our products, at any time;
o our reseller agreements generally are not exclusive and are for one year
terms, with no obligation of the resellers to renew the agreements; and
o our OEM and reseller agreements provide for discounts based on expected
or actual volumes of products purchased or resold by the reseller in a
given period.
The sales cycle for our products is long, and we may incur substantial
non-recoverable expenses or devote significant resources to sales that do not
occur when anticipated.
Our sales cycle, particularly to OEMs, typically involves a lengthy
qualification process during which we generally invest significant resources to
address customer specifications. The purchase of our products or of solutions
that incorporate our products typically involves significant internal procedures
associated with the evaluation, testing, implementation and acceptance of new
technologies. This evaluation process frequently results in a lengthy sales
process, typically ranging from three months to longer than a year, and subjects
each sale to a number of significant risks, including budgetary constraints and
internal acceptance reviews. Because of the length of the sales cycle, we may
experience delays between increasing expenses for research and development and
sales and marketing efforts and the generation of higher revenue, if any, from
such expenditures. If sales forecasted from a specific customer for a particular
quarter are not realized in that quarter, we may be unable to compensate for the
shortfall, which could harm our operating results.
We purchase several key components for our products from single or limited
sources and could lose sales if these sources fail to meet our needs.
We currently purchase several key components used in the manufacture of our
products from single or limited sources and depend upon supply from these
sources to meet our needs. We may encounter shortages and delays in obtaining
components in the future that materially adversely affect our ability to meet
customer orders. In particular, NEC Corporation is the sole manufacturer of the
ASICs that form the core of our NuWaveArchitecture products. We do not have a
long-term supply contract with NEC that obligates them to continue to supply
components to us, and it is possible that NEC could allocate its resources to
its other customers in the future, which could materially disrupt our ability to
manufacture our products and meet customer demands. Qualifying an alternative
manufacturer of our ASICs would be time consuming, costly and disruptive. In
addition, we acquire certain microprocessors and other integrated circuits as
well as a custom designed power supply from sole source suppliers. While we
believe we could qualify alternative suppliers for these products, any delays
caused by supply disruptions could result in increased component prices that
could adversely affect our gross margins. We also use certain components
including memory components and printed circuit boards that we acquire from
limited sources that create risks similar to those created by our sole source
supply arrangements.
19
If we do not accurately estimate our supply requirements, we may have a delay in
satisfying customer orders.
We use a rolling 12-month forecast based on anticipated product orders to
determine our material requirements. Lead times for materials and components we
order vary significantly and depend on factors such as the specific supplier,
contract terms and market demand for a component at a given time. If orders do
not match forecasts, we may have excess or inadequate inventory of certain
materials and components, which could materially adversely affect our operating
results and financial condition. From time to time we have experienced shortages
and allocations of certain components, resulting in delays in filling orders. In
the future we may again experience these shortages, particularly with respect to
the supply of semiconductors.
Because we rely on third parties for substantially all of our manufacturing,
failures by these third parties to provide products of sufficient quality and
quantity could cause us to delay product shipments, which could result in
delayed or lost revenues or customer dissatisfaction.
We rely on third parties, in particular Solectron Corporation, for substantially
all of our manufacturing. Our reliance on Solectron involves particular risks.
Our dependence on Solectron increases our exposure to possible shortages of key
components, product performance shortfalls and reduced controls over delivery
schedules, manufacturing capability, quality assurance, quantity and costs. If
Solectron or any other third-party manufacturer experiences delays, disruptions,
earthquakes, capacity constraints or quality control problems in its
manufacturing operations, then product shipments to our customers could be
delayed, which would negatively impact our net revenues, competitive position
and reputation.
We may in the future need to find new contract manufacturers in order to
increase our volumes or to reduce our costs. We may not be able to find contract
manufacturers that meet our needs, and even if we do, qualifying a new contract
manufacturer and commencing volume production is expensive and time consuming.
If we are required or elect to change contract manufacturers, we may lose
revenues, and our customer relationships may suffer.
If we lose key personnel or are unable to hire additional qualified personnel as
necessary, we may not be able to successfully manage our business or achieve our
objectives.
Our success depends to a significant degree upon the continued contributions of
our key management, engineering, sales and marketing, finance and manufacturing
personnel, many of whom would be difficult to replace. We do not have key
person insurance covering any of our personnel. We believe our future success
will also depend in large part upon our ability to attract and retain highly
skilled managerial, engineering, sales and marketing, finance and manufacturing
personnel. For example, our products and services require a sophisticated sales
effort targeted at several levels within a prospective customer's organization.
Unless we expand our sales force, we will not be able to increase revenue.
Competition for these personnel is intense, and we have had difficulty hiring
employees, particularly software engineers, in the timeframe we desire. There
can be no assurance that we will be successful in attracting and retaining the
personnel we require. The loss of the services of any of our key personnel, the
inability to attract or retain qualified personnel in the future, or delays in
hiring required personnel, particularly engineers and sales personnel, could
make it difficult for us to manage our business and meet key objectives. In
addition, companies in the networking industry whose employees accept positions
with competitors frequently claim that competitors have engaged in unfair hiring
practices. We could incur substantial costs in defending ourselves against any
such claims, regardless of the merits of such claims.
If our products do not comply with evolving industry standards and complex
government regulations, they may not achieve market acceptance, which may
prevent us from increasing our revenue or achieving profitability.
The market for LAN equipment is characterized by the need to support industry
standards as they emerge, evolve and achieve acceptance. We will not be
competitive unless we continually introduce new products and product
enhancements that meet these emerging standards. In addition, in the United
States our products must comply with various regulations and standards defined
by the Federal Communications Commission, or FCC, and Underwriters Laboratories.
Internationally, products that we develop may be required to comply with
standards established by telecommunications authorities in various countries as
well as with recommendations of the International Telecommunication Union. If we
do not comply with existing or evolving industry standards or if we fail to
obtain timely domestic or foreign regulatory approvals or certificates, we may
experience delays in product shipments or be unable to sell our products where
these standards or regulations apply, which could prevent us from increasing our
revenue or achieving profitability.
20
Our ability to increase our revenue depends on successfully expanding our
international sales.
Our ability to grow will depend in part on our ability to increase sales of our
NuWaveArchitecture products to international customers, particularly in Asia. We
anticipate that sales to international customers will constitute a significant
portion of our future sales. There are a number of risks arising from our
international business, including:
o longer accounts receivable collection cycles;
o difficulties in managing operations across disparate geographic areas;
o difficulties associated with enforcing agreements under foreign legal
systems;
o import or export licensing requirements;
o potential adverse tax consequences; and
o unexpected changes in regulatory requirements.
Our international sales are denominated in U.S. dollars. As a result, an
increase in the value of the U.S. dollar relative to foreign currencies could
make our products less competitive in international markets.
We may engage in future acquisitions that dilute the ownership interests of our
stockholders, cause us to incur debt and assume contingent liabilities.
As part of our business strategy, we expect to review acquisition prospects that
would complement our current product offerings, augment our market coverage,
enhance our technical capabilities or otherwise offer growth opportunities.
While we have no current agreements or negotiations underway with respect to any
material acquisitions, we may acquire businesses, products or technologies in
the future. In the event of any future acquisitions, we could:
o issue equity securities which would dilute stockholders' percentage
ownership;
o incur substantial debt; or
o assume contingent liabilities.
Such actions by us could harm our operating results.results and cause the price of our
common stock to decline. We cannot assure you that we will be able to
successfully integrate any businesses, products, technologies or personnel that
we might acquire in the future, and our failure to do so could harm our
business, operating results and financial condition.
Problems arising from the use of our products together with other vendors'
products could disrupt our business and harm our financial condition.
Our products must interoperate with products from other vendors. As a result,
when problems occur in a network, it may be difficult to identify the source of
the problem. The occurrence of hardware and software errors, whether caused by
our products or another vendor's products, could result in the delay or loss of
market acceptance of our products, and any necessary revisions may require us to
incur significant expenses. The occurrence of any such problems would likely
have a material adverse effect on our business, operating results and financial
condition.
We may be subject to intellectual property infringement claims that are costly
to defend and may adversely affect our business and ability to compete.
Our industry is characterized by the existence of a large number of patents and
frequent claims and related litigation regarding patent and other intellectual
property rights. In particular, many leading network companies have extensive
patent portfolios with respect to networking technology. From time to time,
third parties, including leading companies, have asserted against us and others
exclusive patent, copyright, trademark and other intellectual property rights to
technologies and related standards that are important to us. Third parties may
assert claims or initiate litigation against us or our manufacturers, suppliers
or customers alleging infringement of their proprietary rights with respect to
our existing or future products. Any of these claims, with or without merit,
could be time-consuming, result in costly litigation and diversion of technical
and management personnel, or require us to develop non-infringing technology or
enter into royalty or license agreements. These royalty or license agreements,
if required, may not be available on acceptable terms, if at all. If there is a
successful claim of infringement or if we fail to develop non-infringing
technology or license the proprietary rights on a timely basis, we will be
unable to use this technology, and our business could be harmed.
