UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 19971998
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, California 95035
(Address, including zip code of principal executive offices)
(408) 321-7300
(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] 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 18, 19985, 1999 was $94,251,917$82,541,679 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 18, 19985,
1999 was 12,260,412.12,342,681.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting of
stockholders to be held on May 26, 1998April 29, 1999 are incorporated by reference into
Part III of this Annual Report on Form 10-K.
1
NETWORK PERIPHERALS INC.
FORM 10-K
TABLE OF CONTENTS
PART I Page
ITEM 1. Business ............................................................... 3
ITEM 2. Properties ............................................................. 10
ITEM 3. Legal Proceedings ...................................................... 10
ITEM 4. Submission of Matters to a Vote of Security Holders .................... 10
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters 11
ITEM 6. Selected Financial Data ................................................ 12
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 13
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. Directors and Executive Officers 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 ..................................................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. Directors and Executive Officers 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 offices areoffice
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
high
performance FDDI, 10/100100/1000 Layer 2 and GigabitLayer 3 Ethernet switching solutionsproducts for workgroups,
wiring closets and network backbones.backbones, and a full range of high performance FDDI
adapters and switches. These solutionsproducts are designed to increase the available
bandwidth and enhance the bandwidth and performance of client/server networks, embrace all
popularcorporate and departmental networks.
The Company delivers the most advanced high-speed network technologies andto
preserve the end-user'sits 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
a number of
new products, including 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 Gigabitgigabit
Ethernet technologies. This acquisition positioned the Company to develop its
next generation of Ethernet switching products to be introduced in 1998.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 lookingforward-looking statements
describing new products that are expected to be available for shipment to the
Company's customers during 1998.1999. 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.
Recently,In the early stages of 1999, the Company re-alignedonce 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, and operations into three groups:
NuSwitch,especially support of
its OEM base, the bulk of its engineering resources will concentrate on
development efforts to bring the NuWave and NuCleus, each with its own charterArchitecture Layer 3 gigabit family of
switches to develop, engineer and
market new and existing products.market. The NuSwitch group is focused primarily on
FDDI LAN switching products and FDDI network adapter products currently being
sold to OEM customers and a broad line of Fast Ethernet products sold
principally through distribution channels. The NuWave groupCompany intends to introduce new Fast Ethernet and Gigabitgigabit Ethernet solutions
aimed at the small-to-medium enterpriseenterprises (SME) market in 1998. The NuCleus group focuses on low cost 10/100
Mbps Ethernet switches and hubs in motherboard form.mid-1999.
3
NuSwitch Product Line
Network Adapter Products
The Company's line of FDDI network adapters NuCard, connects high-performance servers or
desktop computers directly to 100 Mbps FDDI networks. The Company has
been a leading supplier of certified FDDI adapters since shipment commenced in
1990. NuCard 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 NuCard 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 1997,1998, the Company added a number of new Fast Ethernet LAN
switching products to its NuSwitch product line that offeroffers solutions ranging
from desktop to backbone connectivity, including the FE-208, a series of Fast
Ethernet switches with 10/100Mbps auto-sensing capability,DS-12A and the FE-224, a
recipient of the "iAward" from Informationweek magazine. The Company also
introduced two new high-density fiber-switching solutions, the DS12 and the
DS12TF in 1997.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. The Company believes that they are the
first Fast Ethernet backbone switches with features and performance previously
found primarily in high-end, chassis-based switches.
LAN Hubs. The Company's NuHub includes three LAN switching hubs designed to
expand the network of the 100Base-TX users. The FE-5208 provides eight
100Base-TX Class II Fast Ethernet ports, each capable of half- or full-duplex
transmission. Each connected workstation can have access to all connected file
servers over the high-speed connection without changes to the desktop network.
The NuHub LAN switching hubs have the same form factor and management software
as the NuSwitch switching products, providing a convenient single-vendor 100Mbps
connectivity solution. The FE-5516 and the FE-5216 are stackable sixteen
100Base-TX Class II Fast Ethernet port hubs that provide true network
scalability. The FE-5516 is stackable up to eight units within one repeater
count, expanding the network up to 128 high-speed shared connections. The
FE-5216 provides scaleable expansion with the ability to stack up to five units
without incrementing the repeater count. To expand further, two stacks of
FE-5216 can be cascaded together through an uplink connector, the NuLink, which
allows the network to expand up to 158 ports.
The Company also designs and manufactures a custom FDDI concentrator module for
Newbridge Networks. This product, available in a number of different
configurations, is designed to be integrated in Newbridge Networks' Access/One
enterprise hub.
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 1997,1998, the Company introduced a major revision ofsome 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.
In addition to the NuSight 2.0, the Company introduced new
management features across all its switches and hubs that enable the devices to
be managed via a standard web browser.
The Company intends to introduce a number of new products in 1998, including a1999 based on its
revolutionary NuWave Architecture. NuWave products will be aimed at the rapidly
growing Layer 3 Fast Ethernet to FDDI bridge, other variations ofand gigabit switching markets. These products will
be high-density, low cost 10/100100/1000 auto-sensing switches for use in
departmental networks and Gigabit Ethernet solutions.
4
NuCleus Product Line
The NuCleus products provide a full range of wire-speed 10/100 auto-sensing
switching and repeater hub motherboards, in 2,4,8 and 12 port configurations,
based on the Company's third generation NuCleus ASIC chipsets. These board-level
switches and hubs are designed to enable OEM customers to differentiate their
products with the Company's high performance technologies and to shorten their
development cycles to increase time to market. These products commenced volume
shipment in early 1998.large corporate backbone networks.
NuWave Product Line
NuWave is an innovative line of Ethernet, Fast Ethernet, and Gigabitgigabit Ethernet
solutions being designed for the SME market based on technology and ASICs
developed primarily by the Company. The introduction of the NuWave family of
products is scheduled for mid-1998, with shipment expected to commence by the
fourth quarter of the same year.
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 scalablescaleable 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 Gigabitgigabit 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 utilizeuse the NuWave
Architecture product line to penetrate the rapidly emerging Gigabitgigabit and
stackable Layer 2/3 10/100 Ethernet switching market in 1998.1999.
MARKETING, SALES AND SUPPORT
The Company sells its product worldwide through OEMs, VARs, distributors and
system integrators. As of December 31, 1997,1998, the Company employed 3624 full-time
technically trained marketing, sales and support personnel located in the United
States, the Netherlands, Singapore Japan 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 network operating
system softwareOEM leaders such as Novell, Sun Microsystems and Microsoft.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 26%31% of the Company's net sales in 1997.1998. The
geographic regions with the major portions of export sales in 1997,1998, and the
approximate respective percentages represented by each, were Europe, 11%10% and
Asia, 15%21%. All payments for sales outside the United States are made in U.S.
dollars.
5
Sun Microsystems accounted for 39%35% of net sales in 1997.1998. 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 resources of the Company to meet demand
schedules, the Company's backlog may or may not be indicative of revenue in the
future periods.
The information in the following paragraph contains forward looking statements
describing the Company's 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, price 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.
