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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, 1997
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)
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, 1998 was $94,251,917 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, 1998 was 12,260,412.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting of
stockholders to be held on May 26, 1998 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 .................................................. 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 are 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, 10/100 and Gigabit Ethernet switching solutions for
workgroups, wiring closets and network backbones. These solutions are designed
to enhance the bandwidth and performance of client/server networks, embrace all
popular high-speed technologies and preserve the end-user's existing Ethernet
investments.
The Company introduced its first FDDI network adapter products in 1990 and has
established a leading share of the installed FDDI adapter market. The Company
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 PCI bus architecture.
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 Fast Ethernet
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 LAN switching and Gigabit Ethernet
technologies. This acquisition positioned the Company to develop its next
generation of Ethernet switching products to be introduced in 1998.
The Company markets its products worldwide through OEMs, distributors, VARs and
system integrators.
PRODUCTS
The Company's current line of products consists of a range of Fast Ethernet and
FDDI LAN switches and hubs, FDDI to Fast Ethernet bridges, FDDI Network
Interface Cards, and network management software. Most of these products are
based on core technology and proprietary ASIC components designed by the
Company. The products are offered in a variety of models, configurations and
forms.
The information in the following paragraphs contains forward looking statements
describing new products that are expected to be available for shipment to the
Company's customers during 1998. 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, the Company re-aligned its products and operations into three groups:
NuSwitch, NuWave and NuCleus, each with its own charter to develop, engineer and
market new and existing products. 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 group intends to introduce
new Fast Ethernet and Gigabit Ethernet solutions aimed at the small-to-medium
enterprise (SME) market in 1998. The NuCleus group focuses on low cost 10/100
Mbps Ethernet switches and hubs in motherboard form.
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, the Company added a number of new Fast Ethernet LAN
switching products to its NuSwitch product line that offer solutions ranging
from desktop to backbone connectivity, including the FE-208, a series of Fast
Ethernet switches with 10/100Mbps auto-sensing capability, 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. These two products are 10/100Mbps auto-sensing, 12-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, the Company introduced a major revision of 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 a
Fast Ethernet to FDDI bridge, other variations of high-density 10/100
auto-sensing switches, 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.
NuWave Product Line
NuWave is an innovative line of Ethernet, Fast Ethernet, and Gigabit Ethernet
solutions being designed for the SME market based on technology and ASICs
developed primarily by the Company. The 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 scalable in performance and
configurations for networks up to 1,500 nodes with complex and stringent network
requirements. Networks of this scale require reliability, scalability and
flexibility since as many as 30% of their nodes move or change annually. Thus,
the devices themselves need to be intelligent, fault-tolerant and flexible in
their configurations while being affordable and simple to use.
The NuWave family of 10/100 and Gigabit Ethernet switching solutions is being
designed with a 64-Gbps switching fabric to deliver wire-speed Layer 2 and Layer
3 (IP/IPX) switching for 10/100/1000 Mbps Ethernet networks in a scaleable and
non-blocking stackable form factor. The new platform is designed to accommodate
options such as high-speed LAN/WAN uplinks, advanced web-based management
functions, with intuitive, policy-based network management software, redundant
power supplies and flexible media connections -- capabilities that are found
currently only in expensive, large-scale enterprise systems.
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 utilize the NuWave
product line to penetrate the rapidly emerging Gigabit and stackable Layer 2/3
10/100 Ethernet switching market in 1998.
MARKETING, SALES AND SUPPORT
The Company sells its product worldwide through OEMs, VARs, distributors and
system integrators. As of December 31, 1997, the Company employed 36 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
developing relationships with major end-user accounts and with network operating
system software leaders such as Novell, Sun Microsystems and Microsoft. 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 sales offices in
the Netherlands, Taiwan and Singapore. Sales to customers outside of North
America represented 26% of the Company's net sales in 1997. The geographic
regions with the major portions of export sales in 1997, and the approximate
respective percentages represented by each, were Europe, 11% and Asia, 15%. All
payments for sales outside the United States are made in U.S. dollars.