If we fail to protect our intellectual property, or if others use our
proprietary technology without authorization, our competitive position may
suffer.
21
Our success and ability to compete are substantially dependent upon our
internally developed technology and know-how. We rely on a combination of
copyright, trademark and trade secret laws and restrictions on disclosure to
protect our intellectual property rights. However, we do not own any patents nor
do we have any patent applications pending that relate to our
NuWaveArchitechture products. We enter into confidentiality or license
agreements with our employees, consultants and corporate partners, and control
access to and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology. If so, we will lose any competitive advantage we have, and our
business will suffer.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company'sOur cash equivalents and short-term investments ("investments") are exposed to
financial market risk due to fluctuationfluctuations in interest rates and
foreign exchange rates, which may affect
itsthe interest income and the fair values of itsour investments. The Company managesWe manage the
exposure to financial market risk by performing ongoing evaluation of its investment portfolioour
investments and investing in short-term, investment grade corporatehigh quality debt securities, of which
the majority mature within the next 12 months. In addition, the Company doeswe do not use investments for
trading or other speculative purposes. The effectAs of fluctuation in foreign exchange rates
is immaterial as the majority of the investments held by its foreign
subsidiaries are denominated in US dollars. For the year ended December 31, 1998,2000, the average rate
of return on the investments was approximately 5.5%6.4%. A hypothetical 10%
fluctuation in interest rate in 1999 mayrates would change the interest income by approximately
$130,000. Due$614,000 per annum. In addition, due to the relative short maturities of itsour
investments as of December 31, 2000, we expect that the carrying value approximatesimpact of fluctuations
in interest rates on the fair value, andvalues of investments is immaterial. However, from
time to time, we may adjust the impactaverage maturity of our investments, in order to
maximize the rate of return on investments considering the overall market
condition, as well as when our liquidity requirement changes. Such adjustment to
the average maturity may affect the magnitude of the fluctuation in the fair
value of our investments in the event interest rate to the carrying value is deemed immaterial.
16rates increase or decrease.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements: Page
Report of Independent Accountants....................................... 18Accountants..................................... 24
Consolidated Balance Sheets at December 31, 19982000 and 1997............... 191999............. 25
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 19972000, 1999 and 1996.................................................. 201998................................... 26
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 19972000, 1999 and 1996..................................... 211998................................... 27
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 19972000, 1999 and 1996.................................................. 221998................................... 28
Notes to Consolidated Financial Statements.............................. 23Statements............................ 29
Financial Statement Schedule:
For the three years ended December 31, 1998, 1997 and 1996
Schedule II - Valuation and Qualifying Accounts...................... 38Accounts for the
Years Ended December 31, 2000, 1999 and 1998.................. 43
Schedules other than those listed above have been omitted since either they are
not required or the information is included in the financial statements included
herewith.
1723
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Network Peripherals Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the consolidated financial position of
Network Peripherals Inc. and its subsidiaries at December 31, 19982000 and 19971999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998,2000, in conformity with accounting principles
generally accepted accounting principles.in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted auditing standardsin the United States of America which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 25, 1999
1826, 2001, except as to Note 13
which is as of March 30, 2001
24
NETWORK PERIPHERALS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
1998 19972000 1999
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- --------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,53733,810 $ 16,0944,730
Short-term investments 17,814 14,37162,191 4,985
Accounts receivable, net of allowance for doubtful accounts and
returns; 1998, $523,returns of $259 and 1997, $1,184 3,430 5,170$364 1,479 428
Receivable from sale of assets - 720
Inventories 3,124 1,417
Income tax refund receivable -- 3,98310,626 3,830
Prepaid expenses and other current assets 742 614
----------------------------1,776 815
--------------- --------------
Total current assets 30,647 41,649109,882 15,508
Property and equipment, net 4,560 3,8765,547 4,984
Other assets 342 364
----------------------------285 360
--------------- --------------
$ 35,549 $ 45,889
============================115,714 $20,852
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,4501,902 $ 1,6711,534
Accrued liabilities 2,127 5,539
----------------------------2,908 1,409
--------------- --------------
Total current liabilities 4,577 7,210
----------------------------4,810 2,943
--------------- --------------
Commitments (Note 5)6)
Stockholders' equity:
Preferred Stock, $0.001 par value, 2,000,000 shares authorized;
no shares issued or outstanding -- --- -
Common Stock, $0.001 par value, 20,000,00060,000,000 shares authorized;
1998, 12,292,000,12,907,000 and 1997, 12,252,00012,749,000 shares issued and outstanding 12 1216 13
Additional paid-in capital 64,060 63,878234,820 65,955
Accumulated deficit (33,100) (25,211)
----------------------------(70,301) (48,059)
Accumulated other comprehensive income 106 -
--------------- --------------
164,641 17,909
Treasury stock, 3,485,000 shares of Common Stock, at cost (53,737) -
--------------- --------------
Total stockholders' equity 30,972 38,679
----------------------------110,904 17,909
--------------- --------------
$ 35,549 $ 45,889
============================
The accompanying notes are an integral part of these financial statements.
115,714 $20,852
=============== ==============
19The accompanying notes are an integral part of these
consolidated financial statements.
25
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended December 31,
2000 1999 1998
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ---------------- ----------------- ----------------
Net sales $ 28,5857,514 $ 34,798 $ 53,08010,231 $28,585
Cost of sales 9,144 9,410 17,250
25,341 28,590
-------------------------------------------------------------- ----------------- ----------------
Gross profit (loss) (1,630) 821 11,335
9,457 24,490
-------------------------------------------------------------- ----------------- ----------------
Operating expenses:
Research and development 11,233 7,803 11,485 9,757 8,570
Marketing and selling 10,672 6,437 6,010 13,242 11,849
General and administrative 4,749 3,503 3,234 3,982 3,378
Acquired research and development in process and
product integration costs -- 6,462 13,732
Restructuring expense -- 3,662 --
----------------------------------------------600 - -
Loss (gain) on sale of assets 620 (1,055) -
---------------- ----------------- ----------------
Total operating expenses 27,874 16,688 20,729
37,105 37,529
-------------------------------------------------------------- ----------------- ----------------
Loss from operations (29,504) (15,867) (9,394) (27,648) (13,039)
Interest income 7,262 908 1,505
1,680 1,745
-------------------------------------------------------------- ----------------- ----------------
Loss before income taxes (22,242) (14,959) (7,889)
(25,968) (11,294)
Provision for (benefit from) incomeIncome taxes -- (3,526) 608
----------------------------------------------- - -
---------------- ----------------- ----------------
Net loss $ (7,889) $(22,442) $(11,902)
==============================================(22,242) $(14,959) $(7,889)
================ ================= ================
Net loss per share:
Basic and diluted $ (1.56) $ (1.19) $ (0.64)
$ (1.85) $ (1.01)
==============================================
Diluted $ (0.64) $ (1.85) $ (1.01)
============================================================== ================= ================
Weighted average common shares:
Basic and diluted 14,224 12,584 12,281
12,154 11,760
==============================================
Diluted 12,281 12,154 11,760
==============================================
The accompanying notes are an integral part of these financial statements.
================ ================= ================
20The accompanying notes are an integral part of these
consolidated financial statements.
26
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Retained
Additional Earnings
Common Stock Paid-In Notes (AccumulatedAccumulated
------------------ Additional Other
Number of Paid-in Accumulated Comprehensive Treasury
Shares Amount Capital Receivable Deficit)Deficit Income Stock Total
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------- --------- ------ ----------- ----------- ------------- ---------- -----------
Balance at December 31, 1995 11,268 $ 11 $ 56,579 $ (14) $ 9,133 $ 65,709
Repayment of stockholders' notes
receivable -- -- -- 14 -- 14
Issuance of Common Stock upon
exercise of stock options 200 -- 228 -- -- 228
Issuance of Common Stock under
employee stock purchase plan 45 -- 385 -- -- 385
Income tax benefit associated with
nonqualified stock options -- -- 28 -- -- 28
Issuance of Common Stock for
acquisition of NuCom Systems 441 1 5,341 -- -- 5,342
Foreign currency translation -- -- 53 -- -- 53
adjustment
Net loss -- -- -- -- (11,902) (11,902)
--------------------------------------------------------------------------------
Balance at December 31,1996 11,954 12 62,614 -- (2,769) 59,857
Issuance of Common Stock upon
exercise of stock options 224 -- 410 -- -- 410
Issuance of Common Stock under
employee stock purchase plan 74 -- 451 -- -- 451
Income tax benefit associated with
nonqualified stock options -- -- 403 -- -- 403
Net loss -- -- -- -- (22,442) (22,442)
--------------------------------------------------------------------------------
Balance at December 31, 1997 12,252 12$12 $ 63,878 --$ (25,211) $ - $ - $ 38,679
Issuance of Common Stock upon
exercise of stock options 8 --- 38 -- --- - - 38
Issuance of Common Stock under
employee stock purchase plan 32 --- 144 -- --- - - 144
Net loss -- -- -- --- - - (7,889) - - (7,889)
--------------------------------------------------------------------------------------- ------- ----------- ----------- ------------- ---------- -----------
Balance at December 31, 1998 12,292 12 64,060 (33,100) - - 30,972
Issuance of Common Stock upon
exercise of stock options 457 1 1,895 - - - 1,896
Net loss - - - (14,959) - - (14,959)
------- ------- ----------- ----------- ------------- ---------- -----------
Balance at December 31, 1999 12,749 13 65,955 (48,059) - - 17,909
Issuance of Common Stock in
follow-on public offering 2,875 3 165,361 - - - 165,364
Issuance of Common Stock upon
exercise of stock options 768 - 3,504 - - - 3,504
Common Stock repurchased (3,485) - - - - (53,737) (53,737)
Net loss - - - (22,242) - - (22,242)
Change in unrealized gain on
investments - - - - 106 - 106
----------
Comprehensive loss - - - - - - (22,136)
------- ------- ----------- ----------- ------------- ---------- ----------
Balance at December 31, 2000 12,907 $16 $ 12234,820 $ 64,060 $ -- $(33,100) $ 30,972
================================================================================
The accompanying notes are an integral part of these financial statements.