Beginning 1998,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, with a lower level of support expense.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 19981999 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 Fastand Ethernet, ATM and ASIC design, and client/server
operating system drivers and software modules. The Company believes its focus on
these 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 are currently focusedhas been and will continue to be on developing its NuWave
family of products. The Company is designing numerousa range of high-density ASICs that
provide the Company's NuWave architectural platform with a 64 Gbps switching
fabric for Gigabitgigabit and stackable Layer 2 and 3 (IP/IPX) 10/100100/1000 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 GigabitLayer 3 gigabit Ethernet switching technology. Another focus of the Company's
research and development efforts is an ASICs chipset for a series of very low
cost, wire-speed, 10/100, dual speed Ethernet switches and hubs in motherboard
form. 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 LSI Logic, TSMC,NEC, UMC, MMC and ATMEL, manufacture the Company's ASIC
components.
System Architecture Interfaces and Network Protocol Software. Through the
development of its collection of 100 Mbps network adapters, the Company has
gained expertise in hardware and software support for a variety of standard and
proprietary system bus architectures and network operating systems.
6
Server Bandwidth Optimization. The Company has designed its network operating
system software to address the specific characteristics of each type of adapter
and server architecture. This design provides optimal network bandwidth to high
power servers. As new versions of network operating systems are introduced, the
Company plans to devote development efforts not only to maintain compatibility
with existing versions but also to take advantage of enhanced features and
performance improvements.
As of December 31, 1997,1998, the Company employed 6238 personnel in research and
development. Key members of the Company's research and development team have
been active members of the various network standard committees since 1987,
before the Company was founded. The Company is a charter member of the Advanced
Network Test Center (ANTC), an FDDI interoperability certification center, is a
member of the ANSI FDDI Standards Committee, is a member of the Gigabit Ethernet
Alliance and is a principal member of the ATM Forum. The Company has developed products designed for integration in the
proprietary systems of major networking companies including Sun Microsystems,
Newbridge Networks, Network Associates, NetFRAME, NCR, and Network Associates.3Com. The Company
believes that its relationships with these network technology leaders establish
credibility with end-user customers who demand interoperability of their
networking devices. The Company has active development relationships with
Novell, Microsoft and Sun Microsystems for advanced products for NetWare,
Windows NT and Solaris, respectively.
MANUFACTURING
Throughout 1998 and in the early stages of 1999, the Company partnered with an
established turnkey manufacturer in the Silicon Valley to produce and ship the
Company's FDDI products. The Company also has an in-house manufacturing team in
Taiwan with recently purchased state-of-the-art manufacturing equipment, which
produced its Ethernet products. In the first half of 1999, the Company intends
to transition its entire manufacturing operations to Taiwan. The team of 51
full-time personnel in this manufacturing facility is highly experienced in
advanced manufacturing and test engineering in ongoing reliability/quality
assurance. The manufacturing operation is ISO certified. Dependent upon volumes
in 1999, the Company expects to reduce the cost of products substantially as a
direct result of this transition.
Certain key components used in the Company's products such as ASICs,
microprocessors and controller chips, media interface components and power
supplies are currently available only from single or limited sources. The
Company also has developed proprietary ASICs used in existing products and in
the NuWave Architecture, which will be sourced from a single foundry. While the
Company believes it would be able to obtain alternative sources for key
components and for the ASICs, difficulty in obtaining these supplies could have
a material adverse effect on the Company's results of operations.
COMPETITION
The Company believes that the principal competitive factors 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 market for new products.
The computer networking industry is intensely competitive and is significantly
affected by product introductions and market activities of industry
participants. A number of competitors offer products which compete, both in
price and functionality, favorably with one or more of the Company's products.
Many of the Company's current and potential competitors have significantly
broader product offerings, and 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. TheIn a declining market, the
Company's FDDI network adapters compete on a product-by-product basis with
products offered primarily from Interphase, SysKonnect Digital Equipment Corporation and 3Com. TheIn a maturing
market, the Company's client/serverLayer 2 Fast Ethernet switching solutions compete with
products offered by Cisco, 3Com, Bay Networks
andNortel, 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 increase as a
result of these and other industry consolidations and alliances. These
competitive pressures could adversely affect the Company's business and
operating results. MANUFACTURING
Effective mid-1997, the Company partnered with an established turnkey
manufacturerThe Layer 3 Fast Ethernet and gigabit switching markets are
in the Silicon Valley to procure material, assemble, test, packageearly stages of development with competition for these market coming from
relatively new market entrants such as Extreme Networks and shipFoundry 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 products. The manufacturer is ISO certified and is highly
experienced in manufacturing for other certain Fortune 500 high technology
companies. The Company has ascertained that the manufacturer has the capacity,
quality standards and financial capitalability to meet the Company's manufacturing
needs. By partneringcompete
effectively with a turnkey manufacturer, the Company has reduced its manufacturing costs and avoided significant capital investment, allowing the
Company to concentrate its resources on product design and development. The
Company qualifies its turnkey manufacturers using a selection program that
assesses a potential subcontractor's capacity, quality standards and
manufacturing process. The Company also has an in-house manufacturing team of 26
full time personnel in Taiwan, which manufactures most of its Fast Ethernet
products. This team is experienced in advanced manufacturing and test
engineering in ongoing reliability/quality assurance. The Company is ISO 9001
certified.
7
The Company's strategy to have certain of its products produced by a turnkey
manufacturer involves certain risks including the absence of adequate capacity,
the unavailability of or interruptions in access to certain process technologies
and reduced control over delivery schedules, manufacturing yields, quality and
costs. In the event that any significant subcontractor was to become unable or
unwilling to continue to manufacture and/or test the Company's products in
required volumes, the Company would have to identify and qualify acceptable
replacements. This process of qualifying manufacturing subcontractors and other
suppliers could be lengthy, and no assurances can be given that any additional
sources would become available to the Company on a timely basis. In addition,
certain key components used in the Company's products, such as microprocessors,
ASICs, communications controller chips, FDDI and Ethernet media interface
components and power supplies, are currently available only from single sources
or limited sources. The Company has also developed proprietary ASICs used in its
LAN switching products and in other products, each of which is currently being
supplied by a single foundry. While the Company believes it would be able to
obtain alternative sources of supply for the ASICs at its election, any future
difficulty in obtaining any of these key components or ASICs could result in
delays or reductions in product shipments which, in turn, could have a material
adverse effect on the Company's results of operations.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.
87
EXECUTIVE OFFICERS*
The executive officers of the Company and their ages are as follows:
Name Age Position
- ---- ----- --------
Pauline Lo Alker 55 President, Chief Executive Officer, and Director
Robert Hersh 44 Vice President of Operations and Chief Financial
Officer
Fred Kiremidjian 50 Senior Vice President - NuWave Group
James Sullivan 45 Vice President - NuSwitch Group
Oliver Szu 41 Vice President - NuCleus Group
Mrs. AlkerEXECUTIVE OFFICERS *
The executive officers of the Company and their ages are as follows:
Name Age Position
- --------------------------------------------------------------------------------
William Rosenberger 49 President, Chief Executive Officer, 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 has served as the President, Chief Executive Officer and a
Directordirector of the Company since July 1998. From January 1991.1996 to June 1998, Mr.
Rosenberger was President and Chief Executive Office of NetAccess, Inc., a wide
area networking equipment manufacturer. From October 1995 to December 1995, Mr.
Rosenberger was Vice President of sales and business development for NetVision
Corporation, an Ethernet switching company. From March 1993 to June 1995, Mr.
