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, 1999
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)
1371 McCarthy Boulevard
Milpitas, California 95035
(Address, including zip code, of principal executive offices)
(408) 321-7300
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares of the Registrant's Common Stock, $0.001 par value,
outstanding as of May 7, 1999 was 12,623,597.
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, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
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,
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 5,300 $ 5,537
Short-term investments 15,600 17,814
Accounts receivable, net of allowance for doubtful accounts and
returns of $404 and $523, respectively 2,480 3,430
Inventories 3,941 3,124
Prepaid expenses and other current assets 704 742
-------- --------
Total current assets 28,025 30,647
Property and equipment, net 4,371 4,560
Other assets 364 342
-------- --------
$ 32,760 $ 35,549
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,411 $ 2,450
Accrued liabilities 1,694 2,127
-------- --------
Total current liabilities 4,105 4,577
-------- --------
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;
12,343,000 and 12,292,000 shares issued and outstanding,
respectively 12 12
Additional paid-in capital 64,309 64,060
Accumulated deficit (35,666) (33,100)
-------- --------
Total stockholders' equity 28,655 30,972
-------- --------
$ 32,760 $ 35,549
======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
3
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(in thousands, except per share data)
Three Months Ended
March 31,
-------------------------
1999 1998
-------- --------
Net sales $ 3,783 $ 8,020
Cost of sales 3,118 4,651
-------- --------
Gross profit 665 3,369
-------- --------
Operating expenses:
Research and development 1,392 2,857
Marketing and selling 1,331 1,773
General and administrative 775 866
-------- --------
Total operating expenses 3,498 5,496
-------- --------
Loss from operations (2,833) (2,127)
Interest income 267 382
-------- --------
Loss before income taxes (2,566) (1,745)
Income taxes -- --
-------- --------
Net loss $ (2,566) $ (1,745)
======== ========
Net loss per share:
Basic $ (0.21) $ (0.14)
======== ========
Diluted $ (0.21) $ (0.14)
======== ========
Weighted average common shares:
Basic 12,311 12,255
======== ========
Diluted 12,311 12,255
======== ========
The accompanying notes are an integral part of these financial statements.
4
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
Three Months Ended
March 31,
-------------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net loss $ (2,566) $ (1,745)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 431 477
Amortization of goodwill 10 10
Changes in assets and liabilities:
Accounts receivable 950 (643)
Inventories (817) (1,087)
Income tax refund receivable -- 24
Prepaid expenses and other assets 6 196
Accounts payable (39) 2,491
Accrued liabilities (433) (729)
-------- --------
Net cash used in operating activities (2,458) (1,006)
-------- --------
Cash flows from investing activities:
Proceeds from sales of short-term investments 2,214 --
Purchases of short-term investments -- (21)
Purchases of property and equipment (242) (420)
-------- --------
Net cash provided by (used in) investing activities 1,972 (441)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock 249 31
-------- --------
Net cash provided by financing activities 249 31
-------- --------
Net decrease in cash and cash equivalents (237) (1,416)
Cash and cash equivalents, beginning of period 5,537 16,094
-------- --------
Cash and cash equivalents, end of period $ 5,300 $ 14,678
======== ========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes $ 5 $ 20
<FN>
The accompanying notes are an integral part of these 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, 1999 and December 31, 1998, and the results of its
operations and its cash flows for the three-month periods ended March
31, 1999 and 1998. These financial statements should be read in
conjunction with the audited consolidated financial statements of the
Company as of December 31, 1998 and 1997 and for each of the three
years in the period ended December 31, 1998, 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, 1999 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1999 or for any other future period.
2. NET LOSS 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. For the three months ended
March 31, 1999 and 1998, the Company incurred net losses, and the
inclusion of potential common shares would result in an antidilutive
per share amount. Accordingly, no adjustment is made to basic EPS to
arrive at the diluted EPS.