5
Sun Microsystems accounted for 39% of net sales in 1997. 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, the Company's sales and marketing strategy for its Ethernet
products will emphasize developing an OEM customer base, a potentially lucrative
market, with a lower level of support expense. 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 1998 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.
The Company has developed certain core competencies applicable to multiple
network technologies such as FDDI, Fast Ethernet, ATM and ASIC design and
client/server operating system drivers and software modules. The Company
believes its focus on these core competencies 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 focused on developing its NuWave family of
products. The Company is designing numerous high-density ASICs that provide the
architectural platform with a 64 Gbps switching fabric for Gigabit and stackable
Layer 2 and 3 (IP/IPX) 10/100 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 Gigabit Ethernet 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, 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, the Company employed 62 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, NetFRAME, NCR, and Network Associates. 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.
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 of market share, all
of which would materially adversely affect the Company's business, operating
results and financial condition. 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. The Company's client/server
switching solutions compete with products offered by Cisco, 3Com, Bay Networks
and 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
manufacturer in the Silicon Valley to procure material, assemble, test, package
and ship 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 capital to meet the Company's manufacturing
needs. By partnering 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.
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.
8
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. Alker has served as the President, Chief Executive Officer and a Director
of the Company since January 1991. 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, 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, Inc., a workstation 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. Hersh has served as an executive officer since joining the Company in March
1997. Prior 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 had held executive officer and 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. Prior to joining the Company, he served as the Vice President and
General Manager of Personal Products Business Unit of Xerox Corporation from
October 1995 to June 1996. He has directed research and development, engineering
and manufacturing operations efforts for leading Silicon Valley companies such
as Acer, Convergent Technologies, Counterpoint Computers, and Fairchild
Semiconductor Corp.
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. Szu has served as an executive officer since joining the Company in March
1996, when the Company acquired NuCom Systems, Inc. He was one of the founders
of NuCom Systems, Inc. Prior to founding NuCom in 1994, he was the director of
the Internetworking Department at D-Link Systems, Inc. in Taiwan and served on
the D-Link Board of Directors from 1993 to 1994.
* As of December 31, 1997
9
EMPLOYEES
As of December 31, 1997 the Company employed 152 persons including 62 in
research and development activities, 30 in manufacturing and support, 36 in
sales, marketing and technical support, and 24 in finance and administration.
Approximately 80 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.
10
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, there were approximately 4,800
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.
1995 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
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.
11
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31,
1997 1996 1995 1994 1993
----------------------------------------------------------------------
(in thousands, except per share amounts)
Statement of Operations Data:
Net sales $ 34,798 $ 53,080 $ 47,144 $ 33,463 $ 10,687
Cost of sales 25,341 28,590 24,690 17,507 5,633
----------------------------------------------------------------------
Gross profit 9,457 24,490 22,454 15,956 5,054
----------------------------------------------------------------------
Operating expenses:
Research and development 9,757 8,570 4,811 3,473 1,962
Marketing and selling 13,242 11,849 7,319 4,361 1,865
General and administrative 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 37,105 37,529 14,356 9,452 4,697
----------------------------------------------------------------------
Income (loss) from operations (27,648) (13,039) 8,098 6,504 357
Interest income, net 1,680 1,745 2,236 577 20
----------------------------------------------------------------------
Income (loss) before income taxes (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) $(22,442) $(11,902) $ 6,717 $ 5,665 $ 358
======================================================================
Net income (loss) per share:
Basic $ (1.85) $ (1.01) $ 0.60 $ 1.72 $ 0.12
======================================================================
Diluted $ (1.85) $ (1.01) $ 0.57 $ 0.64 $ 0.05
======================================================================
Weighted average common shares:
Basic 12,154 11,760 11,147 3,302 2,895
======================================================================
Diluted 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)
12
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:
* the timely development and market acceptance of new products;
* the market demand by customers for the Company's existing products,
including demand by OEM customers for custom products;
* competitive actions, including pricing actions and the introduction of new
competitive products, that may affect the volume of sales of the Company's
products;
* uninterrupted supply of key components, including semiconductor devices and
other materials, some of which may be sourced from a single supplier;
* uninterrupted service by subcontractors;
* the ability of the Company to recruit, train and retain key personnel,
including engineers and other technical professionals;
* the development of new technologies rendering existing technologies and
products obsolete; and
* 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 $34.8, $53.1 and $47.1 million in 1997, 1996 and 1995,
respectively. The decrease in 1997 sales compared to 1996 sales was principally
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 FDDI technology
since 1996. Partially offsetting decreased FDDI sales were increased unit
shipments of Fast Ethernet switching products. However, declining average
selling prices countered the increased volume. Despite decreasing demand for
FDDI products, net sales in 1996 increased from 1995 as a result of growth in
Fast Ethernet sales.
