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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, 2000
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)
2859 Bayview Drive
Fremont, California 94538
(Address, including zip code of principal executive offices)
(510) 897-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Common Stock
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes |X| 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 27, 2001 was $89,931,499 based upon the closing price of
the Registrant's Common Stock on the Nasdaq National Market System on that date.
The number of shares of the Registrant's Common Stock outstanding as of
March 27, 2001 was 12,847,357.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting of
stockholders in 2001 are incorporated by reference into Part III of this Annual
Report on Form 10-K.
NETWORK PERIPHERALS INC.
FORM 10-K
TABLE OF CONTENTS
PART I Page
ITEM 1. Business....................................................... 3
ITEM 2. Properties..................................................... 9
ITEM 3. Legal Proceedings.............................................. 9
ITEM 4. Submission of Matters to a Vote of Security Holders............ 9
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters........................................ 10
ITEM 6. Selected Consolidated Financial Data........................... 11
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 12
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk..... 22
ITEM 8. Financial Statements and Supplementary Data.................... 23
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 39
PART III
ITEM 10. Directors and Executive Officers of the Registrant............. 39
ITEM 11. Executive Compensation......................................... 39
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 39
ITEM 13. Certain Relationships and Related Transactions................. 39
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 40
Signatures..................................................... 42
Supplemental Schedule.......................................... 43
2
PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
On March 30, 2001, NPI entered into a series of related agreements with
privately held FalconStor, Inc. pursuant to which NPI purchased Series C
Preferred Stock of FalconStor having an aggregate purchase price of $25.0
million and obtained an exclusive option to merge with FalconStor. FalconStor
develops and markets network storage infrastructure software that enables
storage over IP using standard industry components such as Gigabit Ethernet,
Fibre Channel and SCSI, with planned support for iSCSI and Infiniband. The
investment agreements provide that NPI has the right to designate one member of
FalconStor's board of directors and entitle NPI to liquidation, registration,
voting and preemptive rights customary for venture capital style investments.
The option agreement gives NPI the right to merge with FalconStor pursuant to
the terms of the form of merger agreement attached to the option agreement. The
form of merger agreement provides that, as consideration for all outstanding
shares of FalconStor stock, NPI would issue a number of newly issued shares of
NPI common stock determined in accordance with a formula. The number of shares
issuable in the merger would depend upon a number of variable factors, including
the trading price per share of NPI's common stock at the time of the merger,
NPI's assets at the time of the merger and other factors. The actual number of
shares is expected to result in NPI's current stockholders having a one-third
interest in the combined entity. All shares issued to FalconStor stockholders in
the merger, as well as shares held by NPI officers and directors at the time of
the merger, would be subject to a one-year lock-up agreement, subject to early
release in the discretion of the NPI board following the merger. In addition,
NPI would assume all outstanding options to acquire shares of FalconStor common
stock, which would result in the potential issuance of approximately 4.5 million
shares if those options vested and were exercised. The holders of a majority of
each class of FalconStor's capital stock have agreed that they will vote in
favor of the merger if it is presented to such stockholders for a vote. The
merger would be structured as a tax free reorganization and would be accounted
for as a purchase. Completion of the merger would be subject to the expiration
of the applicable Hart-Scott-Rodino waiting period, NPI stockholder approval and
other customary closing conditions. In the event that NPI does not exercise the
option, and under certain other circumstances, NPI may be required to pay
FalconStor a $3.0 million penalty.
NPI has also engaged Lehman Brothers to advise NPI regarding strategic
alternatives with respect to its hardware business that would allow NPI to focus
its resources on the storage software opportunity presented by the FalconStor
transactions.
OVERVIEW
We design and sell Fast Ethernet and Gigabit Ethernet switching solutions for
local area networks, or LANs. All of our switches are based on our highly
flexible NuWaveArchitecture, built with our proprietary Application-Specific
Integrated Circuits, or ASICs. This architecture is designed to enable us to
deliver standards-based switches that can work with a variety of existing LAN
infrastructures and technologies. We are directing our sales and marketing
resources evenly toward original equipment manufacturers, or OEMs, and
value-added resellers, or VARs.
As the Internet and complex applications, such as storage area networks (SAN),
network attached storage (NAS), enterprise resource planning and data backup,
have become pervasive, the volume of data traffic over LANs has increased
dramatically, often creating bottlenecks on LANs that degrade network
performance. Enterprises have historically implemented Layer 2 switches and
software-based Layer 3 routers to manage increased traffic and to provide the
intelligence necessary to process increasingly complex multi-protocol traffic.
However, increasing bandwidth requirements and transmission speeds combined with
multiple traffic types, such as voice, data and video, have strained the
performance capabilities of software-based Layer 3 routers. In response to these
developments, LAN managers have begun to implement hardware-based Layer 3
switches in their networks to replace both Layer 2 switches and software-based
Layer 3 multi-protocol routers.
Despite the performance improvements of Layer 3 switches versus Layer 3 routers,
many of today's Layer 3 switching solutions still have limitations, such as
traffic blocking. We address this issue and others through our proprietary
NuWaveArchitecture, which enables us to deliver the following benefits to our
customers and end-users:
o High performance at low cost. We believe our architecture and
modular design enable us to deliver products with
price/performance advantages regardless of scale or configuration.
3
o Scalability. Our wire-speed, non-blocking Layer 3 switching
solutions enable enterprises to expand their LANs without creating
bottlenecks or impacting network performance. Modular expansion units
can connect to master units via internal high bandwidth channels that
do not block traffic or reduce switching resources.
o Flexibility. Our proprietary technology enables us to create new
product configurations using the proprietary ASICs that form the
core of our switches. In addition, our architecture enables us to
add software-based Layer 4-7 capabilities or port third-party
software to our switches to develop new products.
o Manageability. We believe our products reduce the complexity of
network management, thereby lowering overall cost of ownership.
As used in this annual report, the terms "we," "us," "our" and "NPI" mean
Network Peripherals Inc. and its subsidiaries (unless the context indicates
another meaning), and the term "common stock" means our common stock, par value
$0.001 per share.
We were incorporated in California in March 1989 and were reincorporated in
Delaware in 1994. We initially focused on networking products based on fiber
distributed data interface, or FDDI, technology, and we obtained a significant
share of the market for FDDI adapter products in the early 1990s. Because the
market for FDDI-based products declined significantly beginning in 1995, we
developed a new line of Layer 2 Fast Ethernet switching products that we first
shipped in early 1996. By 1998, the market for our FDDI-based products and our
Layer 2 Fast Ethernet products (together, our "legacy products") declined
substantially, and we committed nearly all our resources to the development of a
new line of Layer 3 Gigabit Ethernet switches founded on our NuWaveArchitecture.
We commenced limited commercial shipments of the first product in this line, the
Keystone24g in December 1999, followed by the remainder of the product line in
2000. Because the life cycle of our legacy products reached maturity, we ceased
production of these products during 2000 in accordance with the decreasing
demand and profitability in this market.
PRODUCTS AND TECHNOLOGY
All of our Gigabit Ethernet switches are based on our flexible
NuWaveArchitecture, which combines advanced design and proprietary ASICs to
deliver standards-based switches that are intended to work seamlessly with
existing LANs. This architecture offers a 64 Gigabit per second, or Gbps,
crosspoint switching fabric. In addition, the NuWaveArchitecture is designed to
eliminate blocking with multiple input buffers, separate queues for unicast and
multicast traffic and other special queuing and buffering techniques. Further,
our architectural approach gives us the capability to increase functionality and
reduce cost in future generations of NuWaveArchitecture.