(70,301) $106 $(53,737) $110,904
======= ======= =========== =========== ============= ========== ==========
21The accompanying notes are an integral part of these
consolidated financial statements.
27
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
Years Ended December 31,
2000 1999 1998
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ ------------- ------------- ------------
Cash flows from operating activities:
Net loss $(22,242) $ (14,959) $ (7,889) $(22,442) $(11,902)
Adjustments to reconcile net loss to net cash
provided by
(used in)used in operating activities:
Depreciation and amortization 1,960 1,969 2,111
Amortization2,495 1,826 2,000
Loss (gain) of goodwill 40 1,350 665
Acquired research and development in process -- 6,462 13,032
Deferred income taxes -- 2,289 (56)sale of assets 620 (1,055) -
Changes in assets and liabilities:
Accounts receivable (1,051) 3,002 1,740
3,189 (1,845)
Inventories (6,796) (706) (1,707) 6,811 (664)
Income tax refund receivable - - 3,983 (3,580) --
Prepaid expenses and other assets (926) (131) (146) 1,026 862
Accounts payable 368 (916) 779 (1,321) 1,439
Accrued liabilities 1,499 (718) (2,956)
(2,644) 1,623
--------------------------------------------------------- ------------- ------------
Net cash provided by (used in)used in operating activities (26,033) (13,657) (4,196)
(6,891) 5,265
--------------------------------------------------------- ------------- ------------
Cash flows from investing activities:
Purchases of short-term investments (57,100) - (3,443)
Purchases of property and equipment (3,836) (2,559) (2,644)
(2,270) (2,927)
PurchasesProceeds from sale of short-term investments (3,443) -- --assets, net of expenses 918 684 -
Proceeds from sales or maturity of short-term investments -- 7,979 2,581
Cash paid for acquisition, net of cash acquired -- (6,449) (10,401)- 12,829 -
Holdback amount from acquisition - - (456)
(659) 1,115
--------------------------------------------------------- ------------- ------------
Net cash used inprovided by (used in) investing activities (60,018) 10,954 (6,543)
(1,399) (9,632)
--------------------------------------------------------- ------------- ------------
Cash flows from financing activities:
Proceeds from issuance of Common Stockcommon stock, net of offering costs 168,868 1,896 182
861 613
RepaymentRepurchase of stockholders' notes receivable -- -- 14
--------------------------------------------common stock (53,737) - -
------------- ------------- ------------
Net cash provided by financing activities 115,131 1,896 182
861 627
--------------------------------------------
Effect of exchange rate changes on cash -- -- 53
--------------------------------------------------------- ------------- ------------
Net decreaseincrease (decrease) in cash and cash equivalents 29,080 (807) (10,557) (7,429) (3,687)
Cash and cash equivalents, beginning of year 4,730 5,537 16,094
23,523 27,210
--------------------------------------------------------- ------------- ------------
Cash and cash equivalents, end of year $ 33,810 $ 4,730 $ 5,537
$ 16,094 $ 23,523
========================================================= ============= ============
Supplemental disclosure of cash flow information
Cash paid during the year for:
Income taxes $ 67 $ 158 $ 245
Non-cash transactions:
Income tax benefit associated with nonqualified stockReceivable from sale of assets $ --- $ 403720 $ 28
options
Common Stock issued for acquisition of NuCom $ -- $ -- $ 5,342
The accompanying notes are an integral part of these financial statements.
-
22The accompanying notes are an integral part of these
consolidated financial statements
28
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Network Peripherals Inc., a Delaware corporation (the "Company"), designs develops, and
manufactures high performance networking solutions,Layer 2 and Layer 3 functionality Ethernet and Gigabit Ethernet
switching products, which it markets primarily to original equipment
manufacturers, distributors, value-added resellers and system integrators. The
Company's solutionsswitching products are designed for use in workgroups, wiring closets
and network backbones.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted accounting principlesin the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments purchased with an original
or remaining maturity of 90 daysthree months or less to be cash equivalents. The
Company's short-term investments which consist of marketable debt securities,
withsubstantially of which have maturities greater than 90
daysbetween three months and less than one year,year. All
marketable debt securities included in short-term investments have been
classified as available-for-sale.available-for-sale and are carried at fair market value, and the
unrealized gains or losses on these investments are included as a separate
component of the stockholders' equity. For the years ended December 31, 19981999 and
1997,1998, there were no material unrealized gains or losses. Substantially alllosses on investments.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash, cash equivalents, short-term
investments and trade receivables. The Company maintains its cash, cash
equivalents and short-term investments with high credit quality financial
institutions and limits its investments to those that are held inshort-term and low
risk. Concentration of credit risk with respect to trade receivables is
generally limited due to the Company's name by major financial institutions.on-going evaluation of its customers'
credit worthiness and the established long-term relationship with certain
customers.
Revenue Recognition
Revenue from product sales is recognized upon product shipment, provided that no
significant obligations remainwhen pervasive evidence of an
arrangement exists, delivery has occurred, the price is fixed or determinable
and collectabilitycollectibility is probable. The Company provides to certain distributors
limited rights of return and price protection on unsold inventory when specific
conditions exist. Provisions for estimated costs of warranty repairs, product
returns, and allowances, and retroactive price adjustments are recorded at the time products are
shipped (see Sales Reserves
below).
Funding underbased on past experience. Allowances for uncollectible accounts
receivable are provided at the time such receivable is deemed uncollectible.
In December 1999, the Securities and Exchange Commissions issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain development contracts is recognized based upon the
achievement of specified contract milestones. Such funding is recognized as a
reduction of the related development costs and totaled approximately $217,000
and $556,000Staff's views in 1997 and 1996, respectively. No such funding was recognizedapplying
generally accepted accounting principles to revenue recognition in 1998.
Sales Reservesfinancial
statements. The Company provides allowances for accounts receivables deemed uncollectible
and for sales returns and other credits, including credits for retroactive price
adjustmentsadoption of SAB 101 in the fourth quarter of 2000 did not have a
material effect on sales transacted within 90 days prior to the period-end. As of
December 31, 1998 and 1997, the Company's allowances for such potential events
totaled approximately $523,000 and $1,184,000, respectively. As a percentageresults of sales transacted within 90 days prior to December 31, 1998 and 1997, the
allowances for sales returns and other credits were 8% and 18%, respectively.
23operations or financial condition.
29
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash, cash equivalents, short-term
investments and trade receivables. The Company's cash investment policies limit
investments to those that are short-term and low risk. Concentration of credit
risk with respect to trade receivables is generally limited due to the large
number of customers comprising the Company's customer base, their dispersion
across many different geographies, the Company's on-going evaluation of its
customers' credit worthiness, and the established long-term relationship with
certain customers.
Inventories
Inventories are stated at the lower of cost, using the first-in, first-out
method, or market.
Property and Equipment
Property and equipment are stated at cost.cost less accumulated depreciation and
amortization. Depreciation and amortization is computed using the straight-line
method over the estimated useful life of the asset, typically three years.
Depreciation of the Enterprise Resource PlanningCompany's enterprise resource planning systems, theits
information systems infrastructure, and certain manufacturing equipment is based
on an estimated useful life of five years. Amortization of leasehold
improvements is computed using the remaining lease term.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the
identifiable net assets acquired and is amortized on a straight-line basis over
the expected period of benefit, generally five years. Periodically, the Company
evaluates the goodwill for impairment and estimates the future undiscounted cash
flows of the acquired business to ensure that the carrying value has not been
impaired. As of December 31, 19982000 and 1997,1999, goodwill, net of accumulated
amortization, was $133,000$53,000 and $173,000,$93,000, respectively, and was included in other
assets.
