UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION PERIOD PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
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
incorporation or organization) Identification Number)
2859 Bayview Drive
Fremont, California 94538
(Address, including zip code, of principal executive offices)
(510) 897-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
The number of shares of the Registrant's Common Stock, $0.001 par value,
outstanding as of May 5, 2000 was 15,470,922.
NETWORK PERIPHERALS INC.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETWORK PERIPHERALS INC.
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands, except share data)
March 31, December 31,
2000 1999
---------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 169,068 $ 4,730
Short-term investments 972 4,985
Accounts receivable, net of allowance for doubtful accounts
and returns of $317 and $364 2,689 428
Receivable from sale of assets 720 720
Inventories 3,643 3,830
Prepaid expenses and other current assets 648 815
---------------- ---------------
Total current assets 177,740 15,508
Property and equipment, net 5,424 4,984
Other assets 270 360
---------------- ---------------
$ 183,434 $ 20,852
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,410 $ 1,534
Accrued liabilities 1,765 1,409
---------------- ---------------
Total current liabilities 3,175 2,943
---------------- ---------------
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;
15,804,000 and 12,749,000 shares issued and outstanding 16 13
Additional paid-in capital 232,201 65,955
Accumulated deficit (51,942) (48,059)
Unrealized loss on investments (16) -
---------------- ---------------
Total stockholders' equity 180,259 17,909
---------------- ---------------
$ 183,434 $ 20,852
================ ===============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
3
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(in thousands, except per share data)
Three Months Ended
March 31,
-----------------------------------
2000 1999
---------------- ---------------
Net sales $ 3,305 $ 3,783
Cost of sales 2,518 3,118
---------------- ---------------
Gross profit 787 665
---------------- ---------------
Operating expenses:
Research and development 2,414 1,392
Marketing and selling 1,997 1,331
General and administrative 1,038 775
---------------- ---------------
Total operating expenses 5,449 3,498
---------------- ---------------
Loss from operations (4,662) (2,833)
Interest income 779 267
---------------- ---------------
Loss before income taxes (3,883) (2,566)
Income taxes - -
---------------- ---------------
Net loss $(3,883) $(2,566)
================ ===============
Net loss per share:
Basic and diluted $ (0.28) $ (0.21)
================ ===============
Weighted average common shares:
Basic and diluted 13,682 12,311
================ ===============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
4
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
Three Months Ended
March 31,
-----------------------------------
2000 1999
---------------- ---------------
Cash flows from operating activities:
Net loss $ (3,883) $ (2,566)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 541 441
Changes in assets and liabilities:
Accounts receivable (2,261) 950
Inventories 187 (817)
Prepaid expenses and other assets 247 6
Accounts payable (124) (39)
Accrued liabilities 356 (433)
---------------- ---------------
Net cash used in operating activities (4,937) (2,458)
---------------- ---------------
Cash flows from investing activities:
Proceeds from sales or maturity of short-term investments 3,997 2,214
Purchases of property and equipment (971) (242)
---------------- ---------------
Net cash provided by investing activities 3,026 1,972
---------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net of offering costs 166,249 249
---------------- ---------------
Net cash provided by financing activities 166,249 249
---------------- ---------------
Net increase (decrease) in cash and cash equivalents 164,338 (237)
Cash and cash equivalents, beginning of period 4,730 5,537
---------------- ---------------
Cash and cash equivalents, end of period $ 169,068 $ 5,300
================ ===============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
5
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Network
Peripherals Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not contain all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, the
accompanying unaudited consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the Company's financial condition
as of March 31, 2000 and December 31, 1999, and the results of its
operations and its cash flows for the three-month periods ended March
31, 2000 and 1999. These financial statements should be read in
conjunction with the audited consolidated financial statements of the
Company as of December 31, 1999 and 1998 and for each of the three
years in the period ended December 31, 1999, including notes thereto,
included in the Company's Annual Report on Form 10-K (Commission File
No. 0-23970).
Operating results for the three-month period ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 2000 or for any other future period.
2. NET LOSS PER SHARE
Basic earnings per share are computed as net earnings divided by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could
occur from common shares issuable through stock-based compensation
including stock options, restricted stock awards, warrants, and other
convertible securities using the treasury stock method. For the three
months ended March 31, 2000 and 1999, the Company incurred net losses,
such that the inclusion of potential common shares would result in an
antidilutive per share amount. Accordingly, no adjustment is made to
the basic net loss per share to arrive at the diluted net loss per
share.
3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (in thousands)
December 31,
March 31, 2000 1999
---------------------------------------- -------------
Unrealized
Amortized Holding Fair Market Fair Market
Cost Losses Value Value
---------------------------------------- -------------
Cash and cash equivalents:
Cash and money market funds $ 87,154 $ - $ 87,154 $ 2,442
Corporate debt securities 81,692 (13) 81,679 2,288
U.S. government agencies' securities 235 - 235 -
---------------------------------------- -------------
169,081 (13) 169,068 4,730
---------------------------------------- -------------
Short-term investments:
Corporate debt securities 975 (3) 972 4,985
---------------------------------------- -------------
975 (3) 972 4,985
---------------------------------------- -------------
Total $ 170,056 $(16) $170,040 $ 9,715
======================================== =============
<FN>
The amortized cost at December 31, 1999 approximated fair market value.