Sales to OEM customers were $22.0, $30.5 and $27.9 million in 1997, 1996 and
1995, respectively, with the balance of sales to the distribution channel. As a
percentage of net sales, shipments to OEM customers represented 63%, 57% and 59%
in 1997, 1996 and 1995, respectively. Sales to the North America region were
$25.8, $42.0 and $35.5 million in 1997, 1996 and 1995, respectively, with the
balance of sales to the Asia and Europe regions.
The Company expects the declining sales of FDDI products and the slowing growth
in sales of its current Fast Ethernet products 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 is 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
The 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.
Research and Development
Research and development expenses were $9.8, $8.6 and $4.8 million, in 1997,
1996 and 1995, respectively. As a percentage of respective net sales, the
expenses were 28%, 16% and 10%. The expenses are net of contract funding of
$217,000, $556,000 and $906,000 in 1997, 1996 and 1995, respectively. The
increase in spending in 1997 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 reduction in staff as part of the Company's
restructuring in the third quarter of 1997 (refer to Note 9 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 substantially in research and
development in 1998 to develop the NuWave and NuCleus product lines.
Marketing and Selling
Marketing and selling expenses increased to $13.2 million in 1997, compared to
$11.8 and $7.3 million in 1996 and 1995, respectively. As a percentage of
respective net sales, the expenses were 38%, 22% and 16%. The increase in
expenditures in 1997 and 1996 reflected 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 sales offices as part of the
Company's restructuring in the third quarter of 1997. With the Company's
re-aligned strategy to focus on broadening its OEM customer base and as a result
of cost reductions related to the restructuring, the Company expects marketing
and selling expenses to decrease in 1998 from prior levels.
General and Administrative
General and administrative expenses were $4.0, $3.4 and $2.2 million in 1997,
1996 and 1995, respectively. The expenses represented 11%, 6% and 5% of net
sales for each respective year. The additional staffing and 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. The Company does not expect general and administrative
costs to increase substantially 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
Effective April 1997, the Company acquired NetVision Corporation, a company
specializing in LAN switching and Gigabit Ethernet technologies. The Company
expensed $6.5 million in acquired research and development in process as a
result of the acquisition.
Effective March 1996, the Company acquired NuCom Systems, Inc., a Taiwan-based
company developing Fast Ethernet LAN switching products. The Company expensed
$13.7 million in 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.
Restructuring
During 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 facilities, retirement of impaired assets and write-off of goodwill
associated with the acquisition of NuCom. See Note 9 of Notes to Consolidated
Financial Statements.
Interest Income
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 lower
funds being invested in 1997. This higher rate of return resulted primarily from
transitioning short-term investments of tax-exempt securities to taxable
securities, which provide higher returns. Interest income of $1.7 million in
1996 decreased from $2.2 million in 1995 due primarily to a lower level of
invested funds associated from the acquisition of NuCom.
Income Taxes
The Company's effective tax rate for 1997 was a benefit of 13.6%, compared to a
provision of 5.4% and 35% in 1996 and 1995, respectively. The effective tax rate
in 1997 included the establishment of 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.
