UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]10-K/A
|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.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting of
stockholders to be held on April 29, 1999 are incorporated by reference into12,847,357.
The undersigned registrant hereby amends Part III of thisits Annual Report for the
fiscal year ended December 31, 2000 on Form 10-K.
110-K as set forth in the pages
attached hereto:
NETWORK PERIPHERALS INC.
FORM 10-K
TABLE OF CONTENTS
PART I Page
ITEM 1. Business............................................................ 3
ITEM 2. Properties.......................................................... 9
ITEM 3. Legal Proceedings................................................... 9
ITEM 4. Submission of Matters to a Vote of Security Holders................. 9
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters............................................. 10
ITEM 6. Selected Financial Data............................................. 11
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 12
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.......... 16
ITEM 8. Financial Statements and Supplementary Data......................... 17
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 33
PART III
ITEM 10. DirectorsDIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name and Executive Officersage of the Registrant.................. 34
ITEM 11. Executive Compensation.............................................. 34
ITEM 12. Security Ownership of Certain Beneficial Owners and Management...... 34
ITEM 13. Certain Relationships and Related Transactions...................... 34
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 35
Signatures.......................................................... 37
Supplemental Schedule............................................... 38
2
PART I
ITEM 1. BUSINESS
Network Peripherals Inc. (the "Company") was incorporated in California in March
1989 and reincorporated in Delaware in June 1994. The Company's principal office
is located at 1371 McCarthy Boulevard, Milpitas, California 95035, and its
telephone number is (408) 321-7300.
BUSINESS
The Company designs, manufactures, markets and supports a full range of
10/100/1000 Layer 2 and Layer 3 Ethernet switching products 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, 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 Company in 1998 developed and shipped a full
range 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 majority of the Company's
current Fast Ethernet product offerings are based on the switch architecture
developed by the research and development activities in Taiwan.
In April 1997, the Company acquired NetVision Corporation ("NetVision"), a
privately held company located in Long Island, New York. NetVision specialized
in the development of very high bandwidth 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 products 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 of Ethernet, Fast Ethernet, and gigabit Ethernet
solutions being designed for the SME market based on technology 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 networks up to 1,500 nodes with complex and stringent network
requirements. Networks of this scale require reliability, scalability 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 platform is designed to accommodate
options such as high-speed LAN/WAN uplinks, advanced web-based management
functions, with intuitive, policy-based network management software, redundant
power supplies and flexible media connections -- capabilities that are found
currently only in expensive, large-scale enterprise systems.
4
The NuWave switching family, with a very high bandwidth architecture and
flexible configuration plus a comprehensive collection 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.
MARKETING, SALES AND SUPPORT
The Company sells its product worldwide through OEMs, VARs, distributors and
system integrators. As of December 31, 1998, the Company employed 24 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 international
sales offices in the Netherlands, Taiwan 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 distributors as well as changes in its OEM customer 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 resourcesdirector of the Company,
the principal occupation of each during the past five years, and the period
during which each has served as a director of the Company:
Class I Directors Serving for a Three-Year Term Expiring in 2001:
Michael Gardner, age 55, has served as a director of NPI since May 1998. From
July 1999 to meet demand
schedules, the Company's backlog may or may not be indicativepresent, he has been Executive Vice President of revenueWorldwide
Operations at Blue Pumpkin Software, a software company. From February 1998 to
April 1999, he served as Senior Vice President for Sybase, Inc., an information
management software company. From November 1996 to February 1998, he was Chief
Operating Officer for ACT Networks, a wide-area network access products
manufacturer. From May 1995 to November 1996, he was President of Whittaker
Communications (formerly Hughes LAN Systems), a networking company.
James Regel, age 58, joined NPI in the
future periods.
The informationAugust 2000 as President, Chief Operating
Officer and Director and became Chief Executive Officer in the following paragraph contains forward looking statements
describing the Company'sOctober 2000. From
January 2000 to July 2000, Mr. Regel was Vice President of 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 from March 1997 to June 1999.
Previously, he held executive positions in 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, reliability, priceat Verilink
Corporation, Network Equipment Technologies and performance
characteristics of the components, new and existing products, the introduction
of similar products by competitors, pricing actions by competitors and the
inability of the Company to recruit and retain required sales and marketing
staff with the needed skills.
In 1999, the Company's sales and marketing strategy for its Layer 3 Fast
Ethernet and gigabit Ethernet switching products will emphasize on developing an
OEM customer base, a potentially lucrative market. The Company will continue its
commitment to support its existing base of resellers and seek new opportunities
in its reseller channels.
RESEARCH AND DEVELOPMENT
The information in this section contains forward-looking statements describing
the Company's product development plans for 1999 and beyond. The successful
development and introduction of new products is subject to a number of
uncertainties, including the ability of the organization to recruit, train and
retain adequate numbers of professional engineers, successful design of
proprietary application specific integrated circuits and computer software,
design, development and 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, unanticipated technical obstacles or
delays, and the emergence or wide acceptance of new technologies that could
render the products obsolete.
5
The Company has developed certain core competencies applicable to multiple
network technologies such as FDDI and Ethernet, ASIC design, and client/server
operating system drivers and software modules. The Company believes its focus on
core competencies such as these has been, and will continue to be, a significant
factor in its competitive ability to bring emerging network solutions to the
market in a timely manner.
Network Bandwidth Switching. The majority 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 in 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 supportRolm Corporation.
Class II Director Serving for a varietyThree-Year Term Expiring in 2002:
Thomas Brown, age 59, has served as a director of standardNPI since July 2000. From 1990
until his retirement in January 1997, Mr. Brown was an executive officer at
Xircom, Inc., a provider of networking and proprietary system bus architectures and network operating systems.
Server Bandwidth Optimization. The Companyinformation access solutions for
mobile computer users. From 1997 until the present, Mr. Brown has designed its network operating
system software to address the specific characteristicsserved as a
director 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 networkingseveral private companies, including Sun Microsystems,
Newbridge Networks, Network Associates, NetFRAME, NCR,Bourns, Inc., Computer
Economics, Inc. 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 CompanyIntematix. In addition, he 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 substantiallyworked 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.
COMPETITION
The Company believes that the principal competitive factorsconsultant in the
networking 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 markettelecommunications industry.
Class III Directors Serving 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 which compete, botha Three-Year Term Expiring 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 likely 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 increase2003:
Charles Hart, age 63, has served as a resultdirector of theseNPI since November 1996. From
August 2000 to present, Mr. Hart is the Chairman 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's success is dependent upon its proprietary technology. To date, the
Company has relied principally upon patent, copyright, and trade secret laws to
protect its proprietary technology. The Company generally enters into
confidentiality or license agreements with its employees, distributors,
customers and potential customers and limits access to, and distribution of, the
source code to its software and other proprietary information. The Company has
been issued one U.S. patent and has filed three additional U.S. patent
applications covering certain aspects of its technology. The process of
obtaining patents can be expensive, and there can be no assurance that the
patent application will result in the issuance 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.