</FN>
6
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BALANCE SHEET COMPONENTS (in thousands)
March 31, December 31,
2000 1999
---------------- ----------------
Inventories:
Raw materials $ 2,051 $ 2,285
Work-in-process 910 401
Finished goods 682 1,144
---------------- ----------------
$ 3,643 $ 3,830
================ ================
Property and equipment:
Computers and equipment $ 9,053 $ 8,106
Furniture and fixtures 771 750
Leasehold improvements 531 528
---------------- ----------------
10,355 9,384
Accumulated depreciation (4,931) (4,400)
---------------- ----------------
$ 5,424 $ 4,984
================ ================
Accrued liabilities:
Salaries and benefits $ 612 $ 592
Warranty 376 375
Research and development expenses 349 -
Co-op advertising and market development funds 275 250
Other 153 192
---------------- ----------------
$ 1,765 $ 1,409
================ ================
5. FOLLOW-ON PUBLIC OFFERING
In March 2000, the Company completed a follow-on public offering of
2,875,000 shares of its Common Stock at a price of $60.875 per share,
resulting in net proceeds to the Company of approximately $165 million,
after deducting offering costs.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133."
SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal
years beginning after June 15, 2000. The Company will adopt SFAS No.
133 during its year ending December 31, 2001. To date, the Company has
not engaged in derivative or hedging activities. The Company is unable
to predict the impact of adopting SFAS No. 133 if the Company was to
engage in derivative and hedging activity in the future.
In December 1999, the Securities and Exchange Commissions issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the Staff's views in
applying generally accepted accounting principles to revenue
recognition in financial statements. The Company does not expect the
adoption of SAB No. 101 to have a material effect on its results of
operations.
7
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions involving Stock Compensation." FIN 44
clarifies the application of APB Opinion No. 25 regarding (a) the definition of
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a stock option plan qualifies as a noncompensatory plan, (c)
the accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions cover specific events that occur after either December
15, 1998, or January 12, 2000. Management believes that the adoption of FIN 44
will not have a material effect on the financial position or results of
operations of the Company.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
The following forward-looking statements are made in reliance upon the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
future events described in such statements involve risks and uncertainties,
including:
o the timely development and market acceptance of our new products;
o the market demand by customers for our existing products, including demand
by OEM customers for custom products;
o competitive actions, including pricing actions and the introduction of new
competitive products, that may affect the volume of sales of our products;
o uninterrupted supply of key components, including semiconductor devices and
other materials, some of which may be sourced from a single supplier;
o uninterrupted service by contract manufacturers;
o our ability to recruit, train and retain key personnel, including engineers
and other technical professionals;
o the development of new technologies rendering our existing technologies and
products obsolete;
o the economies of countries where our 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 interim
report.
OVERVIEW
We were incorporated in California in March 1989 and were reincorporated in
Delaware in 1994. Our initial business focus was on networking products based on
fiber distributed data interface, or FDDI, technology, and we obtained a
significant share of the market for FDDI adapter products in the early 1990s.
Because the market for FDDI-based products declined significantly beginning in
1995, we developed a new line of Layer 2 Fast Ethernet switching products that
we first shipped in early 1996. By 1998, the market for our FDDI-based products
and our Layer 2 Fast Ethernet products (together, our "legacy products")
declined substantially, and we committed nearly all of our resources to the
development of a new line of Layer 3 Gigabit Ethernet switches (collectively
"NuWave products") founded on our NuWaveArchitecture, which combines our
advanced design and our proprietary application specific integrated circuits, or
ASICs. Accordingly, a substantial portion of our operating expenses has been
incurred for the design and development of our custom ASICs, the development of
network management software and the testing of prototype designs. We commenced
limited commercial shipments of our first NuWave product in December 1999 and
volume shipments of all NuWave products during the first quarter of 2000. We
anticipate that substantially all of our revenues in future periods will be
derived from sales of NuWave products and that sales of our legacy products will
decline to immaterial levels by the end of 2000.
In 2000, we intend to focus our sales and marketing efforts on developing and
expanding our OEM customer base for our NuWave products, and to a lesser extent,
to continue servicing existing reseller customers while seeking new
opportunities in the reseller channel. Therefore, we expect to derive the
majority of our revenue in 2000 from our OEM customers. During the first quarter
of 2000, sales to OEM customers accounted for 55% of total net sales while 45%
of net sales were made to the reseller channel.
Cost of revenue is comprised principally of payments to our materials suppliers
and contract manufacturers, final assembly costs, costs associated with
manufacturing and quality functions, inventory management costs and certain
other product costs. We expect our gross profit to be affected by many factors,
including:
o declines in the average selling price of our products;
o fluctuations in demand for our products;
o the volume of products sold;
9
o the mix of products sold;
o the mix of sales channels through which our products are sold; and
o new product introductions both by us and our competitors.