The effective tax rates in 1997 and 1996 excluded the charge for in-process
research and development, a non-deductible item for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company's operating, investing and financing activities 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, $6.9 million of cash 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 attributable to the net loss
for the year of $22.4 million, offset by non-cash charges of $3.3 million for
deprecation 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 and inventories of $6.8 million (including an
additional charge of $5.1 million for slow moving and obsolete inventory). The
$5.3 million of cash generated by operations during 1996 resulted primarily from
the net loss for the year of $11.9 million, after adjustment for non-cash
charges of $2.8 million for depreciation and amortization and the write-off of
in-process research and development associated with the NuCom acquisition of $13
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 were its cash
and cash equivalents, and short-term investments of $16.1 million and $14.4
million, respectively. The Company also has a line of credit agreement which
provides for borrowings up to $10 million, none of which has been drawn down.
The Company was in compliance with all financial covenants under the line of
credit agreement.
The Company believes that its current cash and cash equivalents, short-term
investments, and borrowing capacity will satisfy the Company's working capital
and capital expenditure requirements for the next 12 months.
BUSINESS RISKS
In addition to the factors addressed in the preceding sections, certain
characteristics and dynamics of the Company's markets, technologies and
operations create risks to the Company's long-term success and to predictable
quarterly results. These risks will also affect the Company's ability to achieve
the results anticipated by the forward-looking statements contained in this
report. The Company's quarterly results have in the past varied and are expected
in the future to vary significantly as a result of factors such as the timing
and shipment of significant orders, new product introductions or technological
advances by the Company and its competitors, market acceptance of new or
enhanced versions of the Company's products, changes in pricing policies by the
Company and its competitors, the mix of distribution channels through which the
Company's products are sold, the mix of products sold, the accuracy of
resellers' and OEM's forecast of end-user demand, the ability of the Company to
obtain sufficient supplies of sole or limited source components for the
Company's products, 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, 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.
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................................ 38
Schedules other than those listed above have been omitted since 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, 1997 and 1996 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, 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 WATERHOUSE LLP
San Jose, California
January 21, 1998
18
NETWORK PERIPHERALS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
1997 1996
- --------------------------------------------------------------------------- -------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,094 $ 23,523
Short-term investments 14,371 22,350
Accounts receivable, net of allowance for doubtful accounts and
returns; 1997, $1,184, and 1996, $1,154 5,170 8,359
Inventories 1,417 8,228
Income tax refund receivable 3,983 -
Deferred income taxes, net - 2,271
Prepaid expenses and other current assets 614 1,843
-------------- ---------------
Total current assets 41,649 66,574
Property and equipment, net 3,876 3,575
Other assets 364 1,285
-------------- ---------------
$ 45,889 $ 71,434
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,415 $ 2,736
Accrued liabilities 5,795 8,841
-------------- ---------------
Total current liabilities 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;
1997, 12,252,000, and 1996, 11,954,000 shares issued and 12 12
outstanding
Additional paid-in capital 63,878 62,614
Accumulated deficit (25,211) (2,769)
-------------- ---------------
Total stockholders' equity 38,679 59,857
-------------- ---------------
$ 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,
1997 1996 1995
- ------------------------------------------------------- ----------------- ---------------- ----------------
Net sales $ 34,798 $ 53,080 $ 47,144
Cost of sales 25,341 28,590 24,690
----------------- ---------------- ----------------
Gross profit 9,457 24,490 22,454
----------------- ---------------- ----------------
Operating expenses:
Research and development 9,757 8,570 4,811
Marketing and selling 13,242 11,849 7,319
General and administrative 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 37,105 37,529 14,356
----------------- ---------------- ----------------
Income (loss) from operations (27,648) (13,039) 8,098
Interest income 1,680 1,745 2,236
----------------- ---------------- ----------------
Income (loss) before income taxes (25,968) (11,294) 10,334
Provision for (benefit from) income taxes (3,526) 608 3,617
----------------- ---------------- ----------------
Net income (loss) $ (22,442) $ (11,902) $ 6,717
================= ================ ================