7
EXECUTIVE OFFICERS *
The executive officers of the Company and their ages are as follows:
Name Age Position
- --------------------------------------------------------------------------------
William Rosenberger 49 President, Chief Executive Officer of
SurfMonkey Inc., a family Internet technology company. From February 1999 to
August 2000, he was the Chief Executive Officer of SANetworks, Inc., a
manufacturer of networking interface cards and Director
Wilson Cheung 35 Vice President - Finance and Chief
Financial Officer
Jerry McDowell 53 Vice President - Marketing
James Sullivan 46 Vice President - Sales
Robert Zecha 41 Vice President - Research and Development
Mr. Rosenberger hasswitches. Previously in 1998, he
served as the President, Chief Executive Officer and a director of the Company since July 1998. From January 1996 to June 1998, Mr.
Rosenberger was President and Chief Executive Office of NetAccess,Micronics Computers
Inc., a wide
area networking equipment manufacturer.supplier of advanced system boards for high-performance personal
computers. From OctoberApril 1997 through February 1998, he served as the Executive
Vice President, Business Development, for NPI. From August 1995 to December 1995, Mr.
RosenbergerMay 1997, he
was Vice Presidenta founding board member of sales and business development for NetVisionInsWeb Corporation, an Ethernet switching company. From March 1993 to June 1995, Mr.
Rosenberger was General Managerinternet technology
company providing a vertically integrated marketplace for the insurance industry
on the World Wide Web. Previously, he held positions of ACSYS, Inc., a networking equipment
manufacturer. Prior to March 1993, Mr. Rosenberger was President and Chief
Executive Officer at Semaphore Communications Corporation, Phaser Systems, Etak,
Inc. and Nestar Systems, Inc. Mr. Hart also serves as a director of Netronix, Inc., a networking hardware designer and
manufacturer.
Mr. CheungCES
Communications Ltd. in New Zealand.
Glenn Penisten, age 69, has served as an executive officer since October 1998. Preceding the appointment to this office, Mr. Cheung held various management positions since
joiningChairman of the Company in July 1995. Prior to joining the Company, Mr. Cheung was 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 BoardsBoard of Directors for
several data communications research and manufacturing firms priorof
NPI since June 1996. From 1985 to joining
the Company in November, 1998.present, he has been a partner of Alpha
Partners, a venture capital firm. He was a co-founder, President and 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. PriorChief Executive Officer for
several leading technology companies including: Superconductor Technologies,
Inc., from May 1987 to joining the Company, he was with Novell,June 1988; American Microsystems, Inc., from July 19951976 to
July 1997 where heDecember 1984; and Data Transmission Co., from February 1972 to April 1976. Mr.
Penisten has also held several sales managementdirector level positions includingat Dataproducts Corporation,
Sanders Associates and Gould, Inc. He served as a corporate officer at Texas
Instruments, Inc., and chairman of the American Electronics Association. Mr.
Penisten currently serves as director for IKOS Systems, Bell Microproducts,
Pinnacle Systems, and Superconductor Technologies, Inc.
There are no family relationships among any directors or executive officers of
the Company.
Compliance with Section 16(a) of the Exchange Act
The Company believes that, under the rules of Securities and Exchange Commission
("SEC") for reporting of securities transactions by executive officers and
directors, all required reports were timely filed during 2000, except for Ronald
Rutherford, Vice President of Worldwide OEM Sales, and James Baker, 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. Zecha has served as Vice
President of Research and Development since April
1997. From January 1997 to April 1997, Mr. Zecha served as PresidentEngineering and Chief Technology Officer, of NetVision Corporation, an Ethernet switching company. From
November 1993 to January 1997, Mr. Zecha was a Vice President and Chief
Technology Officer of NetVision Corporation. Mr. Zecha co-founded and held a
Board of Director position with NetVision Corporation from November 1993 through
April 1997. Prior to November 1993, Mr. Zecha held engineering management
positions at Standard Microsystems Corporation, a networking company.
* As of December 31, 1998
8who were late in filing
Form 3.
2
EMPLOYEES
As of December 31, 1998ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning the Company employed 133 persons including 38 in
research and development activities, 51 in manufacturing and support, 24 in
sales, marketing and technical support, and 20 in finance and administration.
Approximately 70 employees were in international locations. Nonecompensation
of the Company's employees are currently represented by a labor union. The Company
considers its relations with its employees to be good. The Company attempts to
maintain competitive compensation benefits, equity participationChief Executive Officer, the two other most highly compensated
executive officers and work
environment policies to assist in attractingthe two former executive officers whose salary and retaining qualified personnel.
Competitionbonus
for employees in the Company's industry and geographical area is
intense and there can be no assurance that the Company will be successful in
attracting and retaining such personnel.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Milpitas, California
and consist of approximately 18,000 square feet under lease that will expire in
October 2000. Additionally, the Company has research and development facilities
in Taiwan and Long Island, New York. The Company has international sales offices
in the Netherlands, Singapore, and Taiwan. The Company believes that its
existing facilities and equipment are generally adequate to meet its immediate
and foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings.
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.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS2000 exceeded $100,000. The Company's Common Stock is tradedindividuals included
in the over-the-counter market ontable will be collectively referred to as the Nasdaq National Market. As of March 5, 1999, there were approximately 4,000
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.
1996 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 has never paid or declared any cash dividends. It is the present
policy of the Company to retain earnings to finance the growth and development
of the business and, therefore, the Company does not anticipate paying cash
dividends on its Common Stock in the foreseeable future.
10
"Named Officers."