Standalone LAN Switching Solutions
Keystone24g. The Keystone24g was the first commercially available Gigabit
Ethernet switch based on our NuWaveArchitecture. It is a fully managed
standalone switch with 24 fixed Fast Ethernet ports and two optional Gigabit
uplinks. The Keystone24g features advanced, traffic-enhancing capabilities, such
as wire-speed IP routing and protocol-based virtual LANs.
Stacking LAN Switching Solutions
Keystone24mg Stack Master. The Keystone24mg Stack Master is a highly scalable,
fully managed Layer 3 switch that supports high capacity Gigabit Ethernet, Fast
Ethernet and WAN interfaces. The Keystone24mg incorporates a powerful,
non-blocking 64-Gbps switching fabric. The Keystone24mg Stack Master has 24
fixed Fast Ethernet ports and in a stacked environment can provide up to 96 Fast
Ethernet ports without blocking. The use of dedicated, separate channels for
user data and management and control information is designed to ensure
wire-speed performance even under sustained periods of high traffic volume while
maintaining network integrity.
Capstone24t Stack Slave. Commercial shipments of our Capstone24t Stack Slave
commenced in the first quarter of 2000. The Capstone24t connects to the
Keystone24mg over an advanced stacking interface that connects the Capstone24t
directly to the Keystone24mg's 64-Gbps switching fabric. The Capstone24t has 24
fixed, full-duplex, auto-negotiating Fast Ethernet ports. One Capstone24t and
one Keystone24mg create a 48-port stack, while a combination of one Keystone24mg
and three Capstone24t switches creates a 96-port stack. Two optional Gigabit
uplinks on the Keystone24mg can expand the stack functionality and extend
price/performance advantages.
4
Backbone Switching Solutions
Cornerstone Switches. The Cornerstone6g provides up to 12 Gigabit ports and 16
Fast Ethernet ports. The Cornerstone6g is a fully managed standalone switch that
supports high capacity Gigabit Ethernet and Fast Ethernet port configurations.
The base unit has six fixed Gigabit Ethernet ports. Customers can also choose an
additional six Gigabit Ethernet ports and a 16-port Fast Ethernet option.
Gigabit Ethernet ports on the Cornerstone6g are available in short-haul fiber
(SX) and long-haul fiber (LX).
The Cornerstone12g is identical to the Cornerstone6g except that the base unit
has 12 fixed Gigabit ports instead of only six. The same 16-port Faster Ethernet
option card is available on the Cornerstone12g as on the Cornerstone6g. This
combination of port options makes our Cornerstone switches suitable for a range
of high performance applications, including data centers, network backbones and
power workgroups.
Problems encountered with our operating software resulted in unforeseen delays
in commercial shipments, as well as returns, beginning in the second quarter of
2000. Although we believe these problems have been corrected in subsequent
software releases, lost time and expense adversely affected our operating
results and market penetration throughout the year.
Management Software
NuSight GEMS is our Gigabit Ethernet management software that we bundle and ship
with our NuWaveArchitecture products. The initial version was shipped with our
Keystone24g, followed by enhanced versions for each of our NuWaveArchitecture
products as they have been produced. NuSight GEMS provides advanced and
easy-to-use management capabilities that simplify user configuration of our
products as well as diagnostic and management tools. NuSight GEMS is based on
widely accepted industry standards and operates with a variety of management
software applications.
MARKETING, SALES AND SUPPORT
We focus our sales and marketing efforts on OEMs, VARs, system integrators and
distributors. As of December 31, 2000, our worldwide sales and marketing
organization included 38 full-time technically trained marketing, sales and
support personnel located in the United States, the Netherlands and Taiwan. We
have domestic sales offices located in Fremont, Los Angeles, Boston, Chicago and
Denver, as well as Reston, Virginia and Sarasota, Florida.
The information in the following paragraph contains forward-looking statements
describing our 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 us, reliability, price and performance characteristics of the
components, new and existing products, the introduction of similar products by
competitors, pricing actions by competitors and our inability to recruit and
retain required sales and marketing staff with the needed skills.
OEMs. We intend to leverage the flexibility of the NuWaveArchitecture to
integrate our products into OEMs' product lines in traditional LAN markets and
emerging markets such as SAN/NAS, Video, Voice over IP and others. OEMs can
exercise significant influence in the development of our target markets because
they use our products to deliver complete, factory-configured solutions that are
installed and field-serviced by the OEM's technical support organizations. In
2000, we entered into agreements with a number of OEMs to introduce new products
and develop new markets. Our sales personnel, in addition to traditional
marketing and sales functions, are responsible for initiating and developing
relationships with OEM leaders in the computer networking industry. While we do
not generally obtain long-term purchase commitments from OEM customers, we enter
into contracts with OEM customers to establish the terms and conditions of sales
made pursuant to orders from OEMs. Further, the OEM customers typically provide
us with a rolling forecast up to three months in advance of shipment.
VARs, System Integrators and Distributors. We have existing relationships with a
number of distribution channel customers due to our experience with our legacy
products. Our technically trained staff is responsible for initiating and
developing relationships with these customers by providing insight into the
evolution of the network environment and facilitating the development and
deployment of optimal network solutions, domestically and internationally.
In 2000, 74% of our sales were in North America, with the balance of the sales
to Asia and Europe representing 15% and 11%, respectively. We have experienced
fluctuations in the volume of activity with individual customers and changes in
our customer base and expect such fluctuations and changes to continue. The loss
of a major customer, reductions of a major order or delay in a major shipment
could adversely affect our business and financial performance.
5
RESEARCH AND DEVELOPMENT
The information in this section contains forward-looking statements describing
our product development plans for 2001 and beyond. The successful development
and introduction of new products is subject to a number of uncertainties,
including our ability to recruit, train and retain adequate numbers of
professional engineers, successful design of proprietary ASICs and computer
software, design, development and verification testing to confirm that the
products meet our 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 our products obsolete.
Our future success is dependent on our ability to enhance current products and
to design and produce new products that are at the forefront of technological
advancements. We work closely with our OEM partners, reseller customers and
research organizations to identify new solutions to meet the current and future
needs of enterprises and Internet service providers. We design our products
consistent with industry standards to ensure interoperability, and we intend to
support emerging standards in accordance with our product strategy.
We designed the NuWaveArchitecture based on common ASICs and management software
to serve as the foundation of all new models in our product line. This enables
us to reduce product design and development cycles providing for fast time to
market for new products and features.
As of December 31, 2000, we employed 51 personnel in research and development,
including ASIC design, software development and quality assurance. We also
engage third party consultants to expedite development efforts of certain
projects when appropriate. In 2000, our research and development expenses were
$11.2 million.
In October 2000, we opened a new software development center at Research
Triangle Park in Durham, North Carolina. This location enables us to tap into
the pool of software engineering talent in the Durham area and to extend our
abilities to deliver superior partner and customer care. Software as well as
hardware development will continue to be conducted at our research center in
Bohemia, New York, in close coordination with our new software development
center in North Carolina.
CUSTOMER SERVICE AND SUPPORT AND QUALITY ASSURANCE
Our customer service and support organization maintains and supports products
sold by our sales force to end users and provides technical support to our VARs
and OEMs. Generally, our VARs and OEMs provide installation, maintenance and
support services to their customers, and we assist them in providing such
support. Questions and problems from end users, VARs and OEMs can be handled via
telephone, e-mail and facsimile. Our website is continually updated to enable
our customers to download the latest technical information and tips, along with
firmware, software and product manuals. This same group also conducts new
product Beta testing to ensure that our new products will meet customer
requirements when those products reach the marketplace.
Our quality assurance organization is tied to our customer service and support
organization in order to maintain its focus on satisfaction of customer
requirements and expectations. This group conducts network testing, OEM and
third party testing, problem reproduction and resolution and validation of
manufacturing tools in order to ensure compliance with industry standards,
product performance and interoperability with our customer's existing equipment.