Net income (loss) per share:
Basic $ (1.85) $ (1.01) $ 0.60
================= ================ ================
Diluted $ (1.85) $ (1.01) $ 0.57
================= ================ ================
Weighted average common shares:
Basic 12,154 11,760 11,147
================= ================ ================
Diluted 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 11,066 $ 11 $ 55,386 $ (55) $ 2,416 $ 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 45 - 385 - - 385
plan
Income tax benefit associated
with nonqualified stock - - 28 - - 28
options
Issuance of Common Stock for
acquisition of NuCom 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 74 - 451 - - 451
plan
Income tax benefit associated
with nonqualified stock - - 403 - - 403
options
Net loss - - - - (22,442) (22,442)
------------ ------------ ------------- ------------- -------------- -------------
Balance at December 31, 1997 12,252 $ 12 $ 63,878 $ - $ (25,211) $ 38,679
============ ============ ============= ============= ============== =============
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,
1997 1996 1995
- ----------------------------------------------------------------- ------------- -------------- -------------
Cash flows from operating activities:
Net income (loss) $ (22,442) $ (11,902) $ 6,717
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,969 2,111 1,309
Amortization of goodwill 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 3,189 (1,845) (1,061)
Inventories 6,811 (664) 808
Income tax refund receivable (3,580) - -
Prepaid expenses and other assets 1,026 862 (1,185)
Accounts payable (1,321) 1,439 (3,315)
Accrued liabilities (2,644) 1,623 862
------------- -------------- -------------
Net cash provided by (used in) operating activities (6,891) 5,265 2,914
------------- -------------- -------------
Cash flows from investing activities:
Cash paid for acquisition, net of cash acquired (6,449) (10,401) -
Holdback amount from acquisition (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) investing activities (1,399) (9,632) 2,590
------------- -------------- -------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock 861 613 597
Repayment of stockholders' notes receivable - 14 41
------------- -------------- -------------
Net cash provided by financing activities 861 627 638
------------- -------------- -------------
Effect of exchange rate changes on cash - 53 -
------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents (7,429) (3,687) 6,142
Cash and cash equivalents, beginning of year 23,523 27,210 21,068
------------- -------------- -------------
Cash and cash equivalents, end of year $ 16,094 $ 23,523 $ 27,210
============= ============== =============
Supplemental disclosure of cash flow information
Cash paid during the year for:
Income taxes $ 158 $ 245 $ 4,852
Noncash transactions:
Income tax benefit associated with nonqualified stock $ 403 $ 28 $ 596
options
Common Stock issued for acquisition of NuCom $ - $ 5,342 $ -
The accompanying notes are an integral part of these financial statements.
22
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Network Peripherals Inc., a Delaware corporation (the "Company"), designs,
develops, and manufactures high performance networking solutions, which it
markets primarily to original equipment manufacturers, distributors, value-added
resellers and system integrators. The Company's solutions are designed for use
in workgroups, wiring closets and backbones.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments
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 the Company's
short-term investments, which consist of 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, 1997 and 1996, 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 to the related development costs and totaled approximately $217,000,
$556,000, and $906,000 in 1997, 1996 and 1995, respectively.
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 for sales transacted within 90 days prior to the period-end. As
of December 31, 1997 and 1996, the Company's allowances for such potential
events totaled $1.2 million. As a percentage of sales transacted within 90 days
prior to December 31, 1997 and 1996, the allowances for sales returns and other
credits were 18.0% and 7.2%, 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 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, 1997 and 1996, goodwill, net of accumulated
amortization, was $173,000 and $1,258,000, 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, the functional currency of the Company's subsidiary in Taiwan was the
US dollar. For 1996, the functional currency was the local currency.
Accordingly, gains or losses arising from the translation of foreign currency
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 a
401(k) plan that does not require employer matching contributions. 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 basic 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 is 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' EPS to conform with the
provisions of the SFAS No. 128.
During 1997 and 1996, 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 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 Reporting for Segments of a Business Enterprise." 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. 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 maker
in deciding how to allocate resources and in assessing performance.