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31,
1998 1997 1996 1995 1994Long-Term
Annual Compensation Compensation
Name and -------------------------- Awards All Other
Principal Position Year Salary Bonus (1) Options (1) Compensation (2)
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)----------------------------------------------------------------------------------------------------------
StatementJames Regel 2000 $145,833 $ - 375,000 $ -
President and CEO
Joseph Botta 2000 151,000 - 62,500 -
Vice President of Operations Data:
Net sales $ 28,585 $ 34,798 $ 53,080 $ 47,144 $ 33,463
Cost1999 70,062 - 85,000 -
Robert Zecha 2000 172,884 - 32,500 3,000
Vice President of sales 17,250 25,341 28,590 24,690 17,507
-----------------------------------------------------------------------
Gross profit 11,335 9,457 24,490 22,454 15,956
-----------------------------------------------------------------------
Operating expenses: Research and development 11,485 9,757 8,570 4,811 3,473
Marketing1999 152,884 62,500 10,000 1,000
Development 1998 167,875 - 20,000 -
William F. Rosenberger 2000 221,474 200,000 - 86,333
(former President and selling 6,010 13,242 11,849 7,319 4,361
General and administrative 3,234 3,982 3,378 2,226 1,618
Acquired research and development in
process and product integration costs -- 6,462 13,732 -- --
Restructuring expense -- 3,662 -- -- --
-----------------------------------------------------------------------
Total operating expenses 20,729 37,105 37,529 14,356 9,452
-----------------------------------------------------------------------
Income (loss) from operations (9,394) (27,648) (13,039) 8,098 6,504
Interest income, net 1,505 1,680 1,745 2,236 577
-----------------------------------------------------------------------
Income (loss) before income taxes (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) $ (7,889) $(22,442) $(11,902) $ 6,717 $ 5,665
=======================================================================
Net income (loss) per share:
Basic $ (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 12,281 12,154 11,760 11,147 3,302
=======================================================================
Diluted 12,281 12,154 11,760 11,736 8,906
=======================================================================CEO) 1999 250,000 75,000 - 1,000
1998 125,000 50,000(3) 500,000 -
James Sullivan 2000 228,923(4) - 10,000 3,000
(former Vice President of 1999 246,086(4) - 15,000 1,000
Sales)
1998 253,574(4) - 60,000 -
December 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
Balance Sheet Data:
Working capital $26,070 $34,439 $54,997 $63,269 $55,720
Total assets 35,549 45,889 71,434 70,111 65,209
Stockholders' equity 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----------
(1) From time to time, the Compensation Committee reviews the performance of an
executive officer and may award cash bonuses and/or stock options to an
officer.
(2) 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 new products;
o the market demand by customersstated amounts for all Named Officers, except for Mr. Rosenberger, were
the Company's existing products,
including demand by OEM customersmatching contributions to the Company's 401(k) plan. Mr.
Rosenberger's amount for custom products;
o competitive actions, including pricing actionsyear 2000 included a payment of $83,333 based on
the terms of his separation agreement and the introduction of new
competitive products, that may affect the volume of sales$3,000 of the Company's products;
o uninterrupted supplymatching
contributions.
(3) Bonus paid to Mr. Rosenberger in 1998 was pursuant to "sign-on" provisions
in the employment contract.
(4) Included in Mr. Sullivan's salaries were commissions of key components, including semiconductor devices$125,750, $96,086,
$103,574 in 2000, 1999 and other materials, some1998, respectively.
Compensation of which may be sourced from a single supplier;
o uninterrupted service by subcontractors;
o the abilityDirectors
Directors who are not employees of the Company (an "Outside Director") are
entitled to recruit, train and retain key personnel,
including engineers and other technical professionals;
o the developmentreceive a director fee of new technologies rendering existing technologies and
products obsolete;
o the economies of countries where the Company's 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.
RESULTS OF OPERATIONS
Net Sales
Net sales were $28.6, $34.8 and $53.1 million in 1998, 1997 and 1996,
respectively. The sequential decrease in sales from 1996 to 1998 was primarily
attributed to decreased shipments of products based on the FDDI technology. 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$4,000 per fiscal quarter so long as they
remain directors 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 $30.5 million in 1998, 1997 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 million in 1998, 1997 and 1996, respectively. Sales to customers in
North America were $19.7, $25.8 and $42.0 million in 1998, 1997 and 1996,
respectively. The balance of sales to customers in Asia and Europe totaled $8.9,
$9.0 and $11.1 million in 1998, 1997 and 1996, respectively.
The decrease 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 sales was primarily
attributed to the Company's refocusing its effort to strengthen OEM
relationships, weakness in the Asian economies and the maturityCompany. Directors do not receive any additional or
special remuneration for their services on any of the Fast
Ethernet products in general.
As the factors attributable to the decrease in sales continue to exist, the
Company does not expect noticeable growth in sales until the volume shipment 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% 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.
Research and Development
Research and development expenses were $11.5, $9.8 and $8.6 million, in 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, in an effort to further
streamline operations.
The Company continues to invest a substantial amount of its resources in
developing the NuWave products. However, the Company expects that the research
and development expenses will gradually decline from the current level after the
development of the ASICs is completed and the volume shipment of the NuWave
products commences in mid-1999.
Marketing and Selling
Marketing and selling expenses were $6.0, $13.2 and $11.8 million in 1998, 1997
and 1996, respectively. As a percentage of the respective net sales, expenses
were 21%, 38% and 22%. The decrease in expenses in 1998 was attributed to the
reduction in staff and closure of regional sales offices in conjunction with the
Company's restructuring of its business in 1997. The restructuring effort was in
alliance with the Company's strategy to focus on the broadening of its OEM
customer base, which required less sales and marketing resources. The increase
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 increase spending in marketing and selling activities in
1999 in order 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.
General and Administrative
General and administrative expenses were $3.2, $4.0 and $3.4 million in 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 1999 to remain relatively consistent with 1998.
Acquired Research and Development In Process and Product Integration Costs
In April 1997, the Company acquired NetVision Corporation, a company
specializing in LAN switching and gigabit Ethernet technologies. The Company
expensed $6.5 million of acquired research and development in process 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 result of the acquisition. See Note 8
of Notes to Consolidated Financial Statements for more details in connection
with the acquisitions 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 Company completed the restructuring in the second quarter of 1998.
See Note 9 of Notes to Consolidated Financial Statements.
Interest Income
Interest income was $1.5 million in 1998, compared to $1.7 million in 1997 and
1996. The decrease was primarily due to a lower aggregate balance of cash, cash
equivalents and short-term investments in 1998. The Company maintained a
comparable return on investment 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 from short-term investments in tax-exempt securities to
taxable corporate securities in mid-1997.
Income Taxes
The Company did not record a tax benefit associated with the net loss incurred
in 1998, as the realization of deferred tax assets is deemed uncertain based on
evidence currently available and, accordingly, a full valuation allowance has
been provided. During 1998, the Company 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.
The Company's effective tax rate for 1997 and 1996 was a benefit 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.
Euro Conversion
The Company has a wholly 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's 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, sales to all European customers accounted for 10%
of the Company's total sales, and 6% of the Company's total operating expenses
were attributable to this subsidiary. Due to the immateriality of the
Netherlands subsidiary relative to the Company's operations as a whole, the
Company believes the Euro conversion will not have any significant impact to the
Company's 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 beingcommittees 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 $23.4 million at December 31, 1998 from $30.5 million at
December 31, 1997, was used primarily to finance the Company's operations and
capital expenditures. In 1998, net cash used in operating activities was $4.2
million, which was principally attributed to the net loss for the year of $7.9
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 inventories of $6.8 million. The
Company expects the deficiency in cash flow from operations to continue until
after the volume shipment of the NuWave products starts in mid-1999 and overall
sales begin to improve.