MANUFACTURING
Our manufacturing operations consist of procurement of components and the
assembly, testing and quality assurance of finished goods for shipment to
customers. We purchase the components of our products, including our proprietary
ASICs, circuit boards, integrated circuits and power supplies, from third
parties. NEC is the sole manufacturer of our ASICs. We monitor the quality of
the purchased components through quality assurance procedures at our
headquarters in Fremont, California.
In January 2000, we entered into an agreement with Solectron Corporation, a
major contract manufacturer with global capabilities, located in Milpitas,
California, to assume all manufacturing responsibilities for NPI. This
arrangement enables us to manufacture our products near our North American
customer base and accommodate significant increases in production volume, if
necessary. Under this contract, Solectron purchases the components for our
products and assembles them to our specifications. This further enables us to
leverage Solectron's established relationships with suppliers to procure
materials at reduced costs and mitigate potential supply constraints. We also
use Solectron's extensive resources and expertise to assist us in manufacturing
engineering, repair and product testing, and burn-in. We continue to perform all
component and supplier qualification, quality assurance and document control at
our facilities.
6
We select suppliers on the basis of technology, manufacturing capacity, quality
and cost. Our agreement with Solectron affords us the opportunity to have
redundant manufacturing locations for each component. Nevertheless, our reliance
on third party suppliers and manufacturers involves risks, including possible
limitations on availability of products due to market abnormalities, lack of
control over delivery schedules, fluctuating manufacturing yields, and high
production costs. The inability of our suppliers to deliver products of
acceptable quality and in a timely manner, or our inability to procure adequate
supplies of our products could have a material adverse effect on our business,
financial condition or operating results.
COMPETITION
The markets in which we compete are intensely competitive and are characterized
by frequent new product introductions, changing customer preferences and
evolving technology and industry standards. Our competitors continue to
introduce products with improved price/performance characteristics, and we must
do the same to remain competitive. Increased competition is likely to result in
significant price reductions and may result in lower than expected revenues or
profit margins, any of which could harm our business, financial condition or
operating results.
Many of our current and potential competitors have significantly broader product
offerings, greater financial, technical, marketing and other resources, and
larger installed bases of customers than we do. While the Layer 3 switching
market is still in the early stage of development, competition in this market
comes from companies such as Extreme Networks, Foundry Networks, Nortel
Networks, Cisco Systems, 3Com and others. We believe that this market will
consolidate over time and that this consolidation could adversely affect our
ability to compete effectively. A number of companies developing technologies
similar to ours have been acquired by our larger competitors. These acquisitions
are likely to permit our competitors to devote significantly greater resources
to the development and marketing of new competitive products and the marketing
of existing products to their customer bases. We expect that competition will
increase as a result of these and other industry consolidations and alliances.
Some of our current and potential OEM customers could develop products
internally that would replace our products. The resulting lost sales of our
products to any such OEMs, in addition to the increased competition presented by
these OEMs, could have a material adverse effect on our business, financial
condition and operating results.
We believe that the principal competitive factors in the LAN equipment 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. We believe
that we compete favorably with respect to each of these factors.
INTELLECTUAL PROPERTY
Our success is dependent upon our proprietary technology. The core of our
proprietary technology is the NuWaveArchitecture and our ASICs. We rely
principally upon copyright, trademark and trade secret laws to protect our
proprietary technology. We generally enter into confidentiality or license
agreements with employees, suppliers, customers and potential customers,
limiting or prohibiting their disclosure of our proprietary information.
Although we hold five U.S. patents covering technology of our legacy products,
we do not own any patents or have pending patent applications associated with
our NuWaveArchitecture.
We seek to protect our proprietary rights and other intellectual property
through a combination of copyright, trademark and trade secret protection, as
well as through contractual protections such as proprietary information
agreements and nondisclosure agreements. We also believe that factors such as
the technological and creative skills of our personnel, new product
developments, frequent product enhancements and reliable product maintenance are
essential to establishing and maintaining a technology leadership position.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology. Monitoring unauthorized use of our products is difficult, and there
can be no assurance that the steps taken by us will prevent misappropriation of
our technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as do the laws of the United States.
7
EXECUTIVE OFFICERS*
The executive officers of NPI and their ages are as follows:
Name Age Position
- --------------------- --- ------------------------------------------------------------
James Regel 58 President, Chief Executive Officer and Director
James Baker 55 Senior Vice President, Engineering, Chief Technical Officer
Joseph Botta 61 Vice President, Operations
Ronald Rutherford 53 Vice President, Worldwide Sales
James Williams 57 Senior Vice President, Finance and Administration, Secretary,
Treasurer and Chief Financial Officer
James Regel joined NPI in August 2000 as President, Chief Operating Officer and
Director and became Chief Executive Officer in October 2000. From January 2000
to July 2000, Mr. Regel was Vice President of Worldwide Sales at Proxim, a
manufacturer of wireless networking products. Mr. Regel joined Proxim in January
2000 through Proxim's acquisition of Wavespan, a high speed wireless networking
company, where he served as Chief Executive Officer from June 1999 to January
2000 and Senior Vice President of Sales from March 1997 to June 1999.
Previously, he held executive positions in sales and marketing at Verilink
Corporation, Network Equipment Technologies and Rolm Corporation.
James Baker has served as Senior Vice President of Engineering and Chief
Technical Officer of NPI since December 2000. Prior to joining NPI, Mr. Baker
was the Chief Operating Officer of a division of ParkerVision, Inc., a
manufacturer of RF products for wireless communications. From August 1997 to
April 1999, Mr. Baker was Vice President of Engineering at NetWave Technologies,
a wireless local area network equipment manufacturer, which was acquired by Bay
Networks. From June 1996 to July 1997, Mr. Baker was President and Chief
Operating Officer of MediaWise Networks, an Ethernet switching company. Prior to
June 1996, Mr. Baker was President of Loral Data Systems, a manufacturer of
network switching products, which is a division of Loral Corporation.
Joseph Botta has been Vice President of Operations of NPI since June 1999.
Previously, Mr. Botta was the Principal Owner of Silver Creek Investments. From
March 1997 through November 1997, he was Vice President of Operations at ACT
Networks, Inc., a wide area network access products manufacturer. From 1988 to
1997, he held various management positions at Whittaker Corporation, a network
company, most recently serving as Executive Vice President of Operations.
Ronald Rutherford has served as Vice President of Worldwide Sales since October
2000. From March 1997 to May 2000, Mr. Rutherford served as Vice President of
Sales and Customer Support for the Communications Products Division of Harris
Corporation, a communications equipment company. Prior to his service at Harris
Corporation, Mr. Rutherford held executive positions in sales at Netrix
Corporation and Siemens.
James Williams has served as Senior Vice President of Finance and
Administration, Secretary, Treasurer and Chief Financial Officer of NPI since
December 2000. From March 1999 to September 2000, Mr. Williams was Vice
President of Finance, Technology, Operations and Business Integration for
E*TRADE Group, a provider of online personal financial services. From November
1997 to February 1999, Mr. Williams was a financial consultant serving in the
capacity of a chief financial officer for a number of high-tech companies. Prior
to November 1997, Mr. Williams was Executive Vice President of Finance and Chief
Financial Officer of Systems Integrators, Inc., a supplier of software products
and integration systems for newspaper agencies worldwide.
* As of December 31, 2000
8
EMPLOYEES
As of December 31, 2000, we employed 118 people, including 51 in research and
development, 38 in sales, marketing and technical support, nine in manufacturing
operations and 20 in finance and administration. Of those employees, 19 were in
international locations. None of our employees is represented by a labor union.
We consider our relations with our employees to be good. Competition for
employees in our industry and geographical areas is intense, and there can be no
assurance that we will be successful in attracting and retaining such personnel.