Rosenberger was General Manager of ACSYS, Inc., a networking equipment
manufacturer. Prior to joining the Company, she served as
President of the Network Computers Division and President of Sales and Marketing
of Acer North American Operations from October 1987 to September 1990. Prior to
Acer, Mrs. Alker co-founded Counterpoint Computers, Inc., a manufacturer of
modular, multiprocessor UNIX systems, where she served as Chairman,March 1993, Mr. Rosenberger was President and Chief
Executive Officer until it was acquired by Acer. Prior to Counterpoint
Computers, Mrs. Alker held various marketing and engineering management
positions with Intel and with Four Phase Systems and Amdahl Corporation, all of which are computer systems manufacturers. From 1980 to 1984, Mrs. Alker was Vice
President of Marketing and subsequently Vice President and General Manager at
Convergent Technologies,Netronix, Inc., a workstationnetworking hardware designer and
manufacturer.
Ms. Alker has
announced her intention to retire from her position as President, Chief
Executive Officer and Director of the Company in 1998 after a successor has been
selected.
Mr. HershCheung has served as an executive officer since joiningOctober 1998. Preceding the
Company in March
1997. Priorappointment to joining the Company, he served as the Chief Financial Officer and
Vice President of Finance, of SEEQ Technology, Inc., a designer and manufacturer
of integrated circuits from October 1995 to February 1997. Prior to joining
SEEQ, he hadthis office, Mr. Cheung held executive officer andvarious management positions with Alps Electric
(USA), Inc., Widcom, Inc., and UNISYS Corporation, all technology companies.
Mr. Kiremidjian has served as an executive officer since
joining the Company in July 1996.1995. Prior to joining the Company, heMr. 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 asin executive positions and Boards of Directors for
several data communications research and manufacturing firms prior to joining
the Company in November, 1998. He was a co-founder, President and Executive
Director of Research of The Robert Frances Group, Vice President of Marketing
and General ManagerBusiness Development at Objective Systems Integrators and Senior Director of
Personal ProductsMarketing and Business Unit of Xerox Corporation from
October 1995Development at Boole & Babbage. Prior to June 1996. He has directed researchthose positions,
Mr. McDowell served in executive and development, engineeringmanagement positions at Dataquest, The Meta
Group, Wang Laboratories Paradyne and manufacturing operations efforts for leading Silicon Valley companies such
as Acer, Convergent Technologies, Counterpoint Computers, and Fairchild
Semiconductor Corp.others.
Mr. Sullivan has served as an executive officer since joining the Company in
July 1997. Prior to joining the Company, he was with Novell, Inc. from July 1995
to July 1997 where he held several sales management positions, including Vice
President of Worldwide OEM Sales and Senior Director of North American Channel
Sales. Prior to joining Novell, he held various sales positions with Arrow
Electronics, Canon and Lanier Business Products.
Mr. SzuZecha has served as Vice President of Research and Development since April
1997. From January 1997 to April 1997, Mr. Zecha served as President and Chief
Technology Officer of NetVision Corporation, an executive officer since joining the Company in March
1996, when the Company acquired NuCom Systems, Inc. HeEthernet switching company. From
November 1993 to January 1997, Mr. Zecha was onea Vice President and Chief
Technology Officer of the foundersNetVision Corporation. Mr. Zecha co-founded and held a
Board of NuCom Systems, Inc.Director position with NetVision Corporation from November 1993 through
April 1997. Prior to founding NuCom in 1994, he was the director of
the Internetworking DepartmentNovember 1993, Mr. Zecha held engineering management
positions at D-Link Systems, Inc. in Taiwan and served on
the D-Link Board of Directors from 1993 to 1994.Standard Microsystems Corporation, a networking company.
* As of December 31, 1997
91998
8
EMPLOYEES
As of December 31, 19971998 the Company employed 152133 persons including 6238 in
research and development activities, 3051 in manufacturing and support, 3624 in
sales, marketing and technical support, and 2420 in finance and administration.
Approximately 8070 employees were in international locations. None 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 participation and work
environment policies to assist in attracting and retaining qualified personnel.
Competition 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 and research and development
facilities 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, Japan, 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, 1997.
101998.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market on the
Nasdaq National Market. As of March 6, 1998,5, 1999, there were approximately 4,8004,000
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.
19951996 High Low
--------------------------------------- -------------- --------------
First Quarter $ 30.50 $ 19.75
Second Quarter 23.13 16.75
Third Quarter 21.75 13.75
Fourth Quarter 16.00 8.88
1996
--------------------------------------- -------------- ------------------------------------------------------------------------------
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.
1110
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31,
1998 1997 1996 1995 1994
1993
----------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Statement of Operations Data:
Net sales $ 28,585 $ 34,798 $ 53,080 $ 47,144 $ 33,463
$ 10,687
Cost of sales 17,250 25,341 28,590 24,690 17,507
5,633
---------------------------------------------------------------------------------------------------------------------------------------------
Gross profit 11,335 9,457 24,490 22,454 15,956
5,054
---------------------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 11,485 9,757 8,570 4,811 3,473
1,962
Marketing and selling 6,010 13,242 11,849 7,319 4,361
1,865
General and administrative 3,234 3,982 3,378 2,226 1,618 870
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
4,697
---------------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (9,394) (27,648) (13,039) 8,098 6,504
357
Interest income, net 1,505 1,680 1,745 2,236 577
20
---------------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (7,889) (25,968) (11,294) 10,334 7,081 377
Provision for (benefit from) income taxes -- (3,526) 608 3,617 1,416
19
---------------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (7,889) $(22,442) $(11,902) $ 6,717 $ 5,665
$ 358
=============================================================================================================================================
Net income (loss) per share:
Basic $ (0.64) $ (1.85) $ (1.01) $ 0.60 $ 1.72
=======================================================================
Diluted $ 0.12
======================================================================
Diluted(0.64) $ (1.85) $ (1.01) $ 0.57 $ 0.64
$ 0.05
=============================================================================================================================================
Weighted average common shares:
Basic 12,281 12,154 11,760 11,147 3,302
2,895
=============================================================================================================================================
Diluted 12,281 12,154 11,760 11,736 8,906
6,641
======================================================================
December 31,
1997 1996 1995 1994 1993
----------------------------------------------------------------------
(in thousands)
Balance Sheet Data:
Working capital $ 34,439 $ 54,997 $ 63,269 $ 55,720 $ 5,280
Total assets 45,889 71,434 70,111 65,209 8,728
Long-term obligations, net of current portion -- -- -- -- 172
Stockholders' equity (deficit) 38,679 59,857 65,709 57,758 (3,181)=======================================================================
12December 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
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 uninterrupted service by subcontractors;
*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 in a subsequent section of this annual
report.
RESULTS OF OPERATIONS
Net Sales
Net sales were $28.6, $34.8 $53.1 and $47.1$53.1 million in 1998, 1997 1996 and 1995,1996,
respectively. The sequential decrease in 1997 sales comparedfrom 1996 to 1996 sales1998 was principallyprimarily
attributed to decreased shipments of FDDI adapters, and to a lesser extent,
decreased shipments of FDDI LAN switching products. The decreased shipments were
primarily the result of declining demand for products based on the FDDI technology
since 1996. Partially offsetting decreasedtechnology. Net
sales of FDDI products totaled $17.5 million in 1998, compared to $22.9 million
in 1997. Net sales were increased unitof 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.products increased slightly in 1998
primarily due to the introduction of the Fast Ethernet commodity-like products
in 1998. However, the increase was offset by the declining average selling prices counteredunit sales
price due to price competition in the increased volume. Despite decreasing demand for
FDDIcommodity-like products net sales in 1996 increased from 1995 as a result of growth in
Fast Ethernet sales.market.