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,
1997 1996
- --------------------------------------------------------------------------------
Cash, cash equivalent, and short-term investments:
Cash and money market accounts $ 16,094 $ 5,411
Municipal obligations -- 18,112
-------- --------
Cash and cash equivalents 16,094 23,523
-------- --------
Corporate debt securities 14,371 --
Municipal obligations -- 21,238
Government securities -- 1,112
-------- --------
Short-term investments 14,371 22,350
-------- --------
$ 30,465 $ 45,873
======== ========
Inventories:
Raw materials $ 158 $ 4,685
Work-in-process 898 2,600
Finished goods 361 943
-------- --------
$ 1,417 $ 8,228
======== ========
Property and equipment:
Computer and equipment $ 6,918 $ 7,181
Furniture and fixtures 895 907
Leasehold improvements 303 356
-------- --------
8,116 8,444
Accumulated depreciation (4,240) (4,869)
-------- --------
$ 3,876 $ 3,575
======== ========
Accrued liabilities:
Salaries and benefits $ 1,750 $ 2,699
Reserve for contract settlements 1,000 --
Royalty 746 1,154
Restructuring expense 597 --
Warranty 513 717
Holdback amount from acquisition 456 1,115
Customer deposits 38 605
Income taxes -- 1,268
Other 695 1,283
-------- --------
$ 5,795 $ 8,841
======== ========
26
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - LINE OF CREDIT
The Company has a bank line of credit for $10 million which expires on July 31,
1998. 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 1997 and 1996. As of December 31,
1997, 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 and
manufacturing facilities in Taiwan under various operating leases which expire
in February 2002. Rent expense for all Company facilities was $931,000,
$868,000, and $529,000 in 1997, 1996, and 1995, respectively.
Future minimum lease payments as of December 31, 1997 are as follows (in
thousands):
Years ending December 31,
1998 $ 610
1999 588
2000 550
2001 321
2002 68
-------
$ 2,137
=======
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
The Company has an Employee Stock Purchase Plan (the "Plan"), which permits
eligible employees to purchase 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 which the
Common Stock is purchased under 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, the Company has issued 191,714 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)
Stock Option Plans
In April 1997, the Company adopted the 1997 Stock Plan (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 1,500,000 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, options to purchase
664,700 shares of Common Stock were outstanding; 835,300 shares were available
for future grants; and 1,500,000 shares were authorized but unissued.
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, options to purchase a total of
1,893,862 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, options to
purchase 38,000 shares of Common Stock were outstanding; 112,000 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 77.24% in 1997 and 69.36% in both 1996 and 1995; risk-free
interest rate of 5.36% in 1997 and 5.48% in both 1996 and 1995; 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 income and earnings per share
would have been:
1997 1996 1995
---------------------------------------------------------------------------------------
(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 - pro forma (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.
The following table summarizes information about stock options outstanding at December 31, 1997:
Outstanding Exercisable
---------------------------------------------------- ---------------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- -------------------- ---------------------------------------------------- ---------------------------
$ 0.30 - $ 4.99 2,183,754 8.73 Years $4.77 239,566 $3.60
5.00 - 9.99 234,785 9.23 Years 6.56 27,423 6.65
10.00 - 14.99 174,023 8.89 Years 11.55 42,758 13.11
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
============= ==========
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 2,596,562 5.41
=================
The weighted average estimated grant date fair value, as defined by SFAS 123,
for options granted under the stock option plans during 1997, 1996 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 1997, 1996 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 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) as follows:
Years ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
Federal statutory rate (35.0%) (35.0%) 35.0%
State tax, net of federal impact (6.0) .3 5.1
Research and development tax credits (.8) (1.1) (1.2)
Tax-exempt interest income (1.0) (4.5) (6.9)
Provision for valuation allowance on deferred tax assets 22.1 - -
Nondeductible acquisition costs 8.6 45.6 -
Other (1.5) .1 3.0
------------- --------------- -------------
(13.6%) 5.4% 35.0%
============= =============== =============
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 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, the Company has Federal net operating loss
carryforwards of approximately $2.6 million which expire in 2012. For state tax
purposes, the Company has net operating loss carryforwards of approximately $5.2
million which expire in 2002.