Generally, we realize higher margins on sales to the reseller channel than on
sales to OEMs. Any change in the mix between the channels or the loss of a major
customer could adversely affect our gross margin, operating results and
financial condition. We experienced significant erosion in the average selling
prices of our legacy products, and we anticipate that the average selling prices
of our NuWave products will decrease from their levels at introduction and
fluctuate in the future. Therefore, to maintain or increase our gross margins,
we must develop and introduce new products and enhancements on a timely basis.
We must also continually reduce our costs of production. As our average selling
prices decline, we must increase our unit sales volume to maintain or increase
our revenue.
We intend to allocate materials procurement, product assembly and test
engineering in reliability and burn-in between our own manufacturing facility
and Solectron, our contract manufacturer, to obtain optimal production
efficiencies. We will continue to perform component and supplier qualification,
quality assurance and document control at our facilities. We believe that this
strategy will enable us to improve gross margins if volumes increase.
In transitioning from our legacy business to our NuWave business, we have
incurred significant losses in the past three years primarily reflecting
declining revenues of legacy products in conjunction with substantial
investments in research and development to bring NuWave products to market.
Although we expect revenues to increase to the extent that we broaden the
customer base for our NuWave family of products in 2000, we cannot assure you
that such revenues will exceed production costs and operating expenses in the
same periods.
RESULTS OF OPERATIONS
Net Sales
Net sales for the three months ended March 31, 2000 (the "quarter") were $3.3
million, compared to $3.8 million for the three months ended March 31, 1999 (the
"comparable quarter"). The decrease in net sales reflected the winding down of
the legacy business throughout 1999, as demand for such products experienced
rapid decline, offset by the ramp up of the NuWave business, which commenced
shipment in the final weeks of 1999. The quarter ended March 31, 2000 was the
first quarter in which NuWave products were produced and shipped in mass volume.
Net sales to OEMs were $1.8 million for the quarter, decreased from $2.0 million
for the comparable quarter. Net sales to the reseller channel, which followed a
similar trend, decreased to $1.5 million for the quarter from $1.8 million for
the comparable quarter. Geographically, net sales to North America customers
increased to $2.2 million for the quarter from $1.9 million for the comparable
quarter, while net sales to international customers decreased to $1.1 million
for the quarter from $1.9 million for the comparable quarter. The fluctuations
in the sales channels and the geographical regions reflected changes in our
customer base as a result of our migration away from our legacy business to our
next generation NuWave business. As we are only in the early stage of the NuWave
business, we expect such fluctuations to continue for several more quarters.
Gross Profit/Margin
Gross margin was 24% for the quarter, compared to 18% for the comparable
quarter. The improvement of gross margin was the result of commercial shipments
of higher-margin NuWave products in the first quarter of 2000. In addition,
gross margin for the comparable quarter was exceptionally low as the decline in
production volume of legacy products resulted in under-utilization of our
manufacturing facilities.
Research and Development
Research and development expenses were $2.4 million for the quarter, compared to
$1.4 million for the comparable quarter. The increase in research and
development expenses was primarily due to the hiring of
10
additional engineers and increased spending in professional fees and prototype
expenses related to enhancing existing products based on the NuWaveArchitecture,
reducing costs and developing new products and technologies. We believe that
continued investment in research and development activities is essential to
achieve our strategic objectives, and we expect research and development
expenses to increase in the future.
Marketing and Selling
Marketing and selling expenses were $2.0 million for the quarter, compared to
$1.3 million for the comparable quarter. The increase in marketing and selling
expenses was due to increased spending in advertising and other marketing
activities in conjunction with the launch of NuWave business. We expect
marketing and selling expenses to increase during the remainder of 2000, as we
intend to intensify sales and marketing campaigns and expand our field sales and
technical support staff to penetrate the reseller market and seek additional OEM
customers.
General and Administrative
General and administrative expenses were $1.0 million for the quarter, compared
to $775,000 for the comparable quarter. The increase in general and
administrative expenses was primarily attributed to increased professional fees
incurred for investor relations and information technology related services. We
expect to have a moderate increase in general and administrative expenses during
the remainder of 2000, as we strengthen our finance and information system
infrastructure in anticipation of growth in businesses.
Interest Income
Interest income was $779,000 for the quarter and $267,000 for the comparable
quarter. The increase in return on investments was primarily due to an increase
in the aggregate balance of cash, cash equivalents and short-term investments,
of which approximately $165 million was received in March 2000 from our
follow-on public offering.
Income Taxes
The Company did not record a tax benefit associated with the net loss incurred,
as the realization of deferred tax assets is deemed uncertain based on evidence
currently available. Accordingly, a full valuation allowance has been provided.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. In July 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No.
137 deferred the effective date of SFAS No. 133 until fiscal years beginning
after June 15, 2000. We will adopt SFAS No. 133 during the year ending December
31, 2001. To date, we have not engaged in derivative or hedging activities. We
are unable to predict the impact of adopting SFAS No. 133 if we were to engage
in derivative and hedging activity in the future.