ITEM 2. PROPERTIES
Our principal executive offices are located in Fremont, California, and consist
of 22,500 square feet under a lease expiring in October 2004. Our research and
development facility is located in Long Island, New York, whereby we occupy
approximately 24,100 square feet under a lease expiring in October 2007. In
addition, we also have a software development center at Research Triangle Park
in Durham, North Carolina. We have international sales offices in the
Netherlands and Taiwan, as well as domestic sales offices in various states,
including California, Colorado, Illinois, Massachusetts, Virginia and Florida.
We believe that these existing facilities are adequate for the purposes for
which they are currently used.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims arising
out of our operations. As of the date of this Annual Report, we are not a party
to any legal proceedings that are expected, individually or in the aggregate, to
have a material adverse effect on our business, financial condition or results
of operations.
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, 2000.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Our Common Stock is traded in the over-the-counter market on the Nasdaq National
Market. As of March 27, 2001, there were approximately 120 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.
1998 High Low
- ----------------------------- ------------------------ ------------------
First Quarter $ 8.69 $ 6.25
Second Quarter 6.94 3.75
Third Quarter 4.88 3.00
Fourth Quarter 4.88 2.31
1999
- ----------------------------- ------------------------ ------------------
First Quarter $ 7.25 $ 3.69
Second Quarter 19.38 5.75
Third Quarter 19.94 16.00
Fourth Quarter 47.75 18.88
2000
- ----------------------------- ------------------------ ------------------
First Quarter $78.50 $35.50
Second Quarter 30.75 14.06
Third Quarter 19.63 11.56
Fourth Quarter 16.44 6.00
We have never paid or declared any cash dividends. It is our present policy to
retain earnings to finance the growth and development of the business and,
therefore, we do not anticipate paying cash dividends on our Common Stock in the
foreseeable future.
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31,
2000 1999 1998 1997 1996
- ---------------------------------------------- ------------ ------------ ------------- ------------ ------------
(in thousands, except per share amounts)
Consolidated Statement of Operations Data:
Net sales $ 7,514 $ 10,231 $ 28,585 $ 34,798 $ 53,080
Cost of sales 9,144 9,410 17,250 25,341 28,590
-------- -------- -------- -------- --------
Gross profit (loss) (1,630) 821 11,335 9,457 24,490
-------- -------- -------- -------- --------
Operating expenses:
Research and development 11,233 7,803 11,485 9,757 8,570
Marketing and selling 10,672 6,437 6,010 13,242 11,849
General and administrative 4,749 3,503 3,234 3,982 3,378
Restructuring expense 600 - - 3,662 -
Loss (gain) on sale of assets 620 (1,055) - - -
Acquired research and development in
process - - - 6,462 13,732
-------- -------- -------- -------- --------
Total operating expenses 27,874 16,688 20,729 37,105 37,529
-------- -------- -------- -------- --------
Loss from operations (29,504) (15,867) (9,394) (27,648) (13,039)
Interest income 7,262 908 1,505 1,680 1,745
-------- -------- -------- -------- --------
Loss before income taxes (22,242) (14,959) (7,889) (25,968) (11,294)
Provision for (benefit from) income taxes - - - (3,526) 608
-------- -------- -------- -------- --------
Net loss $(22,242) $(14,959) $ (7,889) $(22,442) $(11,902)
======== ======== ======== ======== ========
Net loss per share:
Basic and diluted $ (1.56) $ (1.19) $ (0.64) $ (1.85) $ (1.01)
======== ======== ======== ======== ========
Weighted average common shares:
Basic and diluted 14,224 12,584 12,281 12,154 11,760
======== ======== ======== ======== ========
December 31,
2000 1999 1998 1997 1996
- ---------------------------------------------- ------------ ------------ ------------- ------------ -------------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and
short-term investments $ 96,001 $ 9,715 $ 23,351 $ 30,465 $ 45,873
Working capital 105,072 12,565 26,070 34,439 54,997
Total assets 115,714 20,852 35,549 45,889 71,434
Stockholders' equity 110,904 17,909 30,972 38,679 59,857
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following forward-looking statements are made in reliance upon the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
future events described in such statements involve risks and uncertainties,
including:
o the timely development and market acceptance of our new products;
o our ability to develop and deliver products free from undetected hardware
and software errors;
o the market demand by customers for our new and existing products;
o competitive actions, including pricing actions and the introduction of new
competitive products, that may affect the volume of sales of our products;
o uninterrupted supply of key components, including semiconductor devices and
other materials, some of which may be sourced from a single supplier;
o uninterrupted service by contract manufacturers;
o our ability to recruit, train and retain key personnel, including engineers
and other technical professionals;
o the development of new technologies rendering our existing technologies and
products obsolete;
o the economies of countries where our products are distributed; and
o general market conditions.
In evaluating these forward-looking statements, consideration should also be
given to the Business Risks discussed in a subsequent section of this annual
report.
OVERVIEW
We were incorporated in California in March 1989 and were reincorporated in
Delaware in 1994. Our initial business focus was on networking products based on
fiber distributed data interface, or FDDI, technology, and we obtained a
significant share of the market for FDDI adapter products in the early 1990s.
Because the market for FDDI-based products declined significantly beginning in
1995, we developed a new line of Layer 2 Fast Ethernet switching products that
we first shipped in early 1996. By 1998, the market for our FDDI-based products
and our Layer 2 Fast Ethernet products (together, our "legacy products")
declined substantially, and we committed nearly all of our resources to the
development of a new line of Layer 3 Gigabit Ethernet switches (collectively
"NuWave products") founded on our NuWaveArchitecture, which combines our
advanced design and our proprietary application specific integrated circuits, or
ASICs. We commenced limited commercial shipments of our first NuWave product in
December 1999 and volume shipments of all NuWave products in 2000. We anticipate
that substantially all of our revenues in future periods will be derived from
sales of NuWave products.
Cost of revenue is comprised principally of payments to our materials suppliers
and contract manufacturers, final assembly costs, costs associated with
manufacturing and quality functions, inventory management costs and certain
other product costs. We expect our gross profit to be affected by many factors,
including:
o declines in the average selling price of our products;
o fluctuations in demand for our products;
o the volume of products sold;
o the mix of products sold;
o the mix of sales channels through which our products are sold; and
o new product introductions both by us and our competitors.
Generally, we realize higher margins on sales to the reseller channel than on
sales to OEMs. Any change in the mix between the channels or the loss of a major
customer could adversely affect our gross margin, operating results and
financial condition. We experienced significant erosion in the average selling
prices of our legacy products. The average selling prices of our NuWave products
have decreased from their levels at introduction, and we anticipate that they
will decline in the future. Therefore, to improve our gross margins, we must
develop and introduce new products and enhancements on a timely basis. We must
also continually reduce our costs of production. As our average selling prices
decline, we must also increase our unit sales volume to maintain or increase our
revenue.
In transitioning from our legacy business to our NuWave business, we have
incurred significant losses in the past three years primarily reflecting
declining revenues of legacy products in conjunction with substantial
investments in research and development to bring NuWave products to market. The
losses continued through 2000 due to the failure of our NuWave products to
achieve significant market penetration and continuing high levels of research
and development expenses.
12
Although we expect revenues to increase to the extent that we broaden the
customer base for our NuWave family of products, we cannot assure you that such
revenues will exceed production costs and operating expenses in the same
periods.
See details of recent developments in Part I, Item 1.
RESULTS OF OPERATIONS
Net Sales
Net sales were $7.5, $10.2 and $28.6 million in 2000, 1999 and 1998,
respectively. The decrease in net sales was primarily attributed to the winding
down of the legacy business throughout 1999 and 2000, as the demand for our
legacy products experienced rapid decline. The decrease in net sales in 2000 was
partially offset by volume shipments of NuWave products started in early 2000.