The Company's capital expenditures totaled $2.6 million and $2.3 million in 1998
and 1997, respectively, and were related to purchases of equipment used in
production and development activities and other computer software and equipment
for the upgrade and enhancement of the information systems. In 1999, the Company
plans to incur capital expenditures of approximately $1.3 million.
The Company's principal sources of liquidity are its cash, cash equivalents and
short-term investments. The Company also has a revolving 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 covenants
under the line-of-credit agreement. The Company believes that its current
balance of cash, cash equivalents, and short-term investments and its borrowing
capacity are sufficient to satisfy the Company's working capital and capital
expenditure requirements for the next 12 months.
BUSINESS RISKS
In addition to the factors addressed in the preceding sections, certain
characteristics and dynamics of the Company's markets, technologies and
operations create risks to the Company's long-term success and to predictable
quarterly results. These risks will also affect the Company's ability to achieve
the results anticipated by the forward-looking statements contained
in this report. The Company's quarterly results have in the
past varied and are expected in the future to vary
15
significantly as a result of factors such as the timing and shipment of
significant orders, 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, the ability of the Company to obtain
sufficient supplies of 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 the prices of its products, the Company has committed to
providing retroactive price adjustments on inventories held by its distributors,
which could have the effect of reducing margins and operating results. In
addition, changes in the mix of products sold and the mix of distribution
channels through which the Company's products are sold may cause fluctuations in
the Company's gross margins. The Company's expense levels are based, in part, on
its expectations of its future revenue and, as a result, net income would be
disproportionately affected by a reduction in revenue. Due to the potential
quarterly fluctuation in 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 indicators of 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 problems in the products or their component parts,
failure by its foundry to fabricate and supply proprietary ASICs, the failure to
obtain reliable subcontractors for volume production 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's competitors have significantly broader
product offerings and greater financial, technical, marketing and other
resources and finished installed bases than the Company. These larger
competitors may also be able to obtain higher priority for their products from
distributors and other resellers that carry products of many companies. A number
of the Company's competitors were recently acquired, which is likely to permit
these competitors to devote significantly greater resources to the development
and marketing of competitive products. These competitive pressures could
adversely affect the Company's business and operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's cash equivalents and short-term investments ("investments") are
exposed to financial market risk due to fluctuation in interest rates and
foreign exchange rates, which may affect its interest income and the fair values
of its investments. The Company manages the exposure to financial market risk by
performing ongoing evaluation of its investment portfolio and investing in
short-term investment grade corporate securities, which mature within the next
12 months. In addition, the Company does not use investments for trading or
other speculative purposes. The effect 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, the average rate of return on the investments was approximately 5.5%. A
hypothetical 10% fluctuation in interest rate in 1999 may change the interest
income by approximately $130,000. Due to the short maturities of its
investments, the carrying value approximates the fair value, and the impact of
the fluctuation in interest rate to the carrying value is deemed immaterial.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements: Page
Report of Independent Accountants....................................... 18
Consolidated Balance Sheets at December 31, 1998 and 1997............... 19
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996.................................................. 20
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996..................................... 21
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996.................................................. 22
Notes to Consolidated Financial Statements.............................. 23
Financial Statement Schedule:
For the three years ended December 31, 1998, 1997 and 1996
Schedule II - Valuation and Qualifying Accounts...................... 38
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.
17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Network Peripherals Inc.
In our opinion, the 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, 1998 and 1997 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards 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.
PricewaterhouseCoopers LLP
San Jose, California
January 25, 1999
18
NETWORK PERIPHERALS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,537 $ 16,094
Short-term investments 17,814 14,371
Accounts receivable, net of allowance for doubtful accounts and
returns; 1998, $523, and 1997, $1,184 3,430 5,170
Inventories 3,124 1,417
Income tax refund receivable -- 3,983
Prepaid expenses and other current assets 742 614
----------------------------
Total current assets 30,647 41,649
Property and equipment, net 4,560 3,876
Other assets 342 364
----------------------------
$ 35,549 $ 45,889
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,450 $ 1,671
Accrued liabilities 2,127 5,539
----------------------------
Total current liabilities 4,577 7,210
----------------------------
Commitments (Note 5)
Stockholders' equity:
Preferred Stock, $0.001 par value, 2,000,000 shares authorized;
no shares issued or outstanding -- --
Common Stock, $0.001 par value, 20,000,000 shares authorized;
1998, 12,292,000, and 1997, 12,252,000 shares issued and outstanding 12 12
Additional paid-in capital 64,060 63,878
Accumulated deficit (33,100) (25,211)
----------------------------
Total stockholders' equity 30,972 38,679
----------------------------
$ 35,549 $ 45,889
============================
The accompanying notes are an integral part of these financial statements.
19
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 28,585 $ 34,798 $ 53,080
Cost of sales 17,250 25,341 28,590
----------------------------------------------
Gross profit 11,335 9,457 24,490
----------------------------------------------
Operating expenses:
Research and development 11,485 9,757 8,570
Marketing and selling 6,010 13,242 11,849
General and administrative 3,234 3,982 3,378
Acquired research and development in process and
product integration costs -- 6,462 13,732
Restructuring expense -- 3,662 --
----------------------------------------------
Total operating expenses 20,729 37,105 37,529
----------------------------------------------
Loss from operations (9,394) (27,648) (13,039)
Interest income 1,505 1,680 1,745
----------------------------------------------
Loss before income taxes (7,889) (25,968) (11,294)
Provision for (benefit from) income taxes -- (3,526) 608
----------------------------------------------
Net loss $ (7,889) $(22,442) $(11,902)
==============================================
Net loss per share:
Basic $ (0.64) $ (1.85) $ (1.01)
==============================================
Diluted $ (0.64) $ (1.85) $ (1.01)
==============================================
Weighted average common shares:
Basic 12,281 12,154 11,760
==============================================
Diluted 12,281 12,154 11,760
==============================================
The accompanying notes are an integral part of these financial statements.
20
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Retained
Additional Earnings
Common Stock Paid-In Notes (Accumulated
Shares Amount Capital Receivable Deficit) 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 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
================================================================================
The accompanying notes are an integral part of these financial statements.