In December 1999, the Securities and Exchange Commissions issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We do not expect the adoption of SAB No. 101 to have a material
effect on our results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions involving Stock Compensation." FIN 44
clarifies the application of APB Opinion No. 25 regarding (a) the definition of
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a stock option plan qualifies as a noncompensatory plan, (c)
the accounting consequence of various modifications
11
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998, or January 12, 2000. We believes that the
adoption of FIN No. 44 will not have a material effect on our financial position
or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The aggregate balance of cash, cash equivalents and short-term investments was
$170.0 million at March 31, 2000, compared to $9.7 million at December 31, 1999.
The increase of $160.3 million was primarily due to the net proceeds of $165
million received from our follow-on public offering of 2,875,000 shares of
common stock completed in March 2000, partially offset by cash used to finance
operations and capital expenditures.
Net cash used in operating activities was $4.9 million for the quarter, compared
to $2.5 million for the comparable quarter. The increase in net cash used in
operating activities was primarily attributed to increases in net loss and
accounts receivable. We expect negative cash flows from operations to continue
until we realize net income. Our capital expenditures totaled $971,000 for the
quarter and $242,000 for the comparable quarter, primarily related to purchases
of test equipment and related software for research and development activities.
We expect to incur capital expenditures of over $2 million in 2000, including
leasehold improvements for our new research and development facilities described
below.
In March 2000, we entered into a lease agreement for a 24,000 square feet
facility in Long Island, New York, replacing the existing research and
development facilities. The lease agreement, which has a seven-year term,
requires payments of approximately $430,000 in total, including base rent and
utilities, in its first year and a 4% annual increase thereafter. We expect to
relocate to this new facility within the next three months, and at such time the
current lease will be terminated without penalty.
Subsequent to March 31, 2000, we announced our intention to repurchase up to 1
million shares of our common stock. The repurchase may take up to one year to
complete, and we expect to use our capital resources in such repurchase.
Our principal sources of liquidity are our cash, cash equivalents and short-term
investments that are expected to be used for general corporate purposes,
including expansion of operations and capital expenditures. We may also use
these capital resources to acquire or invest in businesses, technologies,
products or services that are complementary to our business. From time to time
we have discussed potential strategic acquisitions and investments with third
parties. We currently have no agreements or commitments regarding any
acquisitions or investments. In addition to our cash, cash equivalents and
short-term investments, we also have a $5 million revolving bank line of credit,
which expires on May 31, 2000 and is renewable on an annual basis. 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 our receivables,
inventory, and other tangible assets. There were no borrowings under the line of
credit as of March 31, 2000.
We believe that our current balance of cash, cash equivalents, and short-term
investments will be sufficient to satisfy our working capital and capital
expenditure requirements for the next 12 months.
BUSINESS RISKS
If any of the following risks actually occurs, our business, financial condition
or operating results could be materially adversely affected. The risks set forth
below are not the only risks facing us. Additional risks and uncertainties not
presently known to us, or that we currently see as immaterial, may also harm our
business.
We have a history of losses, expect future losses and cannot assure you that we
will achieve profitability.
We have experienced net losses in each of the last four fiscal years, and we
cannot be certain that we will realize sufficient revenue to achieve
profitability. We expect that we will continue to incur significant sales and
12
marketing and product development costs associated with the recent introduction
of the Gigabit Ethernet products based on our NuWaveArchitecture. Consequently,
we will need to generate significantly higher revenue to achieve and sustain
profitability. If sales of our NuWaveArchitecture products do not meet our
expectations, we will continue to experience losses indefinitely. In addition,
we have discontinued production of the Layer 2 Fast Ethernet and FDDI products
that accounted for our historical revenues. We intend to complete end-of-life
sales of these products in the first half of 2000. We cannot assure you that we
will be able to sell all inventories relating to these products. If we are
required to write-off any unsold inventory, our operating results could be
adversely affected.
Substantially all of our future revenue depends on the commercial success of
products based on our NuWaveArchitecture, and if these products do not achieve
market acceptance, our business will be seriously harmed.
Substantially all of our future revenue depends on the commercial success of
products based on our NuWaveArchitecture. If these products fail to meet the
needs of our target customers, or if they do not compare favorably in price and
performance to competing solutions, our revenue will not grow. We cannot assure
you that these products will achieve market acceptance. We have made only
limited sales of these products, and it is possible that they may not satisfy
our customers' requirements. Failure of products based on our NuWaveArchitecture
to satisfy our customers' requirements could delay or prevent their adoption. If
our target customers do not widely adopt, purchase and successfully deploy our
new products, our revenue will not grow significantly, or possibly at all, and
our business, financial condition and results of operations will be seriously
harmed.
A number of factors could cause our quarterly and annual financial results to be
worse than expected, which could result in a decline in our stock price.
To support anticipated sales of our NuWaveArchitecture products, we plan to
increase our operating expenses to expand our sales and marketing activities,
broaden our customer support capabilities, develop new distribution channels and
fund increased levels of research and development. We base our operating
expenses on anticipated revenue trends, and a high percentage of our expenses
are fixed in the short term. Consequently, any delay or failure in generating
revenue could cause our quarterly and annual operating results to be below the
expectations of public market analysts or investors, which could cause the price
of our common stock to decline.