Software Development Costs
The Company's software products are integrated into its hardware products and
are typically available for general release to customers within 30 days after
technological feasibility has been achieved. Accordingly, the production costs
incurred after the establishment of technological feasibility and before general
release to customers are immaterial, thus theimmaterial. The Company doeshas not capitalizecapitalized any
software development costs.costs to date.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs
totaled $2,293,000, $634,000 and $381,000 in 2000, 1999 and 1998, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability method,
which recognizes deferred tax assets and liabilities for the expected tax
consequences of temporary differences between the tax basis of assets and
liabilities and their financial statement reported amounts.amounts, and for net
operating loss and credit carryforwards. The Company records a valuation
allowance against deferred tax assets when it is more likely than not that such
assets will not be realized.
Foreign Currency Translation
The functional currency of the Company's subsidiaries in Taiwan and the
Netherlands is the U.S. dollar. Accordingly, gains or losses arising from the
translation of foreign currency financial statements and transactions are
included in determining consolidated results of operations.
Employee Benefit Plans
The Company has stock option plans and offers a 401(k) plan covering all of its
U.S. employees. The 401(k) plan provides for matching contributions determined
at the Company's discretion. The Company matched 50% of each employee's
contribution up to $3,000 in 2000 and $1,000 in 1999. The matching contributions
totaled $202,000 and $59,000 in 2000 and 1999, respectively. No such matching
contributions were made in 1998,
1997 and 1996. The Company does not have postretirement or postemployment
benefit plans; therefore, Statements of Financial Accounting Standards ("SFAS")
No. 87, 106 and 112 regarding pension, other postretirement and postemployment
benefit plans do not affect the Company's financial statements.
241998.
30
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock-based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), as permitted under the
provisions of SFASStatement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" ("SFAS
123").Compensation." Under APB Opinion No. 25, if the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions involving
Stock Compensation." FIN 44 clarifies the application of APB Opinion No. 25
regarding (a) the definition of employee for purposes of applying APB Opinion
No. 25, (b) the criteria for determining whether a stock option plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 became effective on July 1, 2000, but certain conclusions
cover specific events that occurred after either December 15, 1998, or January
12, 2000. The adoption of FIN 44 did not have a material impact on the Company's
results of operations or financial condition.
Net IncomeLoss Per Share
Basic earnings per share ("EPS") are computed as net earnings divided by the weighted-averageweighted-
average number of common shares outstanding for the period. Diluted EPSearnings per
share reflects the potential dilution that could occur from common shares
issuable through stock-based compensation including stock options, restricted
stock awards, warrants, and other convertible securities using the treasury
stock method. At December 31, 1998, options to purchase 2,798,603 shares of the Company's
common stock were outstanding. During 2000, 1999 and 1998, the Company incurred net losses, such
that the inclusion of potential common shares would result in an antidilutive
per share amount. As such,Accordingly, no adjustment is made to the basic EPSnet loss per
share to arrive at the diluted EPS.
Recently Issuednet loss per share.
Comprehensive Loss
For the year ended December 31, 2000, the Company's comprehensive loss included
net loss and the change in unrealized gain on investments. There were no
reconciling items between the Company's net loss and comprehensive loss for the
years ended December 31, 1999 and 1998.
Recent Accounting StandardsPronouncement
In June 1997,1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative and Hedging Activities." SFAS No.
131, "Disclosures about Segments of an
Enterprise133 establishes accounting and Related Information" ("SFAS 131"), which is effective for
financial statements issued for periods beginning after December 15, 1997. SFAS
131 establishesreporting standards for public companiesderivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires an entity to report information about
operating segmentsrecognize all derivatives
as either assets or liabilities on the balance sheet and measure those
instruments at fair value. In June 2000, SFAS No.133 was amended by SFAS No.
138, which amended or modified certain issues discussed in annual financial statementsSFAS No. 133. The
Company will adopt SFAS No. 133 and requires reporting of
selected information about operating segmentsSFAS No. 138 during the year ending December
31, 2001. To date, the Company has not engaged in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. In accordance with
the provisionsderivative or hedging
activities. The adoption of SFAS 131,No. 133 and SFAS No. 138 will have no material
impact on the Company operated in one business segment in 1998
and 1997.Company's results of operations or financial condition.
Reclassifications
Certain reclassifications have been made to the prior years' amounts in order to
conform to the current year's presentation.
2531
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (in thousands)
December 31,
December 31, 2000 1999
------------------------------------------ -------------
Unrealized
Amortized Holding Fair Market Fair Market
Cost Gain(Loss) Value Value
----------------------------------------- ------------- ------------- -------------- -------------
Cash and cash equivalents:
Cash and money market funds $ 14,037 $ - $ 14,037 $ 2,442
Corporate debt securities 19,773 - 19,773 2,288
------------- ------------- -------------- -------------
33,810 - 33,810 4,730
------------- ------------- -------------- -------------
Short-term investments:
Corporate debt securities 46,680 97 46,777 -
U.S. government agencies' securities 13,501 9 13,510 4,985
Municipal government securities 1,904 - 1,904 -
------------- ------------- -------------- -------------
62,085 106 62,191 4,985
------------- ------------- -------------- -------------
Total $ 95,895 $ 106 $ 96,001 $ 9,715
============= ============= ============== =============
The amortized cost at December 31, 1999 approximated fair market
value.
NOTE 4 - BALANCE SHEET COMPONENTS (in thousands)
December 31,
1998 1997
- --------------------------------------------------------------------------------
Cash, cash equivalents, and short-term investments:
Cash and cash equivalents
Cash and money market accounts $ 2,508 $ 2,532
Corporate debt securities 3,029 13,562
--------------------
5,537 16,094
Short-term investments
Corporate debt securities 17,814 14,371
--------------------
$ 23,351 $ 30,465
====================
Inventories:
Raw materials $ 882 $ 158
Work-in-process 572 898
Finished goods 1,670 361
--------------------
$ 3,124 $ 1,417
====================
Property and equipment:
Computer and equipment $ 8,267 $ 6,918
Furniture and fixtures 920 895
Leasehold improvements 306 303
--------------------
9,493 8,116
Accumulated depreciation (4,933) (4,240)
--------------------
$ 4,560 $ 3,876
====================
Accrued liabilities:
Salaries and benefits $ 973 $ 1,750
Warranty 450 513
Co-op advertising and market development funds 386 298
Royalty 250 746
Reserve for contract settlements -- 1,000
Restructuring expense -- 597
Holdback amount from acquisition -- 456
Other 68 179
--------------------
$ 2,127 $ 5,539
====================
26
December 31,
2000 1999
------------------------------------------------------- ------------- --------------
Inventories:
Raw materials $ 3,764 $ 2,285
Work-in-process 7 401
Finished goods 6,855 1,144
------------- --------------
$ 10,626 $ 3,830
============= ==============
Property and equipment:
Computers and equipment $ 9,408 $ 8,106
Leasehold improvements 993 528
Furniture and fixtures 760 750
------------- --------------
11,161 9,384
Accumulated depreciation (5,614) (4,400)
------------- --------------
$ 5,547 $ 4,984
============= ==============
Accrued liabilities:
Consulting expenses $ 1,588 $ 49
Salaries and benefits 583 592
Warranty 230 375
Others 507 393
------------- --------------
$ 2,908 $ 1,409
============= ==============
32
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 45 - LINE OF CREDIT
The Company currently has a $5 million revolving bank line of credit, which
expires on July 31, 1999.June 1, 2001. The line of credit can be used for either letter of
credit or working capital purposes. Borrowings under the line of credit bear
interest at the lower of the bank's prime rate or the London Interbank Offered Rate plus
2.5% and are secured by the Company's receivables, inventory, and other tangible
assets.short-term
investments of the same amount at the bank. There were no borrowings under the
line of credit in 19982000 and 1997. As
of December 31, 1998, the Company was in compliance with the financial covenants
required by the line of credit agreement.1999.
NOTE 56 - COMMITMENTS
The Company has various operating leases related to its facilities, including
its corporate headquarters under an operating lease thatin Fremont, California, which expires in October
2000. The Company also has2004, and its research and development facilitiesfacility in Long Island, New York, and manufacturing facilitieswhich
expires in Taiwan under various
operating leases expiring in August 2002 and May 2001, respectively.October 2007. Rent expense for all Companyof the Company's facilities
wastotaled $880,000, $760,000, and $764,000 $931,000,in 2000, 1999 and $868,000 in 1998,
1997, and 1996, respectively.
Future minimum lease payments under operating leases as of December 31, 19982000 are
as follows (in thousands):
Years ending December 31,
19992001 $ 754827
2002 895
2003 831
2004 777
2005 511
Thereafter 989
-------------
$ 4,830
=============
NOTE 7 - CAPITAL STOCK
Authorized Shares of Common Stock
On April 25, 2000, 689
2001 250
2002 67
-------
$ 1,760
=======
Thethe Company's stockholders approved an increase in the number
of authorized shares of Common Stock from 20 million to 60 million shares.