21
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
Years Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (7,889) $(22,442) $(11,902)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,960 1,969 2,111
Amortization of goodwill 40 1,350 665
Acquired research and development in process -- 6,462 13,032
Deferred income taxes -- 2,289 (56)
Changes in assets and liabilities:
Accounts receivable 1,740 3,189 (1,845)
Inventories (1,707) 6,811 (664)
Income tax refund receivable 3,983 (3,580) --
Prepaid expenses and other assets (146) 1,026 862
Accounts payable 779 (1,321) 1,439
Accrued liabilities (2,956) (2,644) 1,623
--------------------------------------------
Net cash provided by (used in) operating activities (4,196) (6,891) 5,265
--------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (2,644) (2,270) (2,927)
Purchases of short-term investments (3,443) -- --
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)
Holdback amount from acquisition (456) (659) 1,115
--------------------------------------------
Net cash used in investing activities (6,543) (1,399) (9,632)
--------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock 182 861 613
Repayment of stockholders' notes receivable -- -- 14
--------------------------------------------
Net cash provided by financing activities 182 861 627
--------------------------------------------
Effect of exchange rate changes on cash -- -- 53
--------------------------------------------
Net decrease in cash and cash equivalents (10,557) (7,429) (3,687)
Cash and cash equivalents, beginning of year 16,094 23,523 27,210
--------------------------------------------
Cash and cash equivalents, end of year $ 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 stock $ -- $ 403 $ 28
options
Common Stock issued for acquisition of NuCom $ -- $ -- $ 5,342
The accompanying notes are an integral part of these financial statements.
22
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, which it
markets primarily to original equipment manufacturers, distributors, value-added
resellers and system integrators. The Company's solutions are designed for use
in workgroups, wiring closets and 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 generally accepted
accounting principles 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
maturity of 90 days or less to be cash equivalents. The Company's short-term
investments, which consist of debt securities with maturities greater than 90
days and less than one year, have been classified as available-for-sale. For the
years ended December 31, 1998 and 1997, there were no material unrealized gains
or losses. Substantially all short-term investments are held in the Company's
name by major financial institutions.
Revenue Recognition
Revenue from product sales is recognized upon product shipment, provided that no
significant obligations remain and collectability 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, returns and allowances, and retroactive price
adjustments are recorded at the time products are shipped (see Sales Reserves
below).
Funding under 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 $556,000 in 1997 and 1996, respectively. No such funding was recognized in
1998.
Sales Reserves
The Company provides allowances for accounts receivables deemed uncollectible
and for sales returns and other credits, including credits for retroactive price
adjustments 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 percentage 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.
23
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. Depreciation is computed using the
straight-line method over the estimated useful life of the asset, typically
three years. Depreciation of the Enterprise Resource Planning systems, the
information systems infrastructure, and certain manufacturing equipment is based
on an estimated useful life of five years.
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, 1998 and 1997, goodwill, net of accumulated
amortization, was $133,000 and $173,000, 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 the Company does not capitalize any
software development costs.
Income Taxes
The Company accounts for income taxes under the 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.
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. 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.
24
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 Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), as permitted under the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Under APB 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.
Net Income Per Share
Basic earnings per share ("EPS") are computed as net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted EPS
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 1998, the Company incurred losses, such
that the inclusion of potential common shares would result in an antidilutive
per share amount. As such, no adjustment is made to the basic EPS to arrive at
the diluted EPS.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for
financial statements issued for periods beginning after December 15, 1997. SFAS
131 establishes standards for public companies to report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments 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 provisions of SFAS 131, the Company operated in one business segment in 1998
and 1997.
Reclassifications
Certain reclassifications have been made to the prior years' amounts in order to
conform to the current year's presentation.
25
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - 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
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - LINE OF CREDIT
The Company currently has a $5 million revolving bank line of credit, which
expires on July 31, 1999. 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. There were no borrowings under the line of credit in 1998 and 1997. As
of December 31, 1998, the Company was in compliance with the financial covenants
required by the line of credit agreement.
NOTE 5 - COMMITMENTS
The Company leases its corporate headquarters under an operating lease that
expires in October 2000. The Company also has research and development
facilities in New York and manufacturing facilities in Taiwan under various
operating leases expiring in August 2002 and May 2001, respectively. Rent
expense for all Company facilities was $764,000, $931,000, and $868,000 in 1998,
1997, and 1996, respectively.
Future minimum lease payments as of December 31, 1998 are as follows (in
thousands):
Years ending December 31,
1999 $ 754
2000 689
2001 250
2002 67
-------
$ 1,760
=======
The Company maintains letter-of-credit facilities of $3 million in total with
two financial institutions. Approximately $60,000 of letters of credit was
issued and outstanding at December 31, 1998.
The Company has entered into licensing agreements with third parties to use
certain technologies in the Company's products. Under the terms 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 STOCK
Employee Stock Purchase Plan
Effective May 1998, the Company terminated the 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 Plan,
the Company reserved 250,000 shares of Common Stock for issuance under the Plan,
and the Company has issued 223,606 shares of Common Stock for an aggregate
purchase price of $1,434,000.
Stock Option Plans
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
2,500,000 shares of the Company's Common Stock for issuance under the 1997 Plan.
Pursuant to the 1997 Plan, the exercise price per share of each stock option is
determined by the Company's Board of Directors, provided that (i) the exercise
price for an incentive stock option is not less than the fair market value of a
share of Common Stock on the date of the grant and (ii) the exercise price for a
nonstatutory stock option is not less than 85% of the fair market value of a
share of Common Stock on the date of the grant. Options under the 1997 Plan vest
over a period determined by
the Board of Directors, whichDirectors.
An Outside Director is generally four
years. As of December 31, 1998, optionseligible to purchase 1,795,093 shares of Common
Stock were outstanding; 704,907 shares were available for future grants; and
2,500,000 shares were authorized but unissued.
27
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Upon adoption ofparticipate in 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 and
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, options to purchase a total of
958,510 shares of Common Stock under the 1993 Plan and the 1996 Plan were
outstanding.
TheCompany's 1994 Outside
Directors Stock Option Plan (the "1994"Outside Directors Plan"),. The Outside
Directors Plan, as amended,
which provides for the automatic granting of nonqualifiednonstatutory
stock options to directorsOutside 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 eachCompany. Each new Outside Director
will be granted an option to purchase 15,000 shares of the Company's Common
Stock and to eachon the date of election. Each continuing Outside Director will be granted
an option to purchase 5,000 shares of Common Stock on the date of each annual
meeting of stockholders.
3
Option Grants in Last Fiscal Year
The following table sets forth details regarding stock options granted to the
Named Officers in 2000. The Company granted no stock appreciation rights in
2000. In addition, in accordance with the SEC rules, the table shows the
hypothetical gains or "option spreads" that would exist for the respective
options. These gains are based on assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the options were granted over the full
option term. The actual value, if any, an executive may realize will depend on
the spread between the market price and the exercise price ofon the stock options
will bedate the
option is exercised.