We may fail or experience a delay in generating revenue for a number of reasons.
Our customer agreements typically provide that the customer may delay scheduled
delivery dates and cancel orders within specified time frames without
significant penalty. Accordingly, we may incur significant expenses without
meeting corresponding anticipated revenue levels for a given period. In
addition, the timing of product releases, purchase orders and product
availability could result in significant product shipments scheduled for the end
of a quarter. Failure to ship these products by the end of a quarter may
adversely affect our operating results.
Our periodic revenue and operating results have varied significantly in the past
and may vary significantly in the future due to a number of factors, including:
o market acceptance of and demand for our NuWaveArchitecture products;
o decreased average selling prices of our products;
o unexpected product returns or the cancellation or rescheduling of
significant orders;
o our ability to develop, introduce, ship and support new products and
product enhancements and manage product transitions;
o announcements and new product introductions by our competitors;
o our ability to achieve cost reductions;
o our ability to obtain sufficient supplies of components for our
products for which we rely on sole or limited source suppliers;
o increased prices of the components we purchase;
o our ability to attain and maintain production volumes and quality
levels for our products;
13
o the mix of products sold and the mix of distribution channels through
which they are sold; and
o costs relating to possible acquisitions and integration of technologies
or businesses.
Due to the foregoing factors, we believe that period-to-period comparisons of
our operating results should not be relied upon as an indicator of our future
performance.
Intense competition in the market for LAN equipment could prevent us from
increasing revenue or achieving or sustaining profitability.
The market for local area network, or LAN, equipment is intensely competitive.
Our principal competitors include Alcatel, Bay Networks, Cabletron Systems,
Cisco Systems, Ericsson, Extreme Networks, Foundry Networks, Lucent
Technologies, Nortel Networks, Siemens, and 3Com. Many of our current and
potential competitors have substantially greater financial, technical, sales,
marketing and other resources, as well as greater name recognition and larger
installed customer bases, than we do. These competitors have developed or could
in the future develop new technologies that compete with our products or even
render our products obsolete. We believe that this market will consolidate over
time and that this consolidation could adversely affect our ability to compete
effectively. A number of companies developing technologies similar to ours have
been acquired by our larger competitors. These acquisitions are likely to permit
our competitors to devote significantly greater resources to the development and
marketing of new competitive products and the marketing of existing products to
their installed bases. We expect that competition will increase as a result of
these and other industry consolidations and alliances.
To remain competitive, we believe we must, among other things, invest
significant resources in developing new products with superior performance at
competitive prices, enhance our NuWaveArchitecture products and maintain
customer satisfaction. If we fail to do so, our products may not compete
favorably, and our revenue and future profitability could suffer.
The average selling prices of our products may decrease rapidly, which may
reduce gross margins or revenue if we are unable to reduce our cost of goods
sold.
The enterprise LAN equipment industry has experienced rapid erosion of average
selling prices due to a number of factors, including competitive pricing
pressures and rapid technological change. We may experience substantial
period-to-period fluctuations in future operating results due to the erosion of
our average selling prices. We anticipate that the average selling prices of our
products will decrease in the future in response to competitive pricing
pressures, increased sales discounts, new product introductions by us or our
competitors or other factors. Therefore, to maintain our gross margins, we must
develop and introduce on a timely basis new products and product enhancements
and continually reduce our product costs. As the average selling prices for our
products are expected to decline, we will need to reduce our product costs,
particularly the cost of our ASICs. To reduce the cost of ASICs we intend to
integrate chips and reduce die sizes. However, we cannot be certain when or if
such price reductions will occur. Our failure to achieve cost reductions would
cause our revenue and gross margins to decline, which would harm affect our
operating results.
We must develop and expand our OEM relationships and other indirect distribution
channels to increase revenue and improve our operating results.
Our distribution strategy focuses primarily on developing and expanding indirect
distribution channels through original equipment manufacturers, or OEMs and, to
a lesser extent, resellers, as well as expanding our field sales organization.
If we fail to develop and cultivate relationships with significant OEMs, or if
these OEMs are not successful in their product development and sales efforts,
sales of our products may fail to increase and may even decrease. Our ability to
generate increased revenue depends significantly upon the ability and
willingness of our OEM customers to develop and promote products that
incorporate our technology on a timely basis. If our OEM customers do not
successfully market the solutions that incorporate our products, then sales of
our products to our OEM customers will be adversely affected. The ability and
willingness of OEM customers to develop and promote our products is based upon a
number of factors beyond our control. In addition, some of our current and
potential OEM customers could develop products internally that would replace our
products.
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The resulting lost sales of our products to any such OEMs, in addition to the
increased competition presented by these OEMs, could harm our business,
financial condition and operating results.