Follow-on Public Offering
In March 2000, the Company maintains letter-of-credit facilitiescompleted a follow-on public offering of $32,875,000
shares of its Common Stock at a price of $60.875 per share, resulting in net
proceeds to the Company of approximately $165 million, after deducting offering
costs.
Treasury Stock
In 2000, the Company's Board of Directors approved a common stock repurchase
program, pursuant to which the Company may repurchase up to five million shares
of its Common Stock in total with
two financial institutions. Approximately $60,000the open market. As of letters of credit was
issued and outstanding at December 31, 1998.
The2000, the Company has
entered into licensing agreementsrepurchased 3,485,000 shares of its Common Stock with third parties to use
certain technologies in the Company's products. Under the termsa total purchase price of
the license
agreements, the Company pays a royalty based upon a percentage of the sales
price or units shipped. Royalty expenses incurred are charged to cost of sales
in the period of the related sales and are payable in quarterly installments.
NOTE 6 - CAPITAL STOCKapproximately $53.7 million.
Employee Stock Purchase Plan
Effective May 1998, the Company terminated theits Employee Stock Purchase Plan, (the
"Plan"),
which allowed eligible employees to purchase the Company's Common Stock at a
discount through payroll deductions. Prior to the termination of the Employee
Stock Purchase Plan, the Company reserved 250,000 shares of Common Stock for
issuance under the Plan,thereunder, and the Company has issued 223,606 shares of Common Stock
for an aggregate purchase price of $1,434,000.
33
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Option Plans
The Company's 1999 Stock Plan, as amended, (the "1999 Plan") provides for the
granting of nonstatutory stock options and restricted stock awards to eligible
employees and consultants. Pursuant to the 1999 Plan, the Company has reserved
2,500,000 shares of the Company's Common Stock for issuance, and the terms and
conditions of nonstatutory stock options and restricted stock awards are
determined by the Company's Board of Directors, provided that the exercise price
for a nonstatutory stock option is not less than 85% of the fair market value of
the Company's Common Stock on the date of the grant. As of December 31, 2000,
options to purchase 644,384 shares of Common Stock were outstanding, 1,855,616
shares were available for future grant, and 2,500,000 shares were authorized but
unissued under the 1999 Plan.
The Company's 1997 Stock Plan, as amended, (the "1997 Plan") provides for the
granting of incentive and nonstatutory stock options and restricted stock awards
to eligible employees, directors and consultants. The Company has reserved
2,500,0003,500,000 shares of the Company's Common Stock for issuance under the 1997 Plan.
Pursuant to the 1997 Plan, the exercise price per shareterms and conditions of each stock option isoptions are
determined by the Company's Board of Directors, provided that (i) the exercise
price for an incentive stock optionoptions is not less than the fair market value of a
share ofthe
Company's Common Stock on the date of the grant and (ii) the exercise price for
a
nonstatutory stock optionoptions is not less than 85% of the fair market value of a
share ofthe
Company's Common Stock on the date of the grant. Options under the 1997 Plan vest
over a period determined by the Board of Directors, which is generally four
years. As of December 31, 1998,2000, options to purchase 1,795,0932,411,844 shares of Common
Stock were outstanding; 704,907outstanding, 341,465 shares were available for future grants;grant, and
2,500,0002,753,309 shares were authorized but unissued.
27
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)unissued under the 1997 Plan.
Upon adoption of the 1997 Plan in April 1997, the Company terminated the 1993
Stock Option Plan (the "1993 Plan") and the 1996 Nonstatutory Stock Option Plan
(the "1996 Plan"). No further stock options were granted under the 1993 Plan andor
the 1996 Plan. Outstanding options and shares issued upon the exercise of
options granted continue to be governed by the terms and conditions of the
respective plans. As of December 31, 1998,2000, options to purchase a total of
958,510353,567 shares of Common Stock were outstanding under the 1993 Plan and the 1996
Plan were
outstanding.Plan.
The 1994 Outside Directors Stock Option Plan, as amended, (the "1994 Plan"), as amended,
which provides for the automatic granting of nonqualified stock options to
directors of the Company ("Outside Director"), has a total of 150,000 shares
reserved for issuance. Pursuant to the 1994 Plan, the Company grants to each new
Outside Director an option to purchase 15,000 shares of Common Stock at the time
of their appointment and to each Outside Director an additional option to
purchase 5,000 shares of Common Stock on the date of each annual meeting of
stockholders. The exercise price of the stock options will be the fair market
value of the Common Stock on the date of grant, and options vest over a period
of four years. AtAs of December 31, 1998,2000, options to purchase 45,00070,000 shares of
Common Stock were outstanding; 105,000outstanding, 69,584 shares were available for future grants;grant,
and 150,000139,584 shares of Common Stock were authorized but unissued under the 1994
Plan.
Stock options generally expire 10 years from the date they are granted.
34
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes stock option activity for all of the Company's
stock option plans (in thousands, except per share amounts):
Options Weighted Average
Outstanding Exercise Price
----------------------------------------------------------- --------------- ----------------
Balance at December 31, 1997 2,597 $ 5.41
Granted 1,298 4.11
Exercised (9) 4.23
Canceled (1,087) 6.17
---------------
Balance at December 31, 1998 (913 shares exercisable at
a weighted average price of $4.71 per share) 2,799 4.52
Granted 688 15.62
Exercised (457) 4.14
Canceled (230) 6.70
---------------
Balance at December 31, 1999 (1,177 shares exercisable
at a weighted average price of $4.72 per share) 2,800 7.13
Granted 2,092 16.28
Exercised (768) 4.54
Canceled (644) 9.28
---------------
Balance at December 31, 2000 (1,051 shares exercisable
at a weighted average price of $6.88 per share) 3,480 $12.90
===============
The Company has elected to continue to follow APB Opinion No. 25 in accountingto account for
its employee stock options and adopted the disclosure-only requirements of SFAS
No. 123. SFAS No. 123 requires the disclosure of pro forma net income and
earnings per share as if the Company had accounted for its employee stock
options under the fair value method in accordance with SFAS No. 123. The fair
value of these options is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: zero dividend yield; expected
volatilityvolatilities of 82.35%110% in 1998, 77.24%2000, 93% in 1997,1999 and 69.36%82% in 1996;1998; risk-free interest
raterates of 4.64%5.1% in 1998, 5.36%2000, 6.2% in 19971999 and 5.48%4.6% in 1996;1998; expected lives of 3.5
years in 2000 and 1999 and 2.5 years in 1998; and no dividend yield for all
options
are exercised at vesting.periods.
Had compensation cost for the Company's employee stock-based plans been
determined based on the fair value at the grant date for awards consistent with
the provisions of SFAS No. 123, the Company's net loss and net loss per share
would have been as follows (in thousands, except per share amount)amounts):
1998 1997 1996
- --------------------------------------------------------------------------------
Years ended December 31,
2000 1999 1998
------------------------------------ -------------- -------------- -------------
Net loss - as reported $ (22,242) $ (14,959) $ (7,889)
Net loss - pro forma (29,756) (18,523) (11,368)
Net loss per share:
Basic and diluted- as reported (1.56) (1.19) (0.64)
Basic and diluted- pro forma (2.09) (1.47) (0.93)
The weighted average estimated grant date fair values, as reported $ (7,889) $ (22,442) $ (11,902)
Net loss - pro forma (11,368) (28,003) (14,782)
Net loss per share:
Basic - as reported (0.64) (1.85) (1.01)
Basic - pro forma (0.93) (2.30) (1.26)
Diluted - as reported (0.64) (1.85) (1.01)
Diluted - pro forma (0.93) (2.30) (1.26)
Due to the broad decline in the market price of the Company's Common Stock
during 1997, a substantial amount of stockdefined by SFAS No.
123, for options granted had exercise prices
aboveunder the current market price. On July 25, 1997 and subsequently October 31,
1997, the Company offered stock option plan participants the right to replace
any remaining unexercised stock options with an equal number of options at an
exercise price equal to the closing market price on such dates.
28plans during 2000, 1999 and 1998
were $11.46, $10.25 and $1.98, respectively.