Sales to OEM customers were $19.4, $22.0 $30.5 and $27.9$30.5 million in 1998, 1997 and
1996, and
1995, respectively, with the balance of sales to the distribution channel.respectively. As a percentage of net sales, shipments to OEM customers
represented 63%68%, 63% and 57% in 1998, 1997 and 59%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 1996 and 1995,1996, respectively. Sales to thecustomers in
North America region were $19.7, $25.8 $42.0 and $35.5$42.0 million in 1998, 1997 and 1996,
and 1995, respectively, with therespectively. The balance of sales to thecustomers in Asia and Europe regions.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 maturity 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 slowing growthCompany intends to terminate its turnkey
manufacturing model in salesthe U.S. and relocate all manufacturing operations to its
facilities in Taiwan during the first half of its current Fast Ethernet1999. This transition, in
conjunction with potentially higher margins of the NuWave products commencing
shipment in mid-year, is expected to be offset, in part, by sales
of its NuWave and NuCleus products, to be introduced in 1998. NuWave is the next
generation of Gigabit Ethernet and Fast Ethernet switches targeting small and
medium size enterprise environments. NuCleus isyield a full range of low-cost,
commodity switches and hubs in motherboard and chip form. Both of these new
product lines are positioned primarily to broaden the Company's OEM customer
base.
13
Gross Profit/Margin
Thehigher gross margin in 1997 was 27%, compared to gross margins in 1996 and 1995 of
46% and 48%, respectively. The decrease in the 1997 gross margin compared to
gross margins in 1996 and 1995 reflected charges for excess and obsolete
inventory in 1997, offset in part by efficiency gains in manufacturing overhead
in the final quarter of the year. The inventory charges included a $5.1 million
charge to reserve for slow moving and obsolete inventory, as well as a $200,000
charge for scrapping of FDDI products. Additionally, competitive pricing
pressures on Fast Ethernet switching products and high overhead costs in the
early part of the year further eroded the gross margin. The decrease in gross
margin in 1996 resulted from the inclusion of amortization of intangible assets
related to the acquisition of NuCom in 1996.
With the intangible assets related to the acquisition of NuCom and inventories
of slow-moving products written-off in 1997 and a measurable improvement in the
management of inventory and overhead, the Company expects gross margin in 1998
to improve from 1997. However, the Company does not expect future gross margin
to attain the historical levels of 1996 and 1995 as competitive pricing
continues to pressure the Company's current products. Furthermore, the NuCleus
line of products will be sold at commodity-like prices.1999.
Research and Development
Research and development expenses were $11.5, $9.8 $8.6 and $4.8$8.6 million, in 1998,
1997 1996 and 1995,1996, respectively. As a percentage of the respective net sales,
the
expenses were 28%40%, 16%28% and 10%16%. The expenses areExpenses in 1997 and 1996 were net of contract
funding of $217,000 and $556,000, and $906,000respectively. No contract funding was received
in 1997, 1996 and 1995, respectively.1998. The increase in spendingexpenses in 19971998 and 1996 reflected the addition of staff and
overhead associated with the acquisition of NetVision and NuCom (refer to Note 8
of Notes to Consolidated Financial Statements), respectively. The increase in 1997 was partially offset by a reductionprimarily attributed to
increased resources expended in staff as partthe development of the Company's restructuringnext 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 1997 (refer to Note 91998 in connection with the elimination of Notes to
Consolidated Financial Statements). The Company believes it is essential to
increase its financial and technical resources in developing the next generation
Ethernet products, and thus it expects to invest substantiallycertain
non-critical personnel in research and development, in 1998an effort to developfurther
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 NuCleus product lines.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 increased towere $6.0, $13.2 and $11.8 million in 1998, 1997
compared to
$11.8 and $7.3 million in 1996, and 1995, respectively. As a percentage of the respective net sales, the expenses
were 38%21%, 22%38% and 16%22%. The increasedecrease in expendituresexpenses in 1997 and 1996 reflected1998 was attributed to the addition of staff and overhead
resulting from the acquisition of NuCom, in addition to escalating efforts to
develop the distribution channel through mid-1997. This increase was partially
offset by a
reduction in staff and closure of regional sales offices as part ofin conjunction with the
Company's restructuring of its business in the third quarter of 1997. WithThe restructuring effort was in
alliance with the Company's
re-aligned 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 cost reductions relatedthe acquisition of NuCom and an escalated effort
to expand the restructuring, theexisting distribution channel through mid-1997.
The Company expects to increase spending in marketing and selling expensesactivities in
1999 in order to decrease in 1998 from prior levels.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 $3.4 and $2.2$3.4 million in 1998,
1997 and 1996, and 1995, respectively. The expenses represented 11%, 6% and 5%As a percentage of net sales, expenses were 11% for
each respective year.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 staffingpayroll and other overhead costs associated with
the acquisition of NuCom resulted in an increase in expenditures
in 1997 and 1996. Higher costs related to the information systems function and
staffing issues, offset in part by reduction in headcount, were also
contributing factors in the increase. To continue efficiency gains in the
Company's operations, the Company implemented an Enterprise Resource Planning
(ERP) system and enhanced its information system infrastructure in 1997, with
the depreciation costs associated with these improvements to be reflected in
1998 and future years.NuCom. The Company does not expectexpects general and administrative
costsexpenses in 1999 to increase substantiallyremain relatively consistent with 1998.
As a result of implementing an ERP system and enhancing its information system
infrastructure in 1997, the Company's systems are substantially year 2000
compliant (i.e. software applications functioning properly in the year 2000 and
beyond).
14
Acquired Research and Development In Process and Product Integration Costs
EffectiveIn April 1997, the Company acquired NetVision Corporation, a company
specializing in LAN switching and Gigabitgigabit Ethernet technologies. The Company
expensed $6.5 million inof acquired research and development in process as a
result of the acquisition. EffectiveIn March 1996, the Company acquired NuCom Systems,
Inc., a Taiwan-based company developing Fast Ethernet LAN switching products.
The Company expensed $13.7 million inof 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
DuringIn 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 its cash and
short-term securities of $1.7 million in 1997 compared to 1996,
despite a lower funds being invested fund balance in 1997. This higher rate of return
resulted primarilyreflected a shift from
transitioning short-term investments ofin tax-exempt securities to
taxable corporate securities which provide higher returns. Interestin 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 $1.7$4
million in
1996 decreased from $2.2 millionas a result of the carryback claim of the 1997 net operating loss to
offset net income recognized in 1995 due primarily to a lower level of
invested funds associated from the acquisition of NuCom.