During the second quarter of 2000, the software used in our NuWave products
displayed instability in certain network environments. This software instability
problem caused delay in shipments and product acceptance testing, reduced orders
from customers in the second quarter and negatively impacted our customer demand
in the third quarter and, to a lesser extent, the fourth quarter of 2000.
Consequently, total net sales in 2000 were substantially lower than originally
estimated.
We believe that the software instability issue we experienced during the second
quarter of 2000 has been resolved. However, software and hardware errors may
occur from time to time in new or enhanced products after commencement of
commercial shipments. These potential problems may adversely affect our future
operating results by causing delays in recognition of revenue and causing us to
incur significant warranty and repair costs, diverting the attention of our
engineering personnel from our product development efforts and causing delay or
loss of market acceptance of our products.
Net sales to OEM customers decreased to $4.8 million in 2000 from $5.2 and $19.4
million in 1999 and 1998, respectively. Net sales to the reseller channel,
following the same trend, decreased to $2.7 million in 2000 from $5.0 and $9.2
million in 1999 and 1998, respectively. We expect to have a more evenly
proportioned mix of revenues from OEM and resellers in the future periods. Net
sales to customers in North America were $5.6, $5.7 and $19.7 million in 2000,
1999 and 1998, respectively. The balance of net sales of $1.9, $4.5 and $8.9
million in 2000, 1999 and 1998, respectively, were to Asia and Europe.
Gross Profit/Margin
We had a negative gross margin in 2000, compared to 8% and 40% in 1999 and 1998,
respectively. The negative gross margin in 2000 was primarily attributed to the
lower than expected sales volume and a one-time charge of $1.5 million to
provide reserves for potential excess inventory. We expect our gross margin in
the future periods to improve from the current level to the extent sales volume
increases. The decrease in gross margin in 1999 compared to 1998 primarily
reflected the competitive pricing pressures on the Fast Ethernet products as
this market reached the commodity stage. In addition, the decline in production
volume of all legacy products resulted in under-utilization of our manufacturing
facilities and excess overhead charges.
Research and Development
Research and development expenses were $11.2, $7.8 and $11.5 million in 2000,
1999 and 1998, respectively. The increase in research and development expenses
in 2000 compared to 1999 was primarily due to the hiring of additional engineers
and increased spending in professional fees and prototype expenses related to
enhancing existing products based on the NuWaveArchitecture and developing new
products and technologies. We expect that research and development expenses will
continue to increase in the future periods, as we believe that continued
investment in research and development activities is essential to achieve our
strategic objectives. The decrease in research and development expenses in 1999
from 1998 primarily reflected reduction in compensation, overhead costs and
project costs associated with the termination of legacy product development,
including the divestiture of our research and development office in Taiwan in
June 1999.
Marketing and Selling
Marketing and selling expenses were $10.7, $6.4 and $6.0 million in 2000, 1999
and 1998, respectively. The increase in marketing and selling expenses in 2000
compared to 1999 was primarily due to increased spending in advertising, trade
shows and other marketing activities in conjunction with the launch of NuWave
products. In addition, during the second half of 2000, we rapidly expanded our
sales organization by adding sales personnel across the U.S., in order to
effectively penetrate the reseller channel and seek additional OEM customers.
Beginning in the latter part of 1998 and continuing throughout 1999, we added
staff to the sales and marketing group, including technicians and senior
management, and launched advertising campaigns to draw OEM interest, which was
reflected in the increased spending in 1999 compared to 1998.
13
General and Administrative
General and administrative expenses were $4.7, $3.5 and $3.2 million in 2000,
1999 and 1998, respectively. The increase in general and administrative expenses
in 2000 compared to 1999 was primarily attributed to increased professional fees
incurred for recruiting activities, investor relations and information
technology related services. In addition, we incurred higher insurance expenses
starting the fourth quarter of 2000 as a result of an overall tightening of the
liability insurance market. In 1999, we incurred higher professional fees, which
was the primary factor resulting in increased expenses in 1999 compared to 1998.
These professional fees included the engagement of an investor relations firm
and increased fees paid to information system consultants to prepare our systems
for year 2000 issues.
Restructuring
In August 2000, we approved and announced a plan to divest our manufacturing
facility in Taiwan. Solectron, our contract manufacturer, has agreed to
manufacture all of our products after the divestiture. The objective of this
divestiture is to reduce manufacturing overhead and improve gross margins by
utilizing Solectron's advantages in materials procurement and production
capacity. The divestiture plan consisted of terminating 57 employees in the
manufacturing and the general and administrative functions, selling
manufacturing equipment and closing the manufacturing facility. These actions
resulted in a restructuring expense of $600,000, which included $550,000 for
severance and $50,000 for facility related charges. As of December 31, 2000, we
have paid $410,000 in total for severance and facility related charges. We
completed the divestiture in the first quarter of 2001.
Loss (gain) on Sale of Assets
During the fourth quarter of 2000, we recorded a net loss on sale of assets of
$620,000 in connection with the closure of the manufacturing facility in Taiwan
discussed above. In June 1999, we completed the sale of our research and
development facilities in Hsin-chu, Taiwan, and recorded a gain of $1,055,000,
net of payments of broker fees and severance of $216,000. We divested this
research and development facility to reduce our investment in the legacy
products and to focus our resources on the commercialization of NuWave products.
Interest Income
Interest income was $7.3 million in 2000, compared to $908,000 and $1.5 million
in 1999 and 1998. The increase in interest income in 2000 was due to a net
increase in the aggregate balance of cash, cash equivalents and short-term
investments, of which approximately $165 million was received in March 2000 from
our follow-on public offering. The decrease in interest income in 1999 from 1998
was primarily due to the declining balance of cash, cash equivalents and
short-term investments throughout 1999 and 1998.
Income Taxes
We did not record a tax benefit associated with the net loss incurred in 2000,
1999 and 1998, as we deemed that it was more likely than not that the deferred
tax assets will not be realized based on evidence available and, accordingly, a
full valuation allowance was provided. During 1998, we received an income tax
refund of $4 million as a result of the carryback claim of the 1997 net
operating loss to offset net income recognized in 1995 and 1994. The related tax
benefit was fully recognized in 1997.
Recent Accounting Pronouncement
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires an entity to recognize all derivatives
as either assets or liabilities on the balance sheet and measure those
instruments at fair value. In June 2000, SFAS No.133 was amended by SFAS No.
138, which amended or modified certain issues discussed in SFAS No. 133. We will
adopt SFAS No. 133 and SFAS No. 138 during the year ending December 31, 2001. To
date, we have not engaged in derivative or hedging activities. The adoption of
SFAS No. 133 and SFAS No. 138 will have no material impact on our results of
operations or financial condition.
14
Euro Conversion
We have a wholly-owned subsidiary in the Netherlands, which is one of the 11
European countries participating in the adoption of a common currency, the Euro,
on January 1, 1999. Following the introduction of the Euro, the legacy currency
in each participating country remains as legal tender until January 1, 2002.
During the transition period, either the Euro or the legacy currency may be used
to pay for goods and services. Beginning January 1, 2002, participating
countries will issue new Euro-denominated bills and coins, and the legacy
currency will no longer be the legal tender for any transactions after July 1,
2002.
Our subsidiary in the Netherlands is a sales office for the entire European
region. Sales made to all European countries are denominated in US dollars.
Expenses incurred by this subsidiary are currently paid in guilders, the legacy
currency. Sales to all European customers accounted for 11%, 14% and 10% of our
total sales in 2000, 1999 and 1998, respectively; and 6% of our total operating
expenses in 2000, 1999 and 1998 were attributed to this subsidiary. Due to the
immateriality of expenses of the Netherlands subsidiary relative to our
operations as a whole, we believe the Euro conversion will not have any
significant impact to our results of operations during and after the transition
period.