35
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 2000 (in thousands, except per share amounts):
The following table summarizes information about stock options outstanding at
December 31, 1998:
Outstanding Exercisable
-------------------------------------------- --------------------------------------------------------------------------- ----------------------------
Weighted Average Weighted Weighted
Range of Remaining Contractual Average Average
Exercise Prices Shares Contractual Life (in years) Exercise Price Shares Exercise Price
--------------- -------------------------------------------- ------------------------(in years)
- ------------------- -------------- --------------------- -------------- ------------- --------------
$ 0.30$2.63 - $ 3.00 453,950 8.89 $ 2.36 74,900 $ 0.35
3.88$4.50 235 7.6 $3.66 202 $3.66
4.56 - 4.94 2,121,133 8.48 4.68 775,642 4.85
5.00776 6.1 4.92 632 4.93
5.25 - 8.25 375 9.2 7.50 149,077 8.97 5.95 36,647 5.86
7.6353 6.73
9.11 - 9.13 48,443 8.86 8.05 10,051 8.17
11.6311.88 768 9.7 11.12 13 10.71
12.50 - 15.00 26,000 7.51 13.69 16,082 13.51
--------- -------
2,798,603 8.57 4.52 913,322 4.71
========= =======13.38 433 9.7 13.35 1 13.00
14.00 - 19.72 439 8.8 16.14 112 15.99
21.63 - 73.06 454 9.1 35.24 38 28.41
-------------- -------------
3,480 8.5 12.90 1,051 6.88
============== =============
Stock options generally expire in 10 years from the date they are granted.
The following table summarizes stock option activities for all of the Company's
stock option plans:
Options Weighted Average
Outstanding Exercise Price
- ---------------------------------------------------------------------------------------
Balance at December 31, 1995 1,120,126 $ 10.19
Granted 2,905,155 14.72
Exercised (199,698) 1.14
Canceled (995,216) 15.76
----------
Balance at December 31, 1996 (555,417 shares
exercisable at a weighted average price
of $8.47 per share) 2,830,367 13.52
Granted 1,592,700 7.31
Exercised (224,160) 1.89
Canceled (1,602,345) 11.83
----------
Balance at December 31, 1997 (312,413 shares
exercisable at a weighted average price
of $5.31 per share) 2,596,562 5.41
Granted 1,298,150 4.11
Exercised (8,747) 4.23
Canceled (1,087,362) 6.17
----------
Balance at December 31, 1998 (913,322 shares
exercisable at weighted average price
of $4.71 per share) 2,798,603 4.52
==========
The weighted average estimated grant date fair value, as defined by SFAS 123,
for options granted under the stock option plans during 1998, 1997 and 1996 were
$1.98, $3.29 and $5.66, respectively. The weighted average estimated grant date
fair value, as defined by SFAS 123, for purchase rights granted under the
employee stock purchase plan during 1998, 1997 and 1996 were $1.96, $1.43 and
$2.89, respectively.
29
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 78 - INCOME TAXES
The following is a geographical breakdown of consolidated loss before income
taxes (in thousands):
Years ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
Domestic $ (7,302) $(21,761) $ (1,626)
Foreign (587) (4,207) (9,668)
--------------------------------------------
$ (7,889) $(25,968) $(11,294)
============================================
Provision for (benefit from) income taxes consists of the following (in
thousands):
Years ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
Current:
Federal $ -- $(5,815) $ 174
State -- -- 54
Foreign -- -- 436
-----------------------------------------
-- (5,815) 664
-----------------------------------------
Deferred:
Federal -- 1,993 (46)
State -- 296 (10)
-----------------------------------------
-- 2,289 (56)
-----------------------------------------
$ -- $(3,526) $ 608
=========================================
The provision for income taxes differs from the amount of income tax determined
by applying the applicable U.S. statutory income tax rate to pre-tax loss as
follows:
Years ended December 31,
2000 1999 1998
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------- ------------- --------------
Federal statutory rate (35.0%) (35.0%) (35.0%)
State tax, net of federal impact -- (6.0) 0.3
Research and development tax credits -- (0.8) (1.1)
Tax-exempt interest income -- (1.0) (4.5)
Provision for valuation allowance on deferred tax assets 35.0 22.1 --
Nondeductible acquisition costs -- 8.6 45.6
Other -- (1.5) 0.1
-------------------------------------
-- (13.6%) 5.4%
=====================================Domestic $ (19,731) $ (13,898) $ (7,302)
Foreign (2,511) (1,061) (587)
------------- ------------- --------------
$ (22,242) $ (14,959) $ (7,889)
============= ============= ==============
No federal or state income taxes or income tax benefits were recorded for the
years ended December 31, 2000, 1999 and 1998, as the Company incurred net
operating losses during these periods and potential deferred tax benefits
associated with net operating loss carryforwards were completely offset by a
full valuation allowance.
Deferred tax assets consist of the following (in thousands):
December 31,
1998 1997
- --------------------------------------------------------------------------------
Net operating loss and credits carryforwards $ 3,920 $ 1,575
Reserves and accruals not currently deductible 1,104 1,947
Inventory 1,437 1,789
Other 275 432
--------------------
Gross deferred tax assets 6,736 5,743
Valuation allowance (6,736) (5,743)
--------------------
Net deferred tax assets $ -- $ --
====================
30
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31,
2000 1999
------------------------------------------------------ ------------- -------------
Net operating loss and credit carryforwards $18,315 $11,635
Reserves and accruals not currently deductible 984 987
Capitalized research and development costs 910 367
Inventories 456 585
Other 631 251
------------- -------------
Gross deferred tax assets 21,296 13,825
Valuation allowance (21,296) (13,825)
------------- -------------
Net deferred tax assets $ - $ -
============= =============
Management believes that, based on a number of factors, it is not more likely than
not that the deferred tax assets will not be utilized,realized, such that a full
valuation allowance has been recorded.
As of December 31, 1998,2000, the Company has Federalfederal net operating loss
carryforwards of approximately $8.5$44 million, which will expire beginning in 2013.
For state tax purposes, the Company has net operating loss carryforwards of
approximately $8.5$15.5 million, which will expire beginning in 2002.
NOTE 8 - ACQUISITIONS
Effective April 29, 1997, the Company acquired NetVision Corporation
("NetVision"), a privately held company engaged in the development of very high
bandwidth LAN switching and gigabit Ethernet technologies, at a cost of $6.5
million, including payments to NetVision stockholders, the assumption of certain
liabilities, and transaction expenses. Effective March 21, 1996, the Company
completed its acquisition of NuCom Systems, Inc. ("NuCom"), a Taiwan-based
company, by purchasing all the outstanding shares of NuCom in exchange for $11.2
million in cash, 440,748 shares of the Company's Common Stock valued at $5.3
million, plus product integration costs for an aggregate purchase price of $17.1
million. These transactions were accounted for using the purchase method, and
the purchase price was allocated to the assets acquired and liabilities assumed
based on the estimated fair market values at the date of acquisition. In each
transaction, the research and development in process represented the estimated
current fair market value of specified technologies which had not reached
technological feasibility and had no future uses. The results of the operations
acquired were included with those of the Company from the date of acquisition.
The allocation of the purchase price was as follows (in thousands):
Acquisition of NetVision:
Research and development, in process $ 6,462
Goodwill 200
Assets 44
Liabilities assumed (257)
--------
Total $ 6,449
========
Acquisition of NuCom:
Research and development, in process $ 13,032
Other intangible assets 1,716
Cash and cash equivalents 1,357
Current assets 3,138
Non-current assets 613
Property and equipment 479
Current liabilities assumed (3,235)
--------
Total $ 17,100
========
The total purchase price is as follows:
Cash payment $ 11,158
Issuance of common stock 5,342
Other expenses 600
--------
Total $ 17,100
========
3136
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The pro forma combined results of operations of the Company, NetVision and NuCom
for the years ended December 31, 1997 and 1996, as if the acquisitions had
occurred at the beginning of the respective years, after giving effect to
certain pro forma adjustments, are as follows (in thousands, except per share
amount):
1997 1996
- --------------------------------------------------------------------------------
Net sales $ 34,798 $ 53,080
============================
Net income (loss) $ (15,214) $ 1,884
============================
Net income (loss) per share:
Basic $ (1.29) $ 0.17
============================
Diluted $ (1.29) $ 0.16
============================
The foregoing pro forma results of operations excluded the amortization of
goodwill and the write-off of acquired research and development in process
resulting from the acquisitions.