Income Taxesand 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%, compared to and a
provision of 5.4% and 35% in 1996 and 1995,, respectively. The effective tax rate infor 1997 included the establishment ofreflected a net
loss and was reduced by a full valuation allowance provided against deferred tax
assets because such deferred taxes, based on current
available evidence, are not expected to be realized in the foreseeable future.assets. The effective tax rates infor 1997 and 1996 excluded the charge for in-processcharges of
acquired research and development ain process, which are non-deductible item 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 being established and is expected to be completed by June
1999. As the Company's Program is substantially complete, the incremental cost
to fully complete the Program in 1999 is expected to be less than $100,000.
Despite the Company's efforts (1) to identify the Year 2000 compliance of its
products and the effects of any non-compliance, (2) to assess and mitigate
non-compliance of its information systems and its operational infrastructure,
and (3) to address suppliers readiness, the Company cannot be certain that all
areas have been identified or that the solutions implemented to address
non-compliance will be successful. There remains a risk that the failures and
difficulties encounter in the Program may disrupt operations and cause material
adverse effects on the Company's result of operations and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
DuringThe 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 investing and financing 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 $7.4 million of cash, compared to using cash of $3.7 million during 1996, and
generating cash of $6.1 million during 1995.
During 1997,in operating activities was $6.9 million, of cashwhich was used in operations, compared to the
generation of $5.3 million in 1996, and $2.9 million in 1995. The $6.9 million
of cash used by operations during 1997 was mainly attributableattributed to the
net loss for the year of $22.4 million, partially offset by non-cash charges of
$3.3$12.1 million for
deprecationin total and amortization, the write-off of in-process research and
development associated with the NetVision acquisition of $6.5 million, the
write-off of deferred tax assets of $2.3 million, and the reduction of accounts
receivable of $3.2 million anda 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 (including an
additional chargeand $2.3 million in 1998
and 1997, respectively, and were related to purchases of $5.1 million for slow movingequipment used in
production and obsolete inventory). The
$5.3 million of cash generated by operations during 1996 resulted primarily from
the net lossdevelopment activities and other computer software and equipment
for the yearupgrade and enhancement of $11.9 million, after adjustment for non-cash
chargesthe information systems. In 1999, the Company
plans to incur capital expenditures of $2.8 million for depreciation and amortization and the write-off of
in-process research and development associated with the NuCom acquisition of $13approximately $1.3 million.
Increases in accounts payable and accrued liabilities of $1.4 million
and $1.6 million, respectively, also contributed to cash generated by operations
in 1996. The $2.9 million of cash generated by operations in 1995 was
attributable to the net income of $6.7 million, adjusted for depreciation and
amortization of $1.3 million, and offset by a decrease in accounts payable of
$3.3 million and an increase in deferred tax assets, accounts receivable, and
prepaid expenses and other assets of $1.2 million, $1.1 million, and $1.2
million, respectively.
During 1997, $1.4 million of cash was used in investing activities, compared to
$9.6 million used in 1996, and $2.6 million generated in 1995. Cash used in 1997
of $1.4 million was attributable to the $6.5 million acquisition of NetVision
and the purchase of fixed assets for $2.3 million, offset by the sale of
short-term investments for $8 million. Cash used in 1996 of $9.6 million was
attributable to payments of $10.4 million in the acquisition of NuCom and the
purchase of fixed assets for
15
$3.0 million, offset by the sale of short-term investments for $2.6 million.
Cash was generated in 1995 from the sale of short-term investments for $4.4
million, which was offset by purchases of fixed assets for $1.8 million.
Cash generated from financing activities in 1997, 1996 and 1995 was $861,000,
$627,000, and $638,000, respectively. These funds were raised primarily from the
issuance of Common Stock upon exercise of stock options and purchases made under
the employee stock purchase plan.
At December 31, 1997, the Company's principal sources of liquidity wereare its cash,
and cash equivalents and
short-term investments of $16.1 million and $14.4
million, respectively.investments. The Company also has a revolving line of credit
agreement, which provides for borrowings up to $10$5 million, none of which has
been drawn down. The Company was in compliance with all financial covenants
under the line of
creditline-of-credit agreement. The Company believes that its current
balance of cash, and cash equivalents, and short-term investments and its borrowing
capacity willare 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, 1997 and 1996.......................... 19
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995............................................................. 20
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995.......................................... 21
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995............................................................. 22
Notes to Consolidated Financial Statements......................................... 23
Financial Statement Schedule:
For the three years ended December 31, 1997, 1996 and 1995
Schedule II - Valuation and Qualifying Accounts................................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 either
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, 19971998 and 19961997 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997,1998, 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.
PRICE WATERHOUSEPricewaterhouseCoopers LLP
San Jose, California
January 21, 199825, 1999
18
NETWORK PERIPHERALS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
1998 1997
1996
- --------------------------------------------------------------------------- -------------- ---------------------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,0945,537 $ 23,52316,094
Short-term investments 17,814 14,371 22,350
Accounts receivable, net of allowance for doubtful accounts and
returns; 1998, $523, and 1997, $1,184 and 1996, $1,1543,430 5,170
8,359
Inventories 3,124 1,417 8,228
Income tax refund receivable -- 3,983 -
Deferred income taxes, net - 2,271
Prepaid expenses and other current assets 742 614
1,843
-------------- -------------------------------------------
Total current assets 30,647 41,649 66,574
Property and equipment, net 4,560 3,876 3,575
Other assets 342 364
1,285
-------------- -------------------------------------------
$ 35,549 $ 45,889
$ 71,434
============== ===========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,4152,450 $ 2,7361,671
Accrued liabilities 5,795 8,841
-------------- ---------------2,127 5,539
----------------------------
Total current liabilities 4,577 7,210
11,577
-------------- -------------------------------------------
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 and 1996, 11,954,000 shares issued and outstanding 12 12
outstanding
Additional paid-in capital 64,060 63,878 62,614
Accumulated deficit (33,100) (25,211)
(2,769)
-------------- -------------------------------------------
Total stockholders' equity 30,972 38,679
59,857
-------------- -------------------------------------------
$ 35,549 $ 45,889
$ 71,434
============== ===========================================
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
1995
- ------------------------------------------------------- ----------------- ---------------- ----------------------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 28,585 $ 34,798 $ 53,080
$ 47,144
Cost of sales 17,250 25,341 28,590
24,690
----------------- ---------------- --------------------------------------------------------------
Gross profit 11,335 9,457 24,490
22,454
----------------- ---------------- --------------------------------------------------------------
Operating expenses:
Research and development 11,485 9,757 8,570 4,811
Marketing and selling 6,010 13,242 11,849 7,319
General and administrative 3,234 3,982 3,378 2,226
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
----------------- ---------------- ----------------
Income (loss)----------------------------------------------
Loss from operations (9,394) (27,648) (13,039)
8,098
Interest income 1,505 1,680 1,745
2,236
----------------- ---------------- ----------------
Income (loss)----------------------------------------------
Loss before income taxes (7,889) (25,968) (11,294) 10,334
Provision for (benefit from) income taxes -- (3,526) 608