3. INVENTORIES
The components of inventories consist of the following (in thousands):
March 31, December 31,
1999 1998
------ ------
Raw materials $ 840 $ 882
Work-in-process 1,016 572
Finished goods 2,085 1,670
------ ------
$3,941 $3,124
====== ======
6
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following (in thousands):
March 31, December 31,
1999 1998
------- -------
Computer and equipment $ 8,511 $ 8,267
Furniture and fixtures 919 920
Leasehold improvements 305 306
------- -------
9,735 9,493
Accumulated depreciation (5,364) (4,933)
------- -------
$ 4,371 $ 4,560
======= =======
5. ACCRUED LIABILITIES
The components of accrued liabilities consist of the following (in
thousands):
March 31, December 31,
1999 1998
------ ------
Salaries and benefits $ 505 $ 973
Warranty 469 450
Co-op advertising and market
development funds 355 386
Other 365 318
------ ------
$1,694 $2,127
====== ======
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following forward-looking statements are made in reliance upon the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
future events described in such statements involve risks and uncertainties,
including:
o the timely development and market acceptance of new products;
o the market demand by customers for the Company's existing products,
including demand by OEM customers for custom products;
o competitive actions, including pricing actions and the introduction of new
competitive products, that may affect the volume of sales of the Company's
products;
o uninterrupted supply of key components, including semiconductor devices and
other materials, some of which may be sourced from a single supplier;
o the ability of the Company to recruit, train and retain key personnel,
including engineers and other technical professionals;
o the development 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 below in this interim report.
RESULTS OF OPERATIONS
Net Sales
Net sales for the three months ended March 31, 1999 (the quarter) were $3.8
million, compared to $8.0 million for the three months ended March 31, 1998 (the
comparable quarter). The decrease in net sales was primarily attributed to
decreased shipments of products based on FDDI technology. Net sales of FDDI
products totaled $1.7 million for the quarter, compared to $4.7 million for the
comparable quarter. Such decrease was due to shrinkage of overall demand of FDDI
products and significant reduction of orders from a major OEM customer, that is
in the process of working down its excess inventories. The balance of the
decrease in total net sales for the quarter was attributed to a decrease in the
sales of Layer 2 Fast Ethernet switching products: net sales totaled $2.1
million for the quarter, compared to $3.3 million for the comparable quarter.
Layer 2 Fast Ethernet products continue to encounter increased competition and
price erosion in the commodity-like market.
Sales to OEM customers were $2.0 million, or 53% of net sales, for the quarter,
compared to $5.4 million, or 67% of net sales, for the comparable quarter. The
balance of the sales for both the quarter and the comparable quarter were made
to distribution channels. Distribution sales totaled $1.8 million for the
quarter and $2.6 million for the comparable quarter. Categorizing sales by
geography, sales to customers in North America decreased to $1.9 million for the
quarter from $5.1 million for the comparable quarter, while international sales
decreased to $1.9 million from $2.9 million.
The decrease in sales to OEM customers and customers in North America was
primarily attributed to decreased shipments of FDDI products as discussed above.
The decrease in distribution sales, as well as international sales, reflected
the maturity of the Layer 2 Fast Ethernet products in general.
The Company does not expect any noticeable growth in sales in 1999 until volume
shipment of NuWave products, which are Layer 3 gigabit Ethernet switches,
commences in mid-1999.
8
Gross Profit/Margin
Gross margin was 18% for the quarter, compared to 42% for the comparable
quarter. The gross margin was exceptionally low primarily due to significant
decrease in sales of higher-margin FDDI products, compounded with competitive
pricing on Layer 2 Fast Ethernet switching products. The Company expects that
the quarterly gross margin in 1999 will approximate the current level until
volume shipment of NuWave products commences in mid-1999.
Research and Development
Research and development expenses for the quarter were $1.4 million, or 37% of
net sales, compared to $2.9 million, or 36% of net sales, for the comparable
quarter. The decrease in expenses reflected a significant reduction in payroll
and overhead costs as a result of eliminating certain non-critical personnel in
the third quarter of 1998. In addition, consultant fees and non-recurring
engineering charges decreased from the 1998 level, as the development of NuWave
ASICs (Application-Specific Integration Circuits) is nearly completed.