NOTE 9 - RESTRUCTURING
In the third quarter of 1997, the Company announced and began to implement a
restructuring plan aimed at reducing costs and restoring profitability to the
Company's operations. The restructuring plan was necessitated by decreased
demand for the Company's products and the Company's adoption of a new strategic
direction. These actions resulted in a net charge of approximately $3.7 million
to the consolidated statement of operations in 1997. The restructuring actions
principally consisted of termination of approximately 70 employees, closure of
certain sales and manufacturing facilities, cancellation of the related leases,
and write-off of excess manufacturing equipment and goodwill. The Company
completed the restructuring in the second quarter of 1998. The following table
lists the restructuring accrual activities from July 1, 1997 to December 31,
1998In August 2000, the Company approved and announced a plan to divest its
manufacturing facility in Taiwan. A turnkey manufacturer will manufacture all of
the Company's products after the divestiture. The objective of the divestiture
is to reduce manufacturing overhead and improve gross margins by taking
advantage of the turnkey manufacturer's economies of scale in materials
procurement and production capacity. The divestiture plan consisted of
terminating 57 employees in the manufacturing and the general and administrative
functions, selling manufacturing equipment and closing the manufacturing
facility. These actions resulted in a restructuring expense of $600,000, which
included $550,000 for severance and $50,000 for facility related charges. The
Company completed the divestiture in the first quarter of 2001. The following
table summarizes the activities of the accrual for restructuring expense in 2000
(in thousands):
Reduction Write-off
Write-off of in Work
Closure of
Of Excess
Goodwill Force Facilities Assets OtherSeverance Facility Total
-------------------------------------------------------------------------------------------------------------------------- ------------- ------------- -------------
Reserve provided $ 962550,000 $ 50050,000 $ 200 $ 1,500 $ 500 $ 3,662600,000
Reserve utilized in third quarter (962) -- (100) -- -- (1,062)
Reserve utilized in fourth quarter -- (373) (8) (1,122) (500) (2,003)
----------------------------------------------------------------------------------(391,000) (19,000) (410,000)
------------- ------------- -------------
Balance at December 31, 1997 -- 127 92 378 -- 597
Reserve utilized in first quarter -- (354) (22) -- -- (376)
Reserve utilized in second quarter -- (221) -- -- -- (221)
----------------------------------------------------------------------------------
Balance at December 31, 19982000 $ --159,000 $ (448)31,000 $ 70 $ 378 $ -- $ --
==================================================================================190,000
============= ============= =============
NOTE 10 - SALES BY GEOGRAPHY
Export sales to customers outsideSALE OF ASSETS
During the fourth quarter of North America represented 31%, 26%, and 21%
of2000, the Company 'srecorded a net salesloss on sale of
assets of $620,000 in connection with the closure of its manufacturing facility
in Taiwan discussed in Note 9 above. In June 1999, the Company sold its research
and development facility located in Hsin Chu, Taiwan, for a total of $1,620,000,
of which $900,000 was received in 1999, and the years ended December 31, 1998, 1997remaining balance of $720,000
was received in July 2000. In connection therewith, the Company recorded a gain
of $1,055,000, net of payments of broker fees and 1996, respectively. As a percentageseverance of net sales, export sales$216,000.
NOTE 11 - GEOGRAPHIC INFORMATION
The Company operates in one business segment, which is the design, development,
production, marketing and support of high performance networking solutions.
Geographic information relating to Europe and
Asia for 1998, 1997 and 1996 were 10% and 21%; 11% and 15%; and 8% and 13%,
respectively. Sales to Taiwan accounted for 17% of the Company's net sales and long-lived assets
is reported in 1998.the tables below.
Net sales based on customers' locations are as follows (in thousands):
Years ended December 31,
2000 1999 1998
----------------------- ------------- -------------- -------------
North America $ 5,569 $ 5,732 $ 19,695
Asia 1,086 3,047 5,900
Europe 859 1,452 2,990
------------- -------------- -------------
$ 7,514 $ 10,231 $ 28,585
============= ============== =============
No one foreign country accounted for more than 10% of the Company's net sales in
19972000. Sales to Taiwan-based customers accounted for 17% of the Company's net
sales in 1999 and 1996.
321998.
37
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-lived assets, which consist of property and equipment and other assets, are
reported below based on the location of an asset (in thousands):
December 31,
2000 1999
----------------------- ------------- --------------
North America $5,708 $3,593
Asia 117 1,728
Europe 7 23
------------- --------------
$5,832 $5,344
============= ==============
NOTE 1112 - CONCENTRATIONS
The Company's proprietary ASICs (Application-Specific Integrated Circuits) are
currently manufactured by a single foundry. In 1998,addition, subsequent to the
Company purchased more than $7 millionclosure of its finished good
inventories from athe Company's manufacturing facility in Taiwan in the fourth quarter
of 2000, all of the Company's products are manufactured by one turnkey
manufacturer. In the event that thisthe foundry or the turnkey manufacturer fails to
deliver the requiredexpected volumes or decides to discontinue its
production formeet the required quality standard, the Company
management believes that other subcontractors or the
Company's manufacturing facility in Taiwan can provide for comparable production
capacities. However, an abrupt change in turnkey manufacturer may causeexperience delay in production of its products and possibly loss in sales,of revenues, which
could adversely impact the Company's operating results. The Company's chairman of the Board of Directors is
a director of this turnkey manufacturer.results
The following table summarizes the percentage of net sales accounted for by the
Company's significant customers with sales of 10% or more:
Years ended December 31,
2000 1999 1998
1997 1996
-------------------------------------------------------------------------------- ------------- -------------- -------------
Customer A 32% 36% 35% 39% 26%
Customer B 11% -- --- -
Customer C -- -- 15%
Customer D -- -- 12%- - 11%
NOTE 13 - SUBSEQUENT EVENT
On March 30, 2001, the Company entered into a series of related agreements with
FalconStor, Inc. ("FalconStor"), a privately held company, pursuant to which the
Company purchased Series C Preferred Stock of FalconStor having an aggregate
purchase price of $25,000,000, and obtained an exclusive option to merge with
FalconStor. FalconStor develops and markets network storage infrastructure
software that enables storage over IP using standard industry components such as
Gigabit Ethernet, Fibre Channel and SCSI, with planned support for iSCSI and
Infiniband. The investment agreements provide that the Company has the right to
designate one member of FalconStor's board of directors and entitle the Company
to liquidation, registration, voting and preemptive rights customary for venture
capital style investments.
The option agreement gives the Company the right to merge with FalconStor. The
form of merger agreement provides that, as consideration for all outstanding
shares of FalconStor's stock, the Company would issue a number of newly issued
shares of its common stock determined in accordance with a formula. The number
of shares issuable in the merger would depend upon a number of variable factors,
including the trading price per share of the Company's common stock at the time
of the merger, the Company's assets at the time of the merger and other factors.
The actual number of shares is expected to result in the Company's current
stockholders having a one-third interest in the combined entity. In addition,
the Company would assume all outstanding options to acquire shares of
FalconStor's common stock, which would result in the potential issuance of
approximately 4,500,000 shares if those options vested and were exercised. The
merger would be structured as a tax free reorganization and would be accounted
for as a purchase. Completion of the merger would be subject to the expiration
of the applicable Hart-Scott-Rodino waiting period, stockholder approval and
other customary closing conditions. In the event that the Company does not
exercise the option, and under certain other circumstances, the Company may be
required to pay FalconStor a penalty of $3,000,000.
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There is no reportable information under this item.
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding directors is included under
"Election of Directors" in the Company'sour Proxy Statement for the 19992001 Annual Meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under "Compensation of
Executive Officers" and "Report of the Compensation Committee on Executive
Compensation" in the Company'sour Proxy Statement for the 19992001 Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under "Share Ownership by
Principal Stockholders and Management" and "Election of Directors" in the
Company'sour Proxy
Statement for the 19992001 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under "Compensation Committee
Interlocks and Insider Participation in Compensation Decisions" in the Company'sour Proxy
Statement for the 19992001 Annual Meeting.
3439
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The information required by subsections (a)1 and (a)2 of this item are included
in the response to Item 8 of Part II of this Annual Report on Form 10-K.
(a) Exhibits
--------
3.1(1) Amended and Restated Certificate of Incorporation.
3.2(1) By-Laws.
4.1(1) Fourth Amended and Restated Investor Rights Agreement
dated July 15, 1993.
10.1(1) Form of Indemnity Agreement for directors and officers.
10.2(1) Amended and Restated 1993 Stock Option Plan and forms of
agreement thereunder.
10.4(1) 1994 Outside Directors Stock Option Plan and form of
agreement thereunder.
10.9(1) Facilities Lease dated August 8, 1991 with John
Arrillaga, Trustee, or his Trustee, or his Successor
Trustee UTA dated 7/20/77, as amended, and Richard T.
Peery, Trustee, or his Successor Trustee UTA dated
7/20/77, as amended.
10.12(1)(2) OEM Purchase Agreement with Network General Corporation
dated March 4, 1991.
10.14(3) Amendment No. 1, dated June 1, 1994, to Facilities Lease
with John Arrillaga, Trustee, or his Successor Trustee
UTA dated 7/20/77, as amended, and Richard T. Peery,
Trustee, or his Successor Trustee UTA dated 7/20/77, as
amended.
10.18(4) Purchase Agreement among Network Peripherals Inc.,
Network Peripherals, Ltd., NuCom Systems, Inc., and the
shareholders of NuCom, dated January 31, 1996.
10.22(5) Line of Credit Agreement with Sumitomo Bank dated
October 2, 1996.
10.23(5) Agreement with Glenn Penisten dated May 15, 1996.
10.26(7) Purchase Agreement among Network Peripherals Inc.,
NetVision Corporation, and the shareholders of
NetVision, dated April 29, 1997.
10.28(6) Amended 1994 Outside Directors Option Plan.
10.29(8) Development and Purchase Agreement with Sun
Microsystems, Inc., dated February 25, 1994.
10.30(8) Corporate Supply Agreement with Sun Microsystems, Inc.,
dated March 31, 1997.