3,617
----------------- ---------------- --------------------------------------------------------------
Net income (loss)loss $ (22,442) $ (11,902) $ 6,717
================= ================ ================(7,889) $(22,442) $(11,902)
==============================================
Net income (loss)loss per share:
Basic $ (1.85) $ (1.01) $ 0.60
================= ================ ================
Diluted(0.64) $ (1.85) $ (1.01)
==============================================
Diluted $ 0.57
================= ================ ================(0.64) $ (1.85) $ (1.01)
==============================================
Weighted average common shares:
Basic 12,281 12,154 11,760
11,147
================= ================ ==============================================================
Diluted 12,281 12,154 11,760
11,736
================= ================ ==============================================================
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, 1994 11,0661995 11,268 $ 11 $ 55,38656,579 $ (55)(14) $ 2,4169,133 $ 57,758
Repurchase of Common Stock (15) - - - - -
Repayment of stockholders'
notes receivable - - - 41 - 41
Issuance of Common Stock upon
exercise of stock options 161 - 243 - - 243
Issuance of Common Stock under
employee stock purchase 56 - 354 - - 354
plan
Income tax benefit associated -
with nonqualified stock - 596 - - 596
options
Net income - - - - 6,717 6,717
------------ ------------ ------------- ------------- -------------- -------------
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
plan
Income tax benefit associated with
nonqualified stock - -options -- -- 28 - --- -- 28
options
Issuance of Common Stock for
acquisition of NuCom Systems 441 1 5,341 - --- -- 5,342
Systems
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
plan
Income tax benefit associated with
nonqualified stock - -options -- -- 403 - --- -- 403
options
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 $ 63,87864,060 $ --- $(33,100) $ (25,211) $ 38,679
============ ============ ============= ============= ============== =============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
1995
- ----------------------------------------------------------------- ------------- -------------- -------------------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss)loss $ (22,442) $ (11,902) $ 6,717(7,889) $(22,442) $(11,902)
Adjustments to reconcile net income (loss)loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,960 1,969 2,111 1,309
Amortization of goodwill 40 1,350 665 -
Acquired research and development in process -- 6,462 13,032 -
Deferred income taxes -- 2,289 (56) (1,221)
Changes in assets and liabilities:
Accounts receivable 1,740 3,189 (1,845)
(1,061)
Inventories (1,707) 6,811 (664) 808
Income tax refund receivable 3,983 (3,580) - ---
Prepaid expenses and other assets (146) 1,026 862
(1,185)
Accounts payable 779 (1,321) 1,439
(3,315)
Accrued liabilities (2,956) (2,644) 1,623
862
------------- -------------- ---------------------------------------------------------
Net cash provided by (used in) operating activities (4,196) (6,891) 5,265
2,914
------------- -------------- ---------------------------------------------------------
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
-
Proceeds from sales or maturity of short-term investments 7,979 2,581 4,351
Purchases of property and equipment (2,270) (2,927) (1,761)
------------- -------------- ---------------------------------------------------------
Net cash provided by (used in)used in investing activities (6,543) (1,399) (9,632)
2,590
------------- -------------- ---------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock 182 861 613 597
Repayment of stockholders' notes receivable --- -- 14
41
------------- -------------- ---------------------------------------------------------
Net cash provided by financing activities 182 861 627
638
------------- -------------- ---------------------------------------------------------
Effect of exchange rate changes on cash --- -- 53
-
------------- -------------- ---------------------------------------------------------
Net increase (decrease)decrease in cash and cash equivalents (10,557) (7,429) (3,687) 6,142
Cash and cash equivalents, beginning of year 16,094 23,523 27,210
21,068
------------- -------------- ---------------------------------------------------------
Cash and cash equivalents, end of year $ 5,537 $ 16,094 $ 23,523
$ 27,210
============= ============== =========================================================
Supplemental disclosure of cash flow information
Cash paid during the year for:
Income taxes $ 67 $ 158 $ 245
$ 4,852
NoncashNon-cash transactions:
Income tax benefit associated with nonqualified stock $ -- $ 403 $ 28 $ 596
options
Common Stock issued for acquisition of NuCom $ --- $ 5,342-- $ -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
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reassesses the classification at each
reporting date.
The Company considers all highly liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents. All of theThe 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, 19971998 and 1996,1997, 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 an
offset toa
reduction of the related development costs and totaled approximately $217,000
$556,000, and $906,000$556,000 in 1997 and 1996, and 1995, 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 and foron sales transacted within 90 days prior to the period-end. As of
December 31, 19971998 and 1996,1997, the Company's allowances for such potential events
totaled $1.2 million.approximately $523,000 and $1,184,000, respectively. As a percentage of
sales transacted within 90 days prior to December 31, 19971998 and 1996,1997, the
allowances for sales returns and other credits were 18.0%8% and 7.2%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, and 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, 19971998 and 1996,1997, goodwill, net of accumulated
amortization, was $173,000$133,000 and $1,258,000,$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
For 1997, theThe functional currency of the Company's subsidiarysubsidiaries in Taiwan wasand the
USNetherlands is the U.S. dollar. For 1996, the functional currency was the local currency. Accordingly, gains or losses arising from the
translation of foreign currency financial statements and transactions are
included in determining consolidated results of operations.
Gains or losses arising from the translation of the subsidiary's
statements prior to 1997 were recorded as a separate component of the
stockholders' equity.
Employee Benefit Plans
The Company has stock option plans an employee stock purchase plan, and offers a 401(k) plan that does not require employercovering all of its
U.S. employees. The 401(k) plan provides for matching contributions.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
The Company adopted SFAS No. 128, "Earnings Per Share," which requires dual
presentation of basicBasic earnings per share ("EPS") and diluted EPS on all
statements of earnings issued after December 15, 1997 for all entities with
complex capital structures. Basic EPS isare 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.
The Company has restated all prior years' EPSAt December 31, 1998, options to conform with the
provisionspurchase 2,798,603 shares of the SFAS No. 128.Company's
common stock were outstanding. During 1997 and 1996,1998, 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.
The
reconciliation of the basic and the diluted EPS computations for 1995 is as
follows (in thousands):
Net income as reported $ 6,717
=============
Denominator used to compute basic EPS 11,147
Effect of dilutive securities:
Shares issuable upon exercise of stock options 589
-------------
Denominator used to compute diluted EPS 11,736
=============
Basic EPS $ 0.60
=============
Diluted EPS $ 0.57
=============
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards
for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity, except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS 130 requires that all items which are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which supersedes SFAS No. 14,
"Financial Reportingis effective for
Segments of a Business Enterprise."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, defines operating
segments as components of a company about which separate financial information
is available that is evaluated regularly by the chief operating decision makerCompany operated in deciding howone business segment in 1998
and 1997.
Reclassifications
Certain reclassifications have been made to allocate resources andthe prior years' amounts in assessing performance.order to
conform to the current year's presentation.
25
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Both SFAS 130 and SFAS 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years presented to be restated. The Company's results of operations and
financial position will be unaffected by implementation of these standards.
Reclassifications
Certain amounts in 1996 and 1995 have been reclassified to conform to the 1997
presentation.