NOTE 8 - ACQUISITIONS
Effective April 29, 1997, the Company acquired NetVision Corporation
("NetVision"), a privately held company engaged in the development of very high
bandwidth LAN switching and Gigabit Ethernet technologies, at a cost of $6.5
million, including payments to NetVision stockholders, the assumption of certain
liabilities, and transaction expenses. Effective March 21, 1996, the Company
completed its acquisition of NuCom Systems, Inc. ("NuCom"), a Taiwan-based
company, by purchasing all the outstanding shares of NuCom in exchange for $11.2
million in cash, 440,748 shares of the Company's Common Stock valued at $5.3
million, plus product integration costs for an aggregate purchase price of $17.1
million. These transactions were accounted for using the purchase method, and
the purchase price was allocated to the assets acquired and liabilities assumed
based on the estimated fair market values at the date of acquisition. In each
transaction, the research and development in process represented the estimated
current fair market value of specified technologies which had not reached
technological feasibility and had no future uses. The results of the operations
acquired were included with those of the Company from the date of acquisition.
The allocation of the purchase price was as follows (in thousands):
Acquisition of NetVision:
Research and development, in process $ 6,462
Goodwill 200
Assets 44
Liabilities assumed (257)
--------------
Total $ 6,449
==============
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
=============
The pro forma combined results of operations of the Company, NetVision and NuCom
for the years ended December 31, 1997 and 1996, as if the acquisitions had
occurred at the beginning of the respective years, after giving effect to
certain pro forma adjustments, are as follows (in thousands, except per share
amount):
1997 1996
---------------------------------------------------------
Net sales $ 34,798 $ 53,080
============= ===============
Net income (loss) $(15,214) $ 1,884
============= ===============
Net income (loss) per share:
Basic $ (1.29) $ 0.17
============= ===============
Diluted $ (1.29) $ 0.16
============= ===============
The foregoing pro forma results of operations excluded the amortization of
goodwill and the write-off of acquired research and development in process
resulting from the acquisitions.
NOTE 9 - RESTRUCTURING
In the third quarter of 1997, the Company announced and began to implement a
restructuring plan aimed at reducing costs and restoring profitability to the
Company's operations. The restructuring plan was necessitated by decreased
demand for the Company's products and the Company's adoption of a new strategic
direction. These actions resulted in a net charge of approximately $3.7 million
to the consolidated statement of operations in 1997. The restructuring actions
principally consisted of termination of approximately 70 employees, closure of
certain sales and manufacturing facilities, cancellation of the related leases,
and write-off of excess manufacturing equipment and goodwill. The Company
expects that most of the contemplated restructuring actions will be completed in
1998 and will be financed through working capital. The following table lists the
restructuring accrual activities from July 1, 1997 to December 31, 1997 (in
thousands):
Reduction Write-off
Write-off in Work Closure 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
======= ======= ======= ======= ======= =======
32
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - MARKET DATA
The Company operates in one industry segment. Export sales to customers outside
of North America represented 26%, 21%, and 25% of the Company's net sales for
the years ended December 31, 1997, 1996 and 1995, respectively. As a percentage
of net sales, export sales to Europe and Asia for 1997, 1996 and 1995 were 11%
and 15%; 8% and 13%; and 17% and 8%, respectively.
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,
1997 1996 1995
------------------------------------------------------------------
Customer A 39% 26% 17%
Customer B - - 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 1998 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 1998 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 1998 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 1998 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) Corporate Supply Agreement with Sun Microsystems, Inc., dated March 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
Vice President of Operations 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 ALKER President, Chief Executive Officer and
- -------------------------------- Director (Principal Executive
Pauline Lo Alker Officer)
\s\ ROBERT HERSH Vice President of Operations and
- -------------------------------- Chief Financial Officer
Robert Hersh (Principal Financial Officer)
\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, 1995
Allowance for doubtful accounts $ 165 $ - $ 88 $ (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 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 945 - 3,593 (3,652) 886
credits
-------------- ------------- ------------ ------------- --------------
Total allowances for doubtful accounts
and sales returns $ 1,154 $ - $3,731 $(3,701) $ 1,184
============== ============= ============ ============= ==============
38