10.31(9) Modification Agreement, dated August 29, 1997, to amend
certain terms of the Line of Credit Agreement with
Sumitomo Bank of California.
10.32(9) Second Modification Agreement, dated November 17, 1997,
to amend certain terms of the Line of Credit Agreement
with Sumitomo Bank of California.
10.33(9) Amended and Restated Salary Continuation Agreement with
Pauline Lo Alker dated October 31, 1997.
10.35(9) Salary Continuation Agreement with Glenn Penisten dated
October 31, 1997.
10.37(9) Salary Continuation Agreement with James Sullivan dated
October 31, 1997.
10.39 Amended 1997 Stock Plan.
10.40 Third Modification Agreement, dated August 18, 1998, to
amend certain terms of the Line of Credit Agreement with
Sumitomo Bank of California.
10.41 Employment Agreement with William Rosenberger dated June
11, 1998, and subsequent amendment dated October 19,
1998.
10.42 Salary Continuation Agreement with Jerry McDowell dated
October 19, 1998.
10.43 Salary Continuation Agreement with Wilson Cheung dated
January 13, 1999.
10.44 Salary Continuation Agreement with Robert Zecha dated
January 13, 1999.
21 Subsidiaries of the Registrant.
23.1(9) Consent of Independent Accountants dated March 27, 1998.
23.2 Consent of Independent Accountants dated March 22, 1999.
27 Financial Data Schedule.
35
(a) Exhibits
--------
3.1 (1) Amended and Restated Certificate of Incorporation.
3.2 (1) By-Laws.
3.3 (14) Certificate of Amendment of the Certificate of Incorporation.
4.1 (1) Fourth Amended and Restated Investor Rights Agreement dated July 15, 1993.
10.1 (1) Form of Indemnity Agreement for directors and officers.
10.2 (1)* Amended and Restated 1993 Stock Option Plan and forms of agreement thereunder.
10.4 (1)* 1994 Outside Directors Stock Option Plan and form of agreement thereunder.
10.18 (4) Purchase Agreement among Network Peripherals Inc., Network Peripherals, Ltd., NuCom
Systems, Inc., and the shareholders of NuCom, dated January 31, 1996.
10.23 (5)* Agreement with Glenn Penisten dated May 15, 1996.
10.26 (7) Purchase Agreement among Network Peripherals Inc., NetVision Corporation, and the
shareholders of NetVision , dated April 29, 1997.
10.28 (6)* Amended 1994 Outside Directors Option Plan.
10.29 (8)(10) Development and Purchase Agreement with Sun Microsystems, Inc., dated February 25, 1994.
10.30 (8)(10) Corporate Supply Agreement with Sun Microsystems, Inc., dated March 31, 1997.
10.35 (9)* Salary Continuation Agreement with Glenn Penisten dated October 31, 1997.
10.37 (9)* Salary Continuation Agreement with James Sullivan dated October 31, 1997.
10.39 (10)* Amended 1997 Stock Plan.
10.41 (10)* Employment Agreement with William Rosenberger dated June 11, 1998, and subsequent
amendment dated October 19, 1998.
10.42 (10)* Salary Continuation Agreement with Jerry McDowell dated October 19, 1998.
10.43 (10)* Salary Continuation Agreement with Wilson Cheung dated January 13, 1999.
10.44 (10)* Salary Continuation Agreement with Robert Zecha dated January 13, 1999.
10.45 (11) Agreement for Purchase and Sale of Assets dated June 14, 1999.
10.46 (12) Lease Agreement dated August 31, 1999.
10.47 (13)* Salary Continuation Agreement with Joseph Botta dated June 21, 1999.
10.49 (13)* 1999 Stock Plan.
10.50 (14)* Amended Employment Agreement with William Rosenberger.
10.51 (14) Lease Agreement with Fortunato Development dated March 30, 2000.
10.52 (15) Line of Credit Agreement with Wells Fargo Bank dated June 1, 2000.
10.53 (15)* Amended 1997 Stock Plan.
10.54 (16)* Employment Agreement with James Regel dated September 12, 2000.
10.55 * Amended 1999 Stock Plan.
10.56 * Employment Agreement with Ronald Rutherford dated October 17, 2000.
10.57 * Employment Agreement with James Williams dated December 13, 2000.
10.58 * Employment Agreement with James Baker dated December 13, 2000.
10.59 * Letter to Joseph Botta dated December 18, 2000 regarding executive retention plan.
21 (10) Subsidiaries of the Registrant.
23.4 Consent of Independent Accountants.
40
(b) Reports on Form 8-K
-------------------
None
(1) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 33-78350).
(2) Confidential treatment has been granted as to part of this
Exhibit.
(3) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1994 (File
No. 0-23970).
(4) Incorporated by reference to the Registrant's report on Form 8-K
filed on March 31, 1996 (File No. 0-23970).
(5) Incorporated by reference to the corresponding exhibit in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 0-23970).
(6) Incorporated by reference to the corresponding exhibit in the
Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 1997 (File No. 0-23970).
(7) Incorporated by reference to the Registrant's report on Form 8-K
filed on May 14, 1997 (File No. 0-23970).
(8) The Registrant has filed portions of these agreements separately
with the Commission and has requested that those portions be
afforded confidential treatment.
(9) Filed with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
36(10) Filed with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998.
(11) Incorporated by reference to the corresponding exhibit in the
Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 1999.
(12) Incorporated by reference to the corresponding exhibit in the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1999.
(13) Incorporated by reference to the corresponding exhibit in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999.
(14) Incorporated by reference to the corresponding exhibit in the
Registrant's Quarterly Report on Form 10-Q for the period ended
March 31, 2000.
(15) Incorporated by reference to the corresponding exhibit in the
Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 2000.
(16) Incorporated by reference to the corresponding exhibit in the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 2000.
* Management contract or compensatory plan.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.authorized on April 2, 2001.
NETWORK PERIPHERALS INC.
By: \s\ WILSON CHEUNG
-----------------------------
Wilson Cheung
Vice/s/ JAMES REGEL
-----------------------------------
James Regel
President of Finance and Chief FinancialExecutive Officer
(Authorized Officer)
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
\s\ WILLIAM ROSENBERGER President, Chief Executive Officer
-------------------------- and Director (Principal Executive
William Rosenberger Officer)
\s\ WILSON CHEUNG Vice President of Finance and
-------------------------- Chief Financial Officer
Wilson Cheung (Principal Financial and
Accounting Officer)
\s\ STEVE BELL Director
--------------------------
Steve Bell
\s\ MICHAEL GARDNER Director
--------------------------
Michael Gardner
\s\ CHARLES HART Director
--------------------------April 2, 2001.
Signature Title
- --------- -----
/s/ James Regel President, Chief Executive Officer and Director
- ----------------------------------- (Principal Executive Officer)
James Regel
/s/ James Williams Senior Vice President of Finance and Administration,
- ----------------------------------- Secretary, Treasurer and Chief Financial Officer
James Williams (Principal Financial and Accounting Officer)
/s/ Glenn Penisten Chairman of the Board
- -----------------------------------
Glenn Penisten
/s/ Thomas Brown Director
- -----------------------------------
Thomas Brown
/s/ Michael Gardner Director
- -----------------------------------
Michael Gardner
/s/ Charles Hart Director
- -----------------------------------
Charles Hart
\s\ GLENN PENISTEN Chairman of the Board
--------------------------
Glenn Penisten
37
42
NETWORK PERIPHERALS INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
SCHEDULE II
Additions
-------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
of Year Expenses Accounts Deductions of Year
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ ------------- ------------ ------------ ------------- ------------
Year ended December 31, 19961998
Allowance for doubtful accounts $ 200 $--298 $ 21- $ (12)- $(215) $ 20983
Allowance for sales returns and other 886 82 - (528) 440
credits
538 -- 6,743 (6,336) 945
------------------------------------------------------------------------------- ------------ ------------ ------------- ------------
Total allowances for doubtful accounts
and sales returns 738 -- 6,764 (6,348) 1,1541,184 82 - (743) 523
Year ended December 31, 19971999
Allowance for doubtful accounts 209 -- 138 (49) 29883 47 - (71) 59
Allowance for sales returns and other 440 - - (135) 305
credits
945 -- 3,593 (3,652) 886
------------------------------------------------------------------------------- ------------ ------------ ------------- ------------
Total allowances for doubtful accounts
and sales returns 1,154 -- 3,731 (3,701) 1,184523 47 - (206) 364
Year ended December 31, 19982000
Allowance for doubtful accounts 298 -- 49 (264) 8359 220 - (240) 39
Allowance for sales returns and other 305 - - (85) 220
credits
886 -- 187 (633) 440
------------------------------------------------------------------------------- ------------ ------------ ------------- ------------
Total allowances for doubtful accounts
and sales returns $ 1,184 $--364 $220 $ 236 $ (897) $ 523
==================================================================- $(325) $259
============= ============ ============ ============= ============
3843