NOTE 3 - BALANCE SHEET COMPONENTS (in thousands)
December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
Cash, cash equivalent,equivalents, and short-term investments:
Cash and cash equivalents
Cash and money market accounts $ 16,0942,508 $ 5,411
Municipal obligations -- 18,112
-------- --------
Cash and cash equivalents 16,094 23,523
-------- --------2,532
Corporate debt securities 14,371 --
Municipal obligations -- 21,238
Government securities -- 1,112
-------- --------3,029 13,562
--------------------
5,537 16,094
Short-term investments
Corporate debt securities 17,814 14,371
22,350
-------- ----------------------------
$ 23,351 $ 30,465
$ 45,873
======== ============================
Inventories:
Raw materials $ 882 $ 158
$ 4,685
Work-in-process 572 898 2,600
Finished goods 1,670 361
943
-------- ----------------------------
$ 3,124 $ 1,417
$ 8,228
======== ============================
Property and equipment:
Computer and equipment $ 6,9188,267 $ 7,1816,918
Furniture and fixtures 920 895 907
Leasehold improvements 306 303
356
-------- ----------------------------
9,493 8,116 8,444
Accumulated depreciation (4,933) (4,240)
(4,869)
-------- ----------------------------
$ 4,560 $ 3,876
$ 3,575
======== ============================
Accrued liabilities:
Salaries and benefits $ 973 $ 1,750
$ 2,699Warranty 450 513
Co-op advertising and market development funds 386 298
Royalty 250 746
Reserve for contract settlements 1,000 -- Royalty 746 1,1541,000
Restructuring expense 597 -- Warranty 513 717597
Holdback amount from acquisition -- 456
1,115
Customer deposits 38 605
Income taxes -- 1,268
Other 695 1,283
-------- --------68 179
--------------------
$ 5,7952,127 $ 8,841
======== ========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, for $10 million which
expires on July 31, 1998.1999. 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 19971998 and 1996.1997. As
of December 31, 1997,1998, 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 which expireexpiring in February 2002.August 2002 and May 2001, respectively. Rent
expense for all Company facilities was $764,000, $931,000, and $868,000 in 1998,
1997, and $529,000 in 1997, 1996, and 1995, respectively.
Future minimum lease payments as of December 31, 19971998 are as follows (in
thousands):
Years ending December 31,
19981999 $ 610
1999 588754
2000 550689
2001 321250
2002 6867
-------
$ 2,1371,760
=======
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
TheEffective May 1998, the Company has anterminated the Employee Stock Purchase Plan (the
"Plan"), which permitsallowed eligible employees to purchase the Company's Common Stock
at a discount through payroll deductions during concurrent 24-month offering periods. Each offering period is
divided into four consecutive six-month purchase periods. The price at whichdeductions. Prior to the Common Stock is purchased undertermination of the Plan,
is equal to 85% of the fair market
value of the Common Stock on the first day of the offering period or the last
market day of the purchase period, whichever is lower. The Company has reserved 250,000 shares of Common Stock for issuance under the Plan. Through December 31,
1997,Plan,
and the Company has issued 191,714223,606 shares of Common Stock for an aggregate
purchase price of $1,289,806, and 58,286 shares remain reserved for future
issuance under the Plan.
27
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)$1,434,000.
Stock Option Plans
In April 1997, the Company adopted theThe Company's 1997 Stock Plan, as amended, (the "1997 Plan"), which provides for the
granting of incentive and nonstatutory stock options and restricted stock awards
to eligible employees, directors and consultants. The Company has reserved
1,500,0002,500,000 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, which is generally four
years. As of December 31, 1997,1998, options to purchase 664,7001,795,093 shares of Common
Stock were outstanding; 835,300704,907 shares were available for future grants; and
1,500,0002,500,000 shares were authorized but unissued.
27
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Upon adoption of the 1997 Plan in April 1997, the Company terminated the 1993
Stock Option Plan (the "1993 Plan") and the 1996 Nonstatutory Stock Option Plan
(the "1996 Plan"). No further stock options were granted under the 1993 Plan 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, 1997,1998, options to purchase a total of
1,893,862958,510 shares of Common Stock under the 1993 Plan and the 1996 Plan were
outstanding.
The 1994 Outside Directors Stock Option Plan (the "1994 Plan"), as amended,
which provides for the automatic granting of nonqualified stock options to
directors of the Company ("Outside Director"), has a total of 150,000 shares
reserved for issuance. Pursuant to the 1994 Plan, the Company grants to each new
Outside Director an option to purchase 15,000 shares of Common Stock and to each
Outside Director an option to purchase 5,000 shares of Common Stock on the date
of each annual meeting of stockholders. The exercise price of the stock options
will be the fair market value of the Common Stock on the date of grant, and
options vest over a period of four years. At December 31, 1997,1998, options to
purchase 38,00045,000 shares of Common Stock were outstanding; 112,000105,000 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 employee stock options under the fair
value method in accordance with SFAS 123. The fair value of these options is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions: zero dividend yield; expected
volatility of 82.35% in 1998, 77.24% in 1997, and 69.36% in both 1996 and 1995;1996; risk-free
interest rate of 4.64% in 1998, 5.36% in 1997 and 5.48% in both 1996 and 1995;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 incomeloss and earningsnet loss per share would
have been:
1997 1996 1995
---------------------------------------------------------------------------------------been as follows (in thousands, except per share data)
Net income (loss) - as reported $ (22,442) $ (11,902) $ 6,717
Net income (loss) - pro forma (28,003) (14,782) 5,791
Basic earnings (loss) per share - as (1.85) (1.01) 0.60
reported
Basic earnings (loss) 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) 0.52
Diluted earnings (loss) per share - as (1.85) (1.01) 0.57
reported
Diluted earnings (loss) per share - pro (2.30) (1.26) 0.49
forma
28
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Due to the broad decline in the market 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)
The following table summarizes information about stock options outstanding at
December 31, 1997:1998:
Outstanding Exercisable
---------------------------------------------------- ----------------------------------------------------------------------- ------------------------
Weighted Average Weighted Weighted
Range of Remaining Contractual Average Average
Exercise Prices Shares Contractual Life (in years) Exercise Price Shares Exercise Price
- -------------------- ---------------------------------------------------- ------------------------------------------ -------------------------------------------- ------------------------
$ 0.30 - $ 4.99 2,183,754 8.73 Years $4.77 239,566 $3.603.00 453,950 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 - 9.99 234,785 9.23 Years 6.56 27,423 6.65
10.007.50 149,077 8.97 5.95 36,647 5.86
7.63 - 14.99 174,023 8.89 Years 11.55 42,758 13.119.13 48,443 8.86 8.05 10,051 8.17
11.63 - 15.00 - 20.00 4,000 7.32 Years 20.00 2,666 20.00
------------- ----------
2,596,562 8.78 Years 5.41 312,413 5.31
============= ==========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 31,1994 889,425 $3.31
Granted 533,900 19.79
Exercised (161,382) 1.78
Canceled (141,817) 12.81
-----------------
Balance at December 31, 1995 (374,239 shares exercisable
at a weighted average price of $1.75 per share) 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 1995 were
$3.29, $5.66, and $8.69, 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
1995 were $1.43, $2.89, and
$2.41, respectively.