Although we have secured a limited number of OEM customers for our
NuWaveArchitecture products, nearly all of these customers are still at the
early stages of initial commercial shipments. If our OEM customers are unable to
or otherwise do not ship systems that are based on our products, or if their
shipped systems are not commercially successful, our business, operating results
or financial condition could suffer. In order to support for our indirect
distribution channels, we plan to expand our field sales and support staff. We
cannot assure you that this internal expansion will be successfully completed,
that the cost of this expansion will not exceed the revenue generated or that
our expanded sales and support staff will be able to compete successfully
against the significantly more extensive and well-funded sales and marketing
operations of many of our current or potential competitors. Our inability to
effectively establish our distribution channels or manage the expansion of our
sales and support staff could limit our ability to grow and increase revenue.
Our market is subject to rapid technological change, and we must continually
introduce new products that achieve broad market acceptance to compete
effectively.
The LAN equipment market is characterized by rapid technological change,
frequent new product introductions, changes in customer requirements and
evolving industry standards. If we do not address these changes by regularly
introducing new products, our product line will become obsolete. Developments in
routers and routing software could also significantly reduce demand for our
products. Alternative technologies could achieve widespread market acceptance
and displace the Ethernet technology on which our product lines and architecture
are based. We cannot assure you that our technological approach will achieve
broad market acceptance or that other technologies or devices will not supplant
our approach.
When we announce new products or product enhancements that have the potential to
replace or shorten the life cycle of our existing products, customers may defer
purchasing our existing products. These actions could harm our operating results
by unexpectedly decreasing sales, increasing our inventory levels of older
products and exposing us to greater risk of product obsolescence. The market for
enterprise LAN switching products is evolving, and we believe our ability to
compete successfully in this market is dependent upon the continued
compatibility and interoperability of our products with products offered by
other vendors. In particular, the networking industry has been characterized by
the successive introduction of new technologies and standards that have
dramatically reduced the price and increased the performance of enterprise LAN
equipment. To remain competitive, we need to introduce products in a timely
manner that incorporate or are compatible with these new technologies as they
emerge. We may experience delays in product development in the future, and any
delay in product introduction could adversely affect our ability to compete and
cause our operating results to be below our expectations or the expectations of
public market analysts or investors.
Because we expect to depend on a small number of OEM and distribution channel
customers for a significant portion of our revenue in any period, the loss of
any of these customers or any cancellation or delay of a large purchase by any
of these customers could significantly reduce our revenue.
Our sales strategy is to focus on selling our NuWaveArchitecture products to OEM
customers, and we anticipate that, although our largest customers may vary from
period-to-period, a small number of key OEM customers will account for a
significant portion of our revenues in each fiscal period. We cannot assure you
that we will be able to obtain OEM customers, and even if we are successful,
this strategy will pose a number of significant risks. The loss of any key OEM
customers, or a significant reduction in sales to those customers, could
significantly reduce our revenue below anticipated levels. Because our expense
levels are based on our expectations as to future revenue and to a large extent
are fixed in the short term, a substantial reduction or delay in sales of our
products to, or the loss of any significant OEM, reseller or other customer, or
unexpected returns from resellers could harm our business, operating results and
financial condition.
While we expect that our financial performance in any given period will depend
on orders from a small number of OEMs, resellers and other significant
customers, we do not have contracts with customers binding them to minimum
purchase quantities, except as set forth in a particular purchase orders. For
example:
15
o our customers can stop purchasing, and our OEMs and resellers can stop
marketing our products, at any time;
o our reseller agreements generally are not exclusive and are for one
year terms, with no obligation of the resellers to renew the
agreements; and
o our OEM and reseller agreements provide for discounts based on expected
or actual volumes of products purchased or resold by the reseller in a
given period.
In the future we expect to establish a program which, under specified
conditions, enables some distributors to return products to us. The amount of
potential product returns will be estimated and provided for in the period of
the sale; however, we cannot assure you that our estimates will be adequate to
cover actual returns.
The sales cycle for our products is long, and we may incur substantial
non-recoverable expenses or devote significant resources to sales that do not
occur when anticipated.
Our sales cycle, particularly to OEMs, typically involves a lengthy
qualification process during which we generally invest significant resources to
address customer specifications. Because of the length of the sales cycle, we
may experience delays between increasing expenses for research and development
and sales and marketing efforts and the generation of higher revenue, if any,
from such expenditures. If sales forecasted from a specific customer for a
particular quarter are not realized in that quarter, we may be unable to
compensate for the shortfall, which could harm our operating results. The
purchase of our products or of solutions that incorporate our products typically
involves significant internal procedures associated with the evaluation,
testing, implementation and acceptance of new technologies. This evaluation
process frequently results in a lengthy sales process, typically ranging from
three months to longer than a year, and subjects each sale to a number of
significant risks, including budgetary constraints and internal acceptance
reviews. The length of our sales cycle also may vary substantially from customer
to customer.
We purchase several key components for our products from single or limited
sources and could lose sales if these sources fail to meet our needs.