Individual Grants
------------------------------------------------------ Potential Realizable Value at
Number of Percent of Assumed Annual Rates of Stock
Securities Total Options Exercise Price Appreciation for Option
Underlying Granted to or Base Term (1)
Options Employees in Price Expiration -----------------------------
Name Granted Fiscal Year Per Share Date 5% 10%
- --------------------------------------------------------------------------------------------------------------
James Regel 250,000 11.95% $ 13.375 08/01/2010 $2,102,866 $5,329,076
125,000 5.98% 11.875 08/24/2010 933,515 2,365,711
Joseph Botta 12,500 0.60% 24.375 04/18/2010 191,616 485,593
50,000 2.39% 11.875 08/24/2010 373,406 946,285
Robert Zecha 12,500 0.60% 24.375 04/18/2010 191,616 485,593
20,000 0.96% 11.875 08/24/2010 149,362 378,514
William F. Rosenberger - - - - - -
James Sullivan 10,000 0.48% 24.375 04/18/2010 153,293 388,475
- ----------
(1) The potential gain is calculated based on the fair market value of the
Company's Common Stock on the date of grant, and
options vest over a periodwhich is equal to the closing
price reported on the Nasdaq National Market. These amounts only represent
certain assumed rates of four years. At December 31, 1998, options to
purchase 45,000 sharesappreciation as established by the SEC. Actual
gains, if any, on stock option exercises are dependent upon the future
performance of Common Stock were outstanding; 105,000 shares were
available for future grants; and 150,000 shares of Common Stock were authorized
but unissued under the 1994 Plan.
The Company has elected to continue to follow APB 25 in accounting for its
employee stock options and adopted the disclosure-only requirements of SFAS 123.
SFAS 123 requires the disclosure of pro forma net income and earnings per share
as if the Company had accounted for its employeeand overall stock market conditions. There can
be no assurance that the amounts reflected in this table or the associated
rates of appreciation will be achieved.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth certain information concerning options underexercised
by the fair
value method in accordance with SFAS 123. The fairNamed Officers during 2000, including the aggregate value of these options is
estimatedgains on the
date of grant usingexercise. In addition, this table includes the Black-Scholes option-pricing model withnumber of shares covered
by both exercisable and unexercisable stock options as of year-end. Also
reported are the following weighted-average assumptions: zero dividend yield; expected
volatilityvalues for "in-the-money" options, which represent the positive
spread between the exercise price of 82.35% in 1998, 77.24% in 1997,any such existing stock options and 69.36% in 1996; risk-free
interest rate of 4.64% in 1998, 5.36% in 1997 and 5.48% in 1996; and all options
are exercised at vesting.
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 123, the Company's net loss and net loss per share would
have been as follows (in thousands, except per share amount):
1998 1997 1996
- --------------------------------------------------------------------------------
Net loss - 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 marketyear-end price of the Company's Common Stock
during 1997, a substantial amount of stock options granted had exercise prices
above 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.
28
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Stock.
The following table summarizes information about stock options outstanding
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
Shares at December 31, 1998:
OutstandingFiscal Year End at Fiscal Year End (1)
Acquired Value ----------------------------- ----------------------------
Name on Exercise Realized Exercisable -------------------------------------------- ------------------------
Weighted Average Weighted Weighted
Range of Remaining Contractual Average Average
Exercise Prices Shares Life (in years) Exercise Price Shares Exercise Price
--------------- -------------------------------------------- ------------------------
$ 0.30Unexercisable Exercisable Unexercisable
- $ 3.00 453,950 8.89 $ 2.36 74,900 $ 0.35
3.88 - 4.94 2,121,133 8.48 4.68 775,642 4.85
5.00 - 7.50 149,077 8.97 5.95 36,647 5.86
7.63 - 9.13 48,443 8.86 8.05 10,051 8.17
11.63 - 15.00 26,000 7.51 13.69 16,082 13.51
--------- -------
2,798,603 8.57 4.52 913,322 4.71
========= =======
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 7 - 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,
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%
=====================================
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)
Management believes that, based on a number of factors, it is not more likely
than not that the deferred tax assets will be utilized, such that a full
valuation allowance has been recorded.
As of December 31, 1998, the Company has Federal net operating loss
carryforwards of approximately $8.5 million which will expire beginning in 2013.
For state tax purposes, the Company has net operating loss carryforwards of
approximately $8.5 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
========
31
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,
1998 (in thousands):
Reduction Write-off
Write-off of in Work Closure of Of Excess
Goodwill Force Facilities Assets Other Total
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Reserve providedJames Regel - $ 962- - 375,000 $ 500- $ 200 $ 1,500 $ 500 $ 3,662
Reserve utilized in third quarter (962) -- (100) -- -- (1,062)
Reserve utilized in fourth quarter -- (373) (8) (1,122) (500) (2,003)
----------------------------------------------------------------------------------
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, 1998 $ -- $ (448) $ 70 $ 378 $ -- $ --
==================================================================================-
Joseph Botta - - 31,875 115,625 - -
Robert Zecha 15,000 1,078,594 97,915 64,585 159,842 37,502
William F. Rosenberger 285,102 2,699,438 6,564 - 15,179 -
James Sullivan 94,165 1,156,463 - - - -
NOTE 10 - SALES BY GEOGRAPHY
Export----------
(1) Market value of underlying securities, based on the closing price of the
Company's Common Stock, as reported by the Nasdaq National Market System,
on December 31, 2000 of $6.4375, minus the exercise price.
4
Employment Contracts and Change in Control Arrangements
In September 2000, the Company entered into an employment agreement with James
Regel whereby Mr. Regel agreed to become the President and Co-Chief Executive
Officer. Pursuant to the employment agreement, Mr. Regel's annual base salary is
$250,000, and Mr. Regel is eligible to earn an annual bonus of $100,000, of
which $75,000 is guaranteed during the first 12 months of his employment and the
payment of the remaining balance is based on the attainment of performance
objectives determined by the Compensation Committee. Mr. Regel was granted an
option to purchase 375,000 shares of the Company's Common Stock with a vesting
period of four years. If a change in control occurs during the first six months
of Mr. Regel's employment, 50% of his unvested stock options will immediately
vest; if a change in control occurs between the seventh- and the twelfth-month
of employment, 75% of his unvested stock options will immediately vest; and if a
change in control occurs after 12 months, all of his unvested stock options will
immediately vest. If Mr. Regel is terminated without cause or resigns upon
constructive termination following a change of control, he is entitled to
receive the following: (i) an amount equal to his annual base salary at the time
of termination, (ii) medical insurance coverage for one year, and (iii)
immediate vesting of all unvested stock options which remain exercisable for one
year following the termination. In October 2000, the Compensation Committee
approved an increase in Mr. Regel's annual base salary to $350,000,
retroactively effective as of the commencement of his employment with the
Company, and any guaranteed bonus already paid was considered part of the
increased salary.
In October 2000, the Company entered into an employment agreement with Ronald
Rutherford whereby Mr. Rutherford agreed to be the Vice President of Worldwide
Sales. The employment agreement provides that Mr. Rutherford's annual base
salary is $155,000 and that his annual target commission is set at $100,000.