LIQUIDITY AND CAPITAL RESOURCES
The aggregate balance of cash, cash equivalents and short-term investments was
$96 million at December 31, 2000, compared to $9.7 million at December 31, 1999.
The increase of $86.3 million was primarily due to the net proceeds of $165
million received from our follow-on public offering of 2,875,000 shares of
common stock completed in March 2000, partially offset by cash used in financing
our operations, capital expenditures and the common stock repurchase program.
Net cash used in operating activities in 2000 was $26 million, which was
primarily attributed to our net loss of $22.2 million and increases in accounts
receivable and inventories of $1.1 million and $6.8 million, respectively,
partially offset by depreciation and amortization of $2.5 million and increases
in accounts payable and accrued liabilities of $1.9 million in total. We expect
negative cash flows from operations to continue until we realize operating
income. In 1999, net cash used in operating activities was $13.7 million, which
was principally attributed to the net loss of $15.0 million, partially offset by
a decrease in accounts receivable of $3 million.
Our capital expenditures totaled $3.8 million in 2000, which included
approximately $640,000 of leasehold improvements and furniture and fixtures
added to the new research and development facility in Long Island, New York. The
relocation to this new research and development facility was completed in
November 2000. The balance of the capital expenditures in 2000 was primarily
related to purchases of test equipment and related software for research and
development activities. In 1999, capital expenditures totaled $2.6 million, of
which approximately $650,000 was related to capital expenditures for the
corporate headquarters in Fremont, California.
In 2000, our Board of Directors approved a common stock repurchase program,
pursuant to which we are authorized to repurchase up to five million shares of
our common stock. As of December 31, 2000, we have repurchased 3,485,000 shares
of our common stock with a total purchase price of approximately $53.7 million.
The common stock repurchase program may take up to one year to complete, and we
expect to use our capital resources in such repurchase.
On March 31, 2001 we entered into a series of related agreements with
FalconStor, Inc. ("FalconStor"), a privately held company, pursuant to which the
Company purchased Series C Preferred Stock of FalconStor having an aggregate
price of $25,000,000 and obtained an exclusive option to merge with FalconStor.
See more details in Part I, Item 1 of this report.
Our principal sources of liquidity are our cash, cash equivalents and short-term
investments that are expected to be used for general corporate purposes,
including expansion of operations and capital expenditures. We may also use
these capital resources to acquire or invest in businesses, technologies,
products or services that are complementary to our business. From time to time
we have discussed potential strategic acquisitions and investments in third
parties. Other than as disclosed in this Report, we currently have no agreements
or commitments regarding any acquisitions or investments. In addition to our
cash, cash equivalents and short-term investments, we also have a $5 million
revolving bank line of credit, which expires on June 1, 2001, and is renewable
on an annual basis. Borrowings under the line of credit bear interest at the
bank's prime rate. There were no borrowings under the line of credit as of
December 31, 2000.
We believe that our current balance of cash, cash equivalents and short-term
investments will be sufficient to satisfy our working capital and capital
expenditure requirements for at least the next 12 months.
15
BUSINESS RISKS
If any of the following risks actually occurs, our business, financial condition
or operating results could be materially adversely affected. The risks set forth
below are not the only risks facing us. Additional risks and uncertainties not
presently known to us, or that we currently see as immaterial, may also harm our
business.
If we fail to complete the proposed merger with FalconStor, our stock price may
decline and our business and operating results may suffer.
We have entered into an Option Agreement dated March 30, 2001 with FalconStor,
Inc. pursuant to which we have the right to merge with FalconStor on the terms
set forth in the form of merger agreement attached to the Option Agreement. The
merger agreement contains conditions which we and/or FalconStor must meet in
order to consummate the merger. In addition, the merger agreement may be
terminated by either FalconStor or us under specified circumstances. If the
merger is not completed for any reason, we may be subject to a number of risks,
including the following:
o depending on the reasons for termination, we may be required to pay a
termination fee of $3,000,000 in cash to FalconStor;
o the market price of our common stock may decline to the extent that the
relevant market price reflects a market assumption that the merger will
be completed;
o many costs related to the merger, such as legal, accounting, financial
advisor and financial printing fees, have to be paid regardless of
whether the merger is completed; and
o there will be substantial disruption to our business and distraction of
our workforce and management team.
In addition, in response to the announcement of the merger, our customers may
delay or defer product purchase or other decisions. Any delay or deferral in
product purchase or other decisions by customers could harm our business,
regardless of whether the merger is completed. Similarly, our current and
prospective employees may experience uncertainty about their future roles with
our company until the merger is completed and our strategies with respect to our
employees are announced or executed. As a result, our ability to attract and
retain key management, sales, marketing and technical personnel may suffer.
Further, because the exchange ratio in the merger agreement fluctuates depending
on our assets at closing, we may be required to take actions designed to
preserve the value of our assets that could significantly hinder our ability to
continue our current business. In particular, we are evaluating strategic
alternatives with respect to the continuation of our Ethernet switch business
that could result in our exit from this business. We anticipate that the
announcement of the transactions with FalconStor and our potential exit from the
switch business will adversely affect our average selling prices. If such an
exit occurred, and if the proposed merger were not completed, there would be
substantial uncertainty about the nature of our future business.
We have a history of losses, expect future losses and cannot assure you that we
will achieve profitability.
We have experienced net losses in each of the last four fiscal years, and we
cannot be certain that we will realize sufficient revenue to achieve
profitability. We expect that we will continue to incur significant sales and
marketing and product development costs associated with our NuWave products.
Consequently, we will need to generate significantly higher revenue to achieve
and sustain profitability. To date, due in large part to software instability
problem identified in the second quarter of 2000, sales of our NuWave products
have not increased in accordance with our expectations. If we do not increase
sales of our NuWave products, we will continue to experience losses
indefinitely. In addition, we have discontinued production of the Layer 2 Fast
Ethernet and FDDI products that accounted for our historical revenues. We cannot
assure you that we will be able to sell all remaining inventories relating to
these products.
Substantially all of our future revenue depends on the commercial success of
products based on our NuWaveArchitecture, and if these products do not achieve
market acceptance, our business will be seriously harmed.
Substantially all of our future revenue depends on the commercial success of
products based on our NuWaveArchitecture. If these products fail to meet the
needs of our target customers, or if they do not compare favorably in price and
performance to competing solutions, our revenue will not grow. We cannot assure
you that these products will achieve market acceptance. Partly as a result of
software instability problems, we have made only limited sales of these
products, and it is possible that sales will not increase to levels necessary
for profitable operations. If products based on our NuWaveArchitecture do not
satisfy our customers' requirements or our target customers do not widely adopt,
purchase and successfully deploy our new products, our revenue will not grow
significantly, or possibly at all, and our business, financial condition and
results of operations will be seriously harmed.
16
If our products contain undetected software or hardware errors, we could incur
significant unexpected expenses and lost sales.
When LAN equipment is first released, it frequently contains undetected software
or hardware errors. We have experienced these errors in the past, including the
software instability issue that adversely affected our operating results in the
second quarter of 2000, our competitive position in the marketplace and our
customer relations, and we expect that errors will be found from time to time in
new or enhanced products after commencement of commercial shipments. The
software instability issue resulted in delayed shipments and lost sales, and any
future problems of this nature may materially adversely affect our business by
causing us to incur significant warranty and repair costs, diverting the
attention of our engineering personnel from our product development efforts,
causing significant customer relations problems or causing shipment delays as
the errors are corrected.
A number of factors could cause our quarterly and annual financial results to be
worse than expected, which could result in a decline in our stock price.