We currently purchase several key components used in the manufacture of our
products from single or limited sources and depend upon supply from these
sources to meet our needs. We may encounter shortages and delays in obtaining
components in the future that materially adversely affect our ability to meet
customer orders. In particular, NEC Corporation is the sole manufacturer of the
ASICs that form the core of our NuWaveArchitecture products. We do not have a
long-term supply contract with NEC that obligates them to continue to supply
components to us, and it is possible that they could allocate their resources to
their other customers in the future, which could materially disrupt our ability
to manufacture our products and meet customer demands. Qualifying an alternative
manufacturer of our ASICs would be time consuming, costly and disruptive. In
addition, we acquire certain microprocessors and other integrated circuits as
well as a custom designed power supply from sole source suppliers. While we
believe we could qualify alternative suppliers for these products, any delays
caused by supply disruptions could result in increased component prices that
could adversely affect our gross margins. We also use certain components
including memory components and printed circuit boards that we acquire from
limited sources that create risks similar to those created by our sole source
supply arrangements.
We use a rolling 12-month forecast based on anticipated product orders to
determine our material requirements. Lead times for materials and components we
order vary significantly and depend on factors such as the specific supplier,
contract terms and market demand for a component at a given time. If orders do
not match forecasts, we may have excess or inadequate inventory of certain
materials and components, which could materially adversely affect our operating
results and financial condition. From time to time we have experienced shortages
and allocations of certain components, resulting in delays in filling orders. In
the future we may again experience these shortages, particularly with respect to
the supply of semiconductors.
We may need to expand or relocate our manufacturing operations and may depend on
contract manufacturers for a significant portion of our manufacturing
requirements.
16
We currently manufacture all of our products at our facility in Taiwan. If the
demand for our products grows, we will need to increase our material purchases,
internal manufacturing capacity and internal test and quality functions. Any
disruptions in product flow could limit our revenue, adversely affect our
competitive position and reputation and result in additional costs or
cancellation of orders under agreements with our customers. The property on
which our Taiwan facility is located is currently in receivership. If, as a
result of this receivership, we are unable to maintain our lease of this
property, we may need to relocate our facility. There is no guarantee that we
will be able to find a suitable replacement facility on equal terms or of
sufficient quality.
We have augmented our manufacturing capacity by entering into an agreement with
Solectron Corporation, a contract manufacturer, to manufacture a portion of our
product requirements. As a result of entering into this agreement we may
experience, among others, the following problems, any of which could materially
adversely affect our business and operating results:
o delays in product shipments;
o reduced control over quality and quantity of products; and
o interruption in the supply of products caused by, among other factors,
the loss of a contract manufacturer.
If we lose key personnel or are unable to hire additional qualified personnel as
necessary, we may not be able to successfully manage our business or achieve our
objectives.
Our success depends to a significant degree upon the continued contributions of
our key management, engineering, sales and marketing, finance and manufacturing
personnel, many of whom would be difficult to replace. In particular, we believe
that our future success is highly dependent on William Rosenberger, our
President and Chief Executive Officer, and Robert Zecha, our Vice President,
Research and Development. We do not have key person insurance covering any of
our personnel.
We believe our future success will also depend in large part upon our ability to
attract and retain highly skilled managerial, engineering, sales and marketing,
finance and manufacturing personnel. Competition for these personnel is intense,
and we have had difficulty of hiring employees, particularly software engineers,
in the timeframe we desire. There can be no assurance that we will be successful
in attracting and retaining the personnel we require. The loss of the services
of any of our key personnel, the inability to attract or retain qualified
personnel in the future, or delays in hiring required personnel, particularly
engineers and sales personnel, could make it difficult for us to manage our
business and meet key objectives. In addition, companies in the networking
industry whose employees accept positions with competitors frequently claim that
competitors have engaged in unfair hiring practices. We could incur substantial
costs in defending ourselves against any such claims, regardless of the merits
of such claims.
If our products do not comply with evolving industry standards and complex
government regulations, they may not achieve market acceptance, which may
prevent us from increasing our revenue or achieving profitability.
The market for LAN equipment is characterized by the need to support industry
standards as they emerge, evolve and achieve acceptance. We will not be
competitive unless we continually introduce new products and product
enhancements that meet these emerging standards. We may not be able to
effectively address the compatibility and interoperability issues that arise as
a result of technological changes and evolving industry standards. In addition,
in the United States, our products must comply with various regulations and
standards defined by the Federal Communications Commission, or FCC, and
Underwriters Laboratories. Internationally, products that we develop may be
required to comply with standards established by telecommunications authorities
in various countries as well as with recommendations of the International
Telecommunication Union. If we do not comply with existing or evolving industry
standards or if we fail to obtain timely domestic or foreign regulatory
approvals or certificates, we may experience delays in product shipments or be
unable to sell our products where these standards or regulations apply, which
could prevent us from increasing our revenue or achieving profitability.
We need to expand our sales and support organizations to increase market
acceptance of our products.
17
Our products and services require a sophisticated sales effort targeted at
several levels within a prospective customer's organization. We have recently
expanded our sales force and plan to hire additional sales personnel. Unless we
expand our sales force we will not be able to increase revenue. However,
competition for qualified sales personnel is intense, and we might not be able
to hire an adequate number of sales personnel.