Upon the commencement of his employment with the Company, Mr. Rutherford was
granted an option to purchase 160,000 shares of the Company's Common Stock with
a vesting period of four years. If a change in control occurs during the first
12 months of employment, 50% of Mr. Rutherford's stock options will immediately
vest, and if a change in control occurs after 12 months, all of Mr. Rutherford's
stock options will immediately vest. If Mr. Rutherford is terminated without
cause, he will receive a severance payment equal to his six-month base salary.
In December 2000, the Company entered into an employment agreement with James
Williams whereby James Williams accepted the position of Senior Vice President
of Finance and Administration, Secretary, Treasurer and Chief Financial Officer.
The employment agreement with Mr. Williams provides that his annual base salary
is $225,000. Upon the commencement of his employment with the Company, Mr.
Williams was granted an option to purchase 175,000 shares of the Company's
Common Stock with a vesting period of four years. If a change in control occurs
during the first six months of employment, 50% of Mr. Williams' stock options
will immediately vest; if a change in control occurs between the seventh- and
the twelfth-month of employment, 75% of Mr. Williams' stock options will
immediately vest; and if a change in control occurs after 12 months, all of Mr.
Williams' stock options will immediately vest. If Mr. Williams is terminated
without cause, he will receive a severance payment equal to his six-month base
salary.
In December 2000, the Company also entered into an employment agreement with Mr.
Baker whereby Mr. Baker agreed to be the Senior Vice President of Engineering
and Chief Technology Officer. The employment agreement with Mr. Baker provides
that his annual base salary is $235,000 and that he is eligible to earn a bonus
of $150,000 based on the performance objectives set forth in the bonus plan.
Upon the commencement of his employment with the Company, Mr. Baker was granted
an option to purchase 200,000 shares of the Company's Common Stock with a
vesting period of four years. If a change in control occurs during the first 12
months of employment, 50% of Mr. Baker's stock options will immediately vest,
and if a change in control occurs after 12 months, all of Mr. Baker's stock
options will immediately vest. If Mr. Baker is terminated without cause, he will
receive a severance payment in the amount of his six-month base salary.
The Company has entered into a separation and release agreement with Joseph
Botta. Pursuant to the agreement, upon the closing of the proposed merger with
FalconStor, Inc., Mr. Botta shall receive a severance payment of $500,000 in
total (in the form of cash payment from the Company and proceeds from sales of
the Company's Common Stock upon exercise of his vested stock options). In
addition, in exchange for his signing of the agreement, Mr. Botta waives his
right to customers outsidethe severance benefits set forth in the salary continuation agreement
that was previously entered into with the Company.
The Company has also entered into a salary continuation agreement with Robert
Zecha. Such agreement provides that in the event Mr. Zecha is terminated,
including a constructive termination or a termination within a specified time
period around a change in control, as those terms are defined in each agreement,
he shall be entitled to continued salary and bonus payments for a period of North America represented 31%, 26%,one
year. Mr. Zecha shall also be entitled to continued medical coverage by the
Company during the period of salary continuation unless he is covered by another
employer's group health plan. In the event of a change in control, all stock
options granted to Mr. Zecha shall become exercisable 30 days before the
consummation of such change in control.
The Company's 1997 Stock Plan provides that the Board of Directors may, in its
sole discretion, accelerate the vesting and 21%the ability to exercise options in
the event of a change of control.
5
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
During 2000, no member of the Compensation Committee was an executive officer or
employee of the Company. In addition, no executive officer of the Company 's net sales forhas
served on the years ended December 31, 1998, 1997 and
1996, respectively. Asboard of directors or compensation committee of any other entity
that has an executive officer serving as a percentage of net sales, export sales 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%member of the Company's net sales in
1998. No one foreign country accounted for more than 10%Board of
the Company's net
sales in 1997 and 1996.
32
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - CONCENTRATIONS
In 1998, the Company purchased more than $7 million of its finished good
inventories from a turnkey manufacturer. In the event that this turnkey
manufacturer fails to deliver the required volumes or decides to discontinue its
production for 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 cause delay in
production and possibly loss in sales, which could adversely impact the
Company's operating results.Directors.
Compensation Committee Report on Executive Compensation
The Company's chairmanCompensation Committee of the Board of Directors is a directorcomprised of
this turnkey manufacturer.non-employee directors. The following table summarizesCompensation Committee is responsible for setting
and administering policies governing compensation of executive officers. The
Compensation Committee reviews the percentage of net sales accountedperformance and compensation levels for
byexecutive officers, sets salary and bonus levels and makes option grants under
the Company's significant customers1997 Option Plan.
Compensation Policies
The goals of the Company's executive officer compensation policies are to
attract, retain and reward executive officers who contribute to the Company's
success, to align executive officer compensation with salesthe Company's performance
and to motivate executive officers to achieve the Company's business objectives.
The Company uses salary, bonuses and stock options to achieve these goals. The
Compensation Committee reviews various available data, including compensation
surveys, to enable the Compensation Committee to compare the Company's
compensation package with that of 10% or more:
Years ended December 31,
1998 1997 1996
---------------------------------------------------------
Customer A 35% 39% 26%
Customer B 11% -- --
Customer C -- -- 15%
Customer D -- -- 12%
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
"Electionother high technology companies of Directors"similar
size and growth rates in the Company's Proxy Statementgeographic area.
Compensation Components
Salaries are set for each executive officer with reference to a range of
salaries for comparable positions among high technology companies of similar
size, growth rate and location. Annual salary adjustments take into account
achievements of individual executive officers during the 1999 Annual
Meeting.
ITEM 11. EXECUTIVE COMPENSATIONprior fiscal year as
measured against key Company-wide objectives set each year by the Board of
Directors, as well as the executive officers' performance of their individual
responsibilities. Each Compensation Committee member weighs objective and
subjective performance factors, and a consensus is obtained through discussion.
The information requiredCompensation Committee also considers relative levels of responsibility
among executive officers in attempting to reach equitable and appropriate
projected compensation levels.
Cash incentive compensation is provided through participation in the Company's
executive bonus plan. The Compensation Committee determines the amount of an
individual's bonus based on subjective judgment of the Company's financial
performance and the achievement of established goals. A performance bonus of
$200,000 was paid to William Rosenberger in 2000.
The Compensation Committee strongly believes that equity ownership by this item is included under "Compensationexecutive
officers provides incentives to build stockholder value and aligns the interests
of Executive Officers"executive officers with the stockholders. The size of an initial option grant
to an executive officer has generally been determined with reference to
comparable equity compensation offered by high technology companies of similar
size for similar positions, the responsibilities and "Reportexpected future
contributions of the executive officer, as well as recruitment considerations.