To support anticipated sales of our NuWaveArchitecture products, we plan to
increase our operating expenses to expand our sales and marketing activities,
broaden our customer support capabilities, develop new distribution channels and
fund increased levels of research and development. We base our operating
expenses on anticipated revenue trends, and a high percentage of our expenses
are fixed in the short term. Consequently, any delay or failure in generating
revenue could cause our quarterly and annual operating results to be below the
expectations of public market analysts or investors, which could cause the price
of our common stock to decline.
We may fail or experience a delay in generating revenue for a number of reasons.
Our customer agreements typically provide that the customer may delay scheduled
delivery dates and cancel orders within specified time frames without
significant penalty. Accordingly, we may incur significant expenses without
meeting corresponding anticipated revenue levels for a given period. In
addition, the timing of product releases, purchase orders and product
availability could result in significant product shipments scheduled for the end
of a quarter. Failure to ship these products by the end of a quarter may
adversely affect our operating results.
Our periodic revenue and operating results have varied significantly in the past
and may vary significantly in the future due to a number of factors, including:
o quality and reliability issues with our NuWaveArchitecture products such
as the software instability problem that adversely affected our
operating results in the second quarter of 2000;
o market acceptance of and demand for our NuWaveArchitecture products;
o decreased average selling prices of our products;
o unexpected product returns or the cancellation or rescheduling of
significant orders;
o our ability to develop, introduce, ship and support new products and
product enhancements and manage product transitions;
o announcements and new product introductions by our competitors;
o our ability to achieve cost reductions;
o our ability to obtain sufficient supplies of components for our products
for which we rely on sole or limited source suppliers;
o increased prices of the components we purchase;
o our ability to attain and maintain production volumes and quality levels
for our products;
o the mix of products sold and the mix of distribution channels through
which they are sold; and
o costs relating to possible acquisitions and integration of technologies
or businesses.
Due to the foregoing factors, we believe that period-to-period comparisons of
our operating results should not be relied upon as an indicator of our future
performance.
Intense competition in the market for LAN equipment could prevent us from
increasing revenue or achieving or sustaining profitability.
The market for local area network, or LAN, equipment is intensely competitive.
Our principal competitors include Alcatel, Bay Networks, Cabletron Systems,
Cisco Systems, Ericsson, Extreme Networks, Foundry Networks, Lucent
Technologies, Nortel Networks, Siemens, and 3Com. Many of our current and
potential competitors have substantially greater financial, technical, sales,
marketing and other resources, as well as greater name recognition and larger
installed customer bases, than we do. These competitors have developed or could
in the future develop new technologies that compete with our products or render
our products obsolete. We believe that this market will consolidate over time
and that this consolidation could
17
adversely affect our ability to compete effectively. A number of companies
developing technologies similar to ours have been acquired by our larger
competitors. These acquisitions are likely to permit our competitors to devote
significantly greater resources to the development and marketing of new
competitive products and the marketing of existing products to their installed
bases. We expect that competition will increase as a result of these and other
industry consolidations and alliances.
To remain competitive, we must, among other things, invest significant resources
in developing new products with superior performance at competitive prices,
enhance our NuWaveArchitecture products and maintain customer satisfaction. If
we fail to do so, our products may not compete favorably, and our revenue and
future profitability could suffer.
The average selling prices of our products may decrease rapidly, which may
reduce gross margins or revenue if we are unable to reduce our cost of goods
sold.
The enterprise LAN equipment industry has experienced rapid erosion of average
selling prices due to a number of factors, including competitive pricing
pressures and rapid technological change. We may experience substantial
period-to-period fluctuations in future operating results due to the erosion of
our average selling prices. We anticipate that the average selling prices of our
products will decrease in the future in response to competitive pricing
pressures, increased sales discounts, new product introductions by us or our
competitors or other factors. Therefore, to maintain our gross margins, we must
develop and introduce on a timely basis new products and product enhancements
and continually reduce our product costs. As the average selling prices for our
products are expected to decline, we will need to reduce our product costs,
particularly the cost of our ASICs. To reduce the cost of ASICs, we intend to
integrate chips and reduce die sizes. However, we cannot be certain when or if
such price reductions will occur. If we fail to achieve cost reductions, our
revenue and gross margins will decline which will affect our operating results.
We must develop and expand our OEM relationships and other indirect distribution
channels to increase revenue and improve our operating results.
Our distribution strategy focuses primarily on developing and expanding indirect
distribution channels through original equipment manufacturers, or OEMs and
resellers, as well as expanding our field sales organization. If we fail to
develop and cultivate relationships with OEMs and resellers, or if these parties
are not successful in their sales efforts, sales of our products may fail to
increase and may even decrease. The ability and willingness of OEM and reseller
customers to promote our products is based upon a number of factors beyond our
control. In addition, some of our current and potential OEM and reseller
customers may begin to offer products that will compete with or replace our
products. The resulting lost sales of our products to any such customers, in
addition to the increased competition presented by the products offered by our
OEM and reseller customers, will harm our business, financial condition and
operating results.
Although we have secured a limited number of OEM customers for our
NuWaveArchitecture products, nearly all of these customers are still at the
early stages of initial commercial shipments. If our OEM customers are unable to
or otherwise do not ship systems that are based on our products, or if their
shipped systems are not commercially successful, our business, operating results
or financial condition could suffer.
In order to support our indirect distribution channels, we plan to expand our
field sales and support staff. We cannot assure you that this internal expansion
will be successfully completed, that the cost of this expansion will not exceed
the revenue generated or that our expanded sales and support staff will be able
to compete successfully against the significantly more extensive and well-funded
sales and marketing operations of many of our current or potential competitors.
Our inability to effectively establish our distribution channels or manage the
expansion of our sales and support staff could limit our ability to grow and
increase revenue.
If we do not keep pace with technological changes, our products may become
obsolete and our business may suffer.
The LAN equipment market is characterized by rapid technological change,
frequent new product introductions, changes in customer requirements and
evolving industry standards. If we do not address these changes by regularly
introducing new products, our product line will become obsolete. Alternative
technologies could achieve widespread market acceptance and displace the
Ethernet technology on which our product lines and architecture are based. For
example, developments in routers and routing software could also significantly
reduce demand for our products. We cannot assure you that our technological
approach will achieve broad market acceptance or that other technologies or
devices will not supplant our approach.
When we announce new products or product enhancements that have the potential to
replace or shorten the life cycle of our existing products, customers may not
purchase our existing products. These actions could harm our operating results
by decreasing sales, increasing our inventory levels of older products and
exposing us to greater risk of product obsolescence.
18
The market for enterprise LAN switching products is evolving, and we believe our
ability to compete successfully in this market is dependent upon the continued
compatibility and interoperability of our products with products offered by
other vendors. In particular, the networking industry has been characterized by
the successive introduction of new technologies and standards that have
dramatically reduced the price and increased the performance of enterprise LAN
equipment. To remain competitive, we need to introduce products in a timely
manner that incorporate or are compatible with these new technologies as they
emerge. We may experience delays in product development in the future, and any
delay in product introduction could adversely affect our ability to compete and
cause our operating results to be below our expectations or the expectations of
public market analysts or investors.
Since we depend on a small number of OEM and distribution channel customers for
a significant portion of our revenue in any period, the loss of any of these
customers or any cancellation or delay of a large purchase by any of these
customers could significantly reduce our revenue.
We anticipate that, although our largest customers may vary from
period-to-period, a small number of key OEM and reseller customers will account
for a significant portion of our revenues in each fiscal period. We cannot
assure you that we will be able to obtain new OEM and reseller customers or
maintain relations with existing OEM and reseller customers. The loss of any key
customers, or a significant reduction in sales to those customers, could
significantly reduce our revenue. Because our expense levels are based on our
expectations as to future revenue and to a large extent are fixed in the short
term, a substantial reduction or delay in sales of our products to, or the loss
of any significant OEM, reseller or other customer, or unexpected returns from
resellers could harm our business, operating results and financial condition.