The Company continues to invest a substantial amount of its resources in the
development of NuWave family of products. The Company expects that research and
development expenses will be higher in the second quarter than the current
level; however, such expenses are expected to gradually decline after volume
shipment of NuWave products commences in mid-1999.
Marketing and Selling
Marketing and selling expenses for the quarter were $1.3 million, or 35% of net
sales, compared to $1.8 million, or 22% of net sales, for the comparable
quarter. The decrease in expenses was attributed to decrease in commission
expenses due to lower sales for the quarter and overall reduction in payroll,
overhead costs, and certain promotion expenses during 1998 in connection with
the Company's strategy to refocus on its OEM customer base.
The Company expects to increase spending in marketing and selling activities
from its current level in order to launch NuWave products 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 expense for the quarter were $775,000, or 20% of net
sales, compared to $866,000, or 11% of net sales, for the comparable quarter.
The decrease in expenses was primarily attributed to lower headcount. The
Company expects general and administrative expenses to remain relatively
consistent with the current level for the remainder of 1999.
Interest Income
Interest income for the quarter was $267,000, compared to $382,000 in the
comparable quarter. The decrease was primarily due to a lower aggregate balance
of cash, cash equivalents and short-term investments.
Income Taxes
The Company did not record a tax benefit associated with the net loss incurred
for the quarter and for the comparable quarter, as the realization of deferred
tax assets is deemed uncertain based on evidence currently available.
Accordingly, a full valuation allowance has been provided.
9
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 and beyond.
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, New York and the Netherlands, have completed an update of its
information systems and are also 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 mid-1999 and beyond. Certification from the
manufacturer of the SMT equipment has not yet been received. However, because
the SMT equipment is relatively new, the Company believes that embedded chips in
this equipment are likely to be year 2000 compliant. The Company's
telecommunication systems, security system, electrical power system and other
mission critical systems in its operational infrastructure in all locations are
currently being assessed for compliance. Completion of this phase of the Program
is expected in June 1999.
The Company is conducting a survey of all its suppliers and third parties for
their year 2000 readiness and is expected to complete this assessment by June
1999. The Company is currently developing a plan to address circumstances of
non-compliance of a supplier or third party.
A contingency plan is being established and is expected to be completed by June
1999. As the Company's Program is substantially complete, the incremental cost
to fully complete the Program in 1999 is expected to be less than $100,000.
Despite the Company's efforts (i) to identify the Year 2000 compliance of its
products and the effects of any non-compliance, (ii) to assess and mitigate
non-compliance of its information systems and its operational infrastructure,
and (iii) 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 encountered 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 $23.9 million and $26.1 million at March 31,
1999 and December 31, 1998, respectively, and the current ratio (ratio of
current assets to current liabilities) was 6.8 to 1 and 6.7 to 1, respectively.
The aggregate balance of cash, cash equivalents and short-term investments,
which decreased to $20.9 million at March 31, 1999 from $23.4 million at
December 31, 1998, was used primarily to finance the Company's operations and
capital expenditures. For the quarter ended March 31, 1999, net cash used in
10
operating activities was $2.5 million, which was principally attributed to the
net loss of $2.6 million and an increase in inventories of $817,000, partially
offset by a decrease in accounts receivable of $950,000. For the quarter ended
March 31, 1998, net cash used in operating activities was $1 million, which was
attributed to the net loss of $1.7 million, an increase in accounts receivable
of $643,000 and an increase in inventories of $1.1 million, partially offset by
an increase in accounts payable of $2.5 million. The Company expects the
deficiency in cash flow from operations to continue until after the volume
shipment of NuWave products starts in mid-1999 and overall sales begin to
improve.
The Company's capital expenditures totaled $242,000 and $420,000 for the
quarters ended March 31, 1999 and 1998, 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 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, 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.
11
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 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
acquired by larger companies in the past few years, and one competitor recently
had an initial public offering of its common stock. As a result, these
competitors are able 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 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, 1998.
12
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.
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
13
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 12, 1999 By:
-----------------------------
Wilson Cheung
Vice President of Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
14