In determining the size of subsequent grants, the Compensation Committee has
considered the individual executive officer's performance during the previous
fiscal year, the expected contributions during the coming year, the amount of
options already held and the level of recent grants. Stock options granted to
executive officers during 2000 were based upon available data concerning option
grants to executive officers of companies of similar size, growth and location
and a review of recent grants. The Compensation Committee believes that future
subsequent option grants, with vesting schedules of up to four years, will
provide strong incentives for executive officers to remain with the Company.
Chief Executive Officer Compensation
The Compensation of the Chief Executive Officer is based upon the same criteria
outlined above for the other executive officers of the Company. While the Chief
Executive Officer makes recommendations about the compensation levels, goals and
performance of the other executive officers, he does not participate in the
discussions regarding his compensation or performance.
Qualifying Compensation
The Compensation Committee has considered the potential impact of Section 162(m)
of the Internal Revenue Code ("Section 162(m)") adopted under the Federal
Revenue Reconciliation Act of 1993. Section 162(m) disallows a tax deduction for
any publicly held corporation for certain executive officers' compensation
exceeding $1 million per person in any taxable year unless it is "performance
based" within the meaning of Section 162(m). Since to date the cash
6
compensation plus restricted stock vesting of each of the Company's executive
officers has been below the $1 million threshold and since the Committee
believes that any options granted under the Company's option plan will meet the
requirement of being performance-based under the provisions of Section 162(m),
the Committee believes that Section 162(m) will not reduce the tax deduction
available to the Company for fiscal year 2000 or prior years. The Company's
policy is, to the extent reasonable, to qualify its executive officers'
compensation for deductibility under the applicable tax laws.
Submitted by the Compensation Committee
Charles Hart, Chairperson
Thomas Brown
Michael Gardner
Stock Performance Graph
The following graph compares the cumulative total return on Executive
Compensation"the Company's Common
Stock with the Nasdaq Stock Market Index, an indicator of broad market
performance, and the Nasdaq Computer Manufacturer Stocks Index (SIC 357), an
indicator of the market performance of this sector, over the past five years.
The graph assumes a $100 investment at the closing price on December 29, 1995 in
the Company's Proxy Statement forCommon Stock and in each index listed above, and reinvestment of
dividends. Dividends have never been declared on the 1999 Annual Meeting.Company's Common Stock. The
stock price performance shown on the graph below is not necessarily indicative
of future price performance.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
[LINE CHART INSERTED HERE IN PRINTED COPY]
PLOT POINTS FROM LINE GRAPH
12/95 12/96 12/97 12/98 12/99 12/00
----- ----- ----- ----- ----- -----
Network Peripherals Inc. $100 $151 $ 62 $ 38 $402 $ 55
Nasdaq Stock Market Index $100 $123 $151 $213 $395 $238
Nasdaq Computer Manufacturer Index $100 $134 $162 $352 $746 $420
7
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 "Electionfollowing table sets forth the beneficial ownership of Directors"the Company's Common
Stock as of April 19, 2001 by: (a) each director; (b) each of the executive
officers named in the Summary Compensation Table; (c) all current directors and
executive officers as a group; and (d) each person known to the Company who
beneficially owns 5% or more of the outstanding shares of its Common Stock. The
number and percentage of shares beneficially owned is determined under rules of
the SEC, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership includes
any shares as to which the individual has sole or shared voting power or
investment power and also any shares which the individual has the right to
acquire within 60 days after April 19, 2001 through the exercise of any stock
option or other right. To the Company's Proxy Statement forknowledge, the 1999 Annual Meeting.persons named in the
following table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them, subject to community
property laws where applicable and the information contained in the footnotes to
this table. A total of 12,850,899 shares of the Company's Common Stock were
issued and outstanding as of April 19, 2001.
Shares Beneficially Owned
-------------------------
Name of Beneficial Owner Number Percent
- --------------------------------------------------------------------------------
Senaca Ventures (1)................................. 957,800 7.1%
Glenn Penisten (2).................................. 406,925 3.0%
Thomas Brown (3).................................... 3,750 *
Michael Gardner (3)................................. 24,354 *
Charles Hart (3).................................... 27,604 *
James Regel......................................... - *
Joseph Botta (3).................................... 43,853 *
Robert Zecha (4).................................... 127,602 *
William F. Rosenberger (5).......................... - *
James Sullivan (5).................................. - *
All current directors and executive officers
as a group (9 persons) (6)....................... 506,486 3.8%
- ----------
* Represents less than 1%.
(1) Based on information contained in the Schedule 13G filed on February 14,
2001 with the SEC by the above entity and other members of a group of which
this entity is a part, including Woodland Venture Fund, Woodland Partners,
Barry Rubenstein and Marilyn Rubenstein.
(2) Includes 386,667 shares issuable upon exercise of outstanding stock
options, which are exercisable within 60 days after April 19, 2001.
(3) Represents the number of shares issuable upon exercise of outstanding stock
options, which were exercisable within 60 days after April 19, 2001.
(4) Includes 115,102 shares issuable upon exercise of outstanding stock
options, which are exercisable within 60 days after April 19, 2001.
(5) Former executive officer of the Company named in the Summary Compensation
Table.
(6) Includes 486,228 shares issuable upon exercise of outstanding stock
options, which are exercisable within 60 days after April 19, 2001
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under "Compensation Committee
InterlocksNo such relationships and Insider Participation Decisions" in the Company's Proxy Statement
for the 1999 Annual Meeting.
34transactions are to be reported.
8
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
(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
SIGNATURESSIGNATURE
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 27, 2001.
NETWORK PERIPHERALS INC.
By: \s\ WILSON CHEUNG
-----------------------------
Wilson Cheung/s/ JAMES WILLIAMS
------------------------------
James Williams
Senior Vice President of Finance and
Administration, Secretary, Treasurer
and Chief Financial 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
--------------------------
Charles Hart
\s\ GLENN PENISTEN Chairman of the Board
--------------------------
Glenn Penisten
37
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, 1996
Allowance for doubtful accounts $ 200 $-- $ 21 $ (12) $ 209
Allowance for sales returns and other
credits 538 -- 6,743 (6,336) 945
------------------------------------------------------------------
Total allowances for doubtful accounts and
sales returns 738 -- 6,764 (6,348) 1,154
Year ended December 31, 1997
Allowance for doubtful accounts 209 -- 138 (49) 298
Allowance for sales returns and other credits 945 -- 3,593 (3,652) 886
------------------------------------------------------------------
Total allowances for doubtful accounts and
sales returns 1,154 -- 3,731 (3,701) 1,184
Year ended December 31, 1998
Allowance for doubtful accounts 298 -- 49 (264) 83
Allowance for sales returns and other credits 886 -- 187 (633) 440
------------------------------------------------------------------
Total allowances for doubtful accounts and
sales returns $ 1,184 $-- $ 236 $ (897) $ 523
==================================================================
389