While we expect that our financial performance in any given period will depend
on orders from a small number of OEMs, resellers and other significant
customers, we do not have contracts with customers binding them to minimum
purchase quantities, except as set forth in a particular purchase orders. For
example:
o our customers can stop purchasing, and our OEMs and resellers can stop
marketing our products, at any time;
o our reseller agreements generally are not exclusive and are for one year
terms, with no obligation of the resellers to renew the agreements; and
o our OEM and reseller agreements provide for discounts based on expected
or actual volumes of products purchased or resold by the reseller in a
given period.
The sales cycle for our products is long, and we may incur substantial
non-recoverable expenses or devote significant resources to sales that do not
occur when anticipated.
Our sales cycle, particularly to OEMs, typically involves a lengthy
qualification process during which we generally invest significant resources to
address customer specifications. The purchase of our products or of solutions
that incorporate our products typically involves significant internal procedures
associated with the evaluation, testing, implementation and acceptance of new
technologies. This evaluation process frequently results in a lengthy sales
process, typically ranging from three months to longer than a year, and subjects
each sale to a number of significant risks, including budgetary constraints and
internal acceptance reviews. Because of the length of the sales cycle, we may
experience delays between increasing expenses for research and development and
sales and marketing efforts and the generation of higher revenue, if any, from
such expenditures. If sales forecasted from a specific customer for a particular
quarter are not realized in that quarter, we may be unable to compensate for the
shortfall, which could harm our operating results.
We purchase several key components for our products from single or limited
sources and could lose sales if these sources fail to meet our needs.
We currently purchase several key components used in the manufacture of our
products from single or limited sources and depend upon supply from these
sources to meet our needs. We may encounter shortages and delays in obtaining
components in the future that materially adversely affect our ability to meet
customer orders. In particular, NEC Corporation is the sole manufacturer of the
ASICs that form the core of our NuWaveArchitecture products. We do not have a
long-term supply contract with NEC that obligates them to continue to supply
components to us, and it is possible that NEC could allocate its resources to
its other customers in the future, which could materially disrupt our ability to
manufacture our products and meet customer demands. Qualifying an alternative
manufacturer of our ASICs would be time consuming, costly and disruptive. In
addition, we acquire certain microprocessors and other integrated circuits as
well as a custom designed power supply from sole source suppliers. While we
believe we could qualify alternative suppliers for these products, any delays
caused by supply disruptions could result in increased component prices that
could adversely affect our gross margins. We also use certain components
including memory components and printed circuit boards that we acquire from
limited sources that create risks similar to those created by our sole source
supply arrangements.
19
If we do not accurately estimate our supply requirements, we may have a delay in
satisfying customer orders.
We use a rolling 12-month forecast based on anticipated product orders to
determine our material requirements. Lead times for materials and components we
order vary significantly and depend on factors such as the specific supplier,
contract terms and market demand for a component at a given time. If orders do
not match forecasts, we may have excess or inadequate inventory of certain
materials and components, which could materially adversely affect our operating
results and financial condition. From time to time we have experienced shortages
and allocations of certain components, resulting in delays in filling orders. In
the future we may again experience these shortages, particularly with respect to
the supply of semiconductors.
Because we rely on third parties for substantially all of our manufacturing,
failures by these third parties to provide products of sufficient quality and
quantity could cause us to delay product shipments, which could result in
delayed or lost revenues or customer dissatisfaction.
We rely on third parties, in particular Solectron Corporation, for substantially
all of our manufacturing. Our reliance on Solectron involves particular risks.
Our dependence on Solectron increases our exposure to possible shortages of key
components, product performance shortfalls and reduced controls over delivery
schedules, manufacturing capability, quality assurance, quantity and costs. If
Solectron or any other third-party manufacturer experiences delays, disruptions,
earthquakes, capacity constraints or quality control problems in its
manufacturing operations, then product shipments to our customers could be
delayed, which would negatively impact our net revenues, competitive position
and reputation.
We may in the future need to find new contract manufacturers in order to
increase our volumes or to reduce our costs. We may not be able to find contract
manufacturers that meet our needs, and even if we do, qualifying a new contract
manufacturer and commencing volume production is expensive and time consuming.
If we are required or elect to change contract manufacturers, we may lose
revenues, and our customer relationships may suffer.
If we lose key personnel or are unable to hire additional qualified personnel as
necessary, we may not be able to successfully manage our business or achieve our
objectives.
Our success depends to a significant degree upon the continued contributions of
our key management, engineering, sales and marketing, finance and manufacturing
personnel, many of whom would be difficult to replace. We do not have key
person insurance covering any of our personnel. We believe our future success
will also depend in large part upon our ability to attract and retain highly
skilled managerial, engineering, sales and marketing, finance and manufacturing
personnel. For example, our products and services require a sophisticated sales
effort targeted at several levels within a prospective customer's organization.
Unless we expand our sales force, we will not be able to increase revenue.
Competition for these personnel is intense, and we have had difficulty hiring
employees, particularly software engineers, in the timeframe we desire. There
can be no assurance that we will be successful in attracting and retaining the
personnel we require. The loss of the services of any of our key personnel, the
inability to attract or retain qualified personnel in the future, or delays in
hiring required personnel, particularly engineers and sales personnel, could
make it difficult for us to manage our business and meet key objectives. In
addition, companies in the networking industry whose employees accept positions
with competitors frequently claim that competitors have engaged in unfair hiring
practices. We could incur substantial costs in defending ourselves against any
such claims, regardless of the merits of such claims.
If our products do not comply with evolving industry standards and complex
government regulations, they may not achieve market acceptance, which may
prevent us from increasing our revenue or achieving profitability.
The market for LAN equipment is characterized by the need to support industry
standards as they emerge, evolve and achieve acceptance. We will not be
competitive unless we continually introduce new products and product
enhancements that meet these emerging standards. In addition, in the United
States our products must comply with various regulations and standards defined
by the Federal Communications Commission, or FCC, and Underwriters Laboratories.
Internationally, products that we develop may be required to comply with
standards established by telecommunications authorities in various countries as
well as with recommendations of the International Telecommunication Union. If we
do not comply with existing or evolving industry standards or if we fail to
obtain timely domestic or foreign regulatory approvals or certificates, we may
experience delays in product shipments or be unable to sell our products where
these standards or regulations apply, which could prevent us from increasing our
revenue or achieving profitability.
20
Our ability to increase our revenue depends on successfully expanding our
international sales.
Our ability to grow will depend in part on our ability to increase sales of our
NuWaveArchitecture products to international customers, particularly in Asia. We
anticipate that sales to international customers will constitute a significant
portion of our future sales. There are a number of risks arising from our
international business, including:
o longer accounts receivable collection cycles;
o difficulties in managing operations across disparate geographic areas;
o difficulties associated with enforcing agreements under foreign legal
systems;
o import or export licensing requirements;
o potential adverse tax consequences; and
o unexpected changes in regulatory requirements.
Our international sales are denominated in U.S. dollars. As a result, an
increase in the value of the U.S. dollar relative to foreign currencies could
make our products less competitive in international markets.
We may engage in future acquisitions that dilute the ownership interests of our
stockholders, cause us to incur debt and assume contingent liabilities.
As part of our business strategy, we expect to review acquisition prospects that
would complement our current product offerings, augment our market coverage,
enhance our technical capabilities or otherwise offer growth opportunities.
While we have no current agreements or negotiations underway with respect to any
material acquisitions, we may acquire businesses, products or technologies in
the future. In the event of any future acquisitions, we could:