We currently have a small customer service and support organization and will
need to increase our staff to support new customers and the expanding needs of
existing customers. The design and installation of networking products can be
complex. Accordingly, we need highly trained customer service and support
personnel. Hiring customer service and support personnel is very competitive in
our industry due to the limited number of people available with the necessary
technical skills and understanding of our products.
Our ability to increase our revenue depends on successfully expanding our
international sales.
Our ability to grow will depend in part on our ability to increase sales of our
NuWaveArchitecture products to international customers, particularly in Asia. We
anticipate that sales to international customers will constitute a significant
portion of our future sales. There are a number of risks arising from our
international business, including:
o longer accounts receivable collection cycles;
o difficulties in managing operations across disparate geographic areas;
o difficulties associated with enforcing agreements under foreign legal
systems;
o import or export licensing requirements;
o potential adverse tax consequences; and
o unexpected changes in regulatory requirements.
Our international sales are denominated in U.S. dollars. As a result, an
increase in the value of the U.S. dollar relative to foreign currencies could
make our products less competitive in international markets.
We may engage in future acquisitions that dilute the ownership interests of our
stockholders, cause us to incur debt and assume contingent liabilities.
As part of our business strategy, we expect to review acquisition prospects that
would complement our current product offerings, augment our market coverage,
enhance our technical capabilities or otherwise offer growth opportunities.
While we have no current agreements or negotiations underway with respect to any
material acquisitions, we may acquire businesses, products or technologies in
the future. In the event of any future acquisitions, we could:
o issue equity securities which would dilute stockholders' percentage
ownership;
o incur substantial debt; or
o assume contingent liabilities.
Such actions by us could harm our operating results and cause the price of our
common stock to decline. We cannot assure you that we will be able to
successfully integrate any businesses, products, technologies or personnel that
we might acquire in the future, and our failure to do so could harm our
business, operating results and financial condition.
If our products contain undetected software or hardware errors, we could incur
significant unexpected expenses and lost sales.
Complex LAN equipment frequently contains undetected software or hardware errors
when first introduced or as new versions are released. We have experienced these
errors in the past, and we expect that these errors will be found from time to
time in new or enhanced products after commencement of commercial shipments.
These problems may materially adversely affect our business by causing us to
incur significant warranty and repair
18
costs, diverting the attention of our engineering personnel from our product
development efforts and causing significant customer relations problems.
Problems arising from the use of our products together with other vendors'
products could disrupt our business and harm our financial condition.
Our products must successfully interoperate with products from other vendors. As
a result, when problems occur in a network, it may be difficult to identify the
source of the problem. The occurrence of hardware and software errors, whether
caused by our products or another vendor's products, could result in the delay
or loss of market acceptance of our products, and any necessary revisions may
require us to incur significant expenses. The occurrence of any such problems
would likely have a material adverse effect on our business, operating results
and financial condition.
We may be subject to intellectual property infringement claims that are costly
to defend and may adversely affect our business and ability to compete.
Our industry is characterized by the existence of a large number of patents and
frequent claims and related litigation regarding patent and other intellectual
property rights. In particular, many leading network companies have extensive
patent portfolios with respect to networking technology, while we do not own any
patents nor do we have any patent applications pending that relate to our
NuWaveArchitecture products. We may not have taken actions that adequately
protect our intellectual property rights. From time to time, third parties,
including leading companies, have asserted against others and may assert against
us exclusive patent, copyright, trademark and other intellectual property rights
to technologies and related standards that are important to us. Third parties
may assert claims or initiate litigation against us or our manufacturers,
suppliers or customers alleging infringement of their proprietary rights with
respect to our existing or future products. Any of these claims, with or without
merit, could be time-consuming, result in costly litigation and diversion of
technical and management personnel, or require us to develop non-infringing
technology or enter into royalty or license agreements. These royalty or license
agreements, if required, may not be available on acceptable terms, if at all. If
there is a successful claim of infringement or if we fail to develop
non-infringing technology or license the proprietary rights on a timely basis,
our business could be harmed.
If we fail to protect our intellectual property, or if others use our
proprietary technology without authorization, our competitive position may
suffer.
Our success and ability to compete are substantially dependent upon our
internally developed technology and know-how. We rely on a combination of
copyright, trademark and trade secret laws and restrictions on disclosure to
protect our intellectual property rights. We also enter into confidentiality or
license agreements with our employees, consultants and corporate partners, and
control access to and distribution of our software, documentation and other
proprietary information. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no changes in financial market risk as originally discussed in
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
19
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Description of Document
3.1 (1) Amended and Restated Certificate of Incorporation.
3.2 (1) By-Laws.
10.50 Amended Employment Agreement with William Rosenberger.
10.51 Lease Agreement with Fortunato Development dated March
30, 2000.
27 Financial Data Schedule.
(1) Incorporated by reference to the corresponding exhibit
in the Registrant's Registration Statement on Form S-1.
(b) Reports on Form 8-K
None
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETWORK PERIPHERALS INC.
Date: May 10, 2000 By: \s\ Wilson Cheung
-------------------
Wilson Cheung
Vice President of Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
21