29
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - INCOME TAXES
The following is a geographical breakdown of consolidated income (loss) before income taxes (in thousands):
Years ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
Domestic $ (21,761) $ (1,626) $ 10,334
Foreign (4,207) ( 9,668) -
------------- --------------- -------------
$ (25,968) $ (11,294) $ 10,334
============= =============== =============
Provision for (benefit from) income taxes consists of the following (in
thousands):
Years ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
Current:
Federal $ (5,815) $ 174 $ 3,862
State - 54 976
Foreign - 436 -
------------- --------------- -------------
(5,815) 664 4,838
------------- --------------- -------------
Deferred:
Federal 1,993 (46) (1,058)
State 296 (10) (163)
------------- --------------- -------------
2,289 (56) (1,221)
------------- --------------- -------------
$ (3,526) $ 608 $ 3,617
============= =============== =============
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 income (loss)loss as
follows:
Years ended December 31,
1998 1997 1996
1995
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Federal statutory rate (35.0%) (35.0%) 35.0%(35.0%)
State tax, net of federal impact -- (6.0) .3 5.10.3
Research and development tax credits (.8)-- (0.8) (1.1) (1.2)
Tax-exempt interest income -- (1.0) (4.5) (6.9)
Provision for valuation allowance on deferred tax assets 35.0 22.1 - ---
Nondeductible acquisition costs -- 8.6 45.6
-
Other -- (1.5) .1 3.0
------------- --------------- -------------0.1
-------------------------------------
-- (13.6%) 5.4%
35.0%
============= =============== ==================================================
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)
Deferred tax assets consist of the following (in thousands):
December 31,
1997 1996
- --------------------------------------------------------------------------------
Net operating loss and credits carryforwards $ 1,575 $ --
Reserves and accruals not currently deductible 1,947 1,286
Inventory 1,789 572
Other 432 431
------- -------
Gross deferred tax assets 5,743 2,289
Valuation allowance (5,743) --
------- -------
Net deferred tax assets $ -- $ 2,289
======= =======
Current $ -- $ 2,271
Noncurrent -- 18
------- -------
Net deferred tax assets $ -- $ 2,289
======= =======
Management believes that, based on a number of factors, it is not more likely
than not that the deferred tax assets will not be utilized, such that a full
valuation allowance has been recorded.
As of December 31, 1997,1998, the Company has Federal net operating loss
carryforwards of approximately $2.6$8.5 million which will expire beginning in 2012.2013.
For state tax purposes, the Company has net operating loss carryforwards of
approximately $5.2$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 Gigabitgigabit 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
==============
31
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)========
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) $(15,214)$ (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
expects that mostcompleted the restructuring in the second quarter of the contemplated restructuring actions will be completed in
1998 and will be financed through working capital.1998. The following table
lists the restructuring accrual activities from July 1, 1997 to December 31,
19971998 (in thousands):
Reduction Write-off
Write-off of in Work Closure of Of Excess
of
Goodwill Force Facilities Assets Other Total
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
Reserve provided $ 962 $ 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 $ -- $ 127(448) $ 9270 $ 378 $ -- $ 597
======= ======= ======= ======= ======= =======--
==================================================================================
32
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - MARKET DATA
The Company operates in one industry segment.SALES BY GEOGRAPHY
Export sales to customers outside of North America represented 26%31%, 21%26%, and 25%21%
of the Company'sCompany 's net sales for the years ended December 31, 1998, 1997 1996 and
1995,1996, respectively. As a percentage of net sales, export sales to Europe and
Asia for 1998, 1997 and 1996 were 10% and 1995 were21%; 11% and 15%; and 8% and 13%;,
respectively. Sales to Taiwan accounted for 17% of the Company's net sales in
1998. No one foreign country accounted for more than 10% of the Company's net
sales in 1997 and 17%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 8%, respectively.possibly loss in sales, which could adversely impact the
Company's operating results. The Company's chairman of the Board of Directors is
a director of this turnkey manufacturer.
The following table summarizes the percentage of net sales accounted for by the
Company's significant customers with sales of 10% or more:
Years ended December 31,
1998 1997 1996
1995
---------------------------------------------------------------------------------------------------------------------------
Customer A 35% 39% 26%
17%
Customer B - -11% -- --
Customer C -- -- 15%
Customer C - 15% 10%
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
"Election of Directors" in the Company's Proxy Statement for the 19981999 Annual
Meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under "Compensation of
Executive Officers" and "Report of the Compensation Committee on Executive
Compensation" in the Company's Proxy Statement for the 19981999 Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under "Share Ownership by
Principal Stockholders and Management" and "Election of Directors" in the
Company's Proxy Statement for the 19981999 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under "Compensation Committee
Interlocks and Insider Participation Decisions" in the Company's Proxy Statement
for the 19981999 Annual Meeting.
34
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 III 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.
10.3(1) 1994 Employee Stock Purchase Plan.
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.
10.27 (6) 1997 Stock Option Plan.
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) Amendment No. 1, dated April 5, 1996, to the Development and Purchase Agreement with
Sun Microsystems, Inc.
10.31 (8) Amendment No. 2, dated December 20, 1996, to the Development and Purchase Agreement
with Sun Microsystems, Inc.
10.32 (8)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.
10.33 (8) Amendment, dated April 30, 1997, to the Corporate Supply Agreement with Sun
Microsystems, Inc.
10.34 Modification Agreement, dated August 29, 1997, to amend certain terms of the Line of Credit Agreement
with Sumitomo Bank of California.
10.35 Second Modification Agreement, dated November 17, 1997, to amend certain terms of the Line of Credit
Agreement with Sumitomo Bank of California.
10.36 Amended and Restated Salary Continuation Agreement with Pauline Lo Alker dated October
31, 1997.
10.37 Amended and Restated Salary Continuation Agreement with Robert Hersh dated October 31,
1997.
10.38 Salary Continuation Agreement with Glenn Penisten dated October 31, 1997.
10.39 Salary Continuation Agreement with Fred Kiremidjian dated October 31, 1997.
10.40 Salary Continuation Agreement with James Sullivan dated October 31, 1997.
10.41 Consent of Independent Accountants dated March 27, 1998.
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) This exhibit will be submitted with an amendment to Item 14, "Exhibits, Financial Statement Schedules and Reports
on Form 8-K," of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 (File
No. 0-23970). The Registrant intend`s to seek confidential treatment with respect to portions of this Agreement.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NETWORK PERIPHERALS INC.
By: \s\ROBERT HERSH
----------------------------------
Robert Hersh WILSON CHEUNG
-----------------------------
Wilson Cheung
Vice President of OperationsFinance 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\ PAULINE LO ALKERWILLIAM ROSENBERGER President, Chief Executive Officer
-------------------------- and
- -------------------------------- Director (Principal Executive
Pauline Lo AlkerWilliam Rosenberger Officer)
\s\ ROBERT HERSHWILSON CHEUNG Vice President of OperationsFinance and
- ---------------------------------------------------------- Chief Financial Officer
Robert HershWilson 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\ KENNETH LEVY Director
- --------------------------------
Kenneth Levy
\s\ JOSEPH MARENGI Director
- --------------------------------
Joe Marengi
\s\ GLENN PENISTEN Chairman of the Board
- ----------------------------------------------------------
Glenn Penisten
\s\ WILLIAM P. TAI Director
- --------------------------------
William P. Tai
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, 19951996
Allowance for doubtful accounts $ 165200 $-- $ -21 $ 88(12) $ (53) $ 200
Allowance for sales returns and other 744 - 1,664 (1,870) 538
credits
-------------- ------------- ------------ ------------- --------------
Total allowances for doubtful accounts
and sales returns 909 - 1,752 (1,923) 738
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
credits
-------------- ------------- ------------ ------------- --------------------------------------------------------------------------------
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 $ 1,1541,184 $-- $ - $3,731 $(3,701)236 $ 1,184
============== ============= ============ ============= ==============(897) $ 523
==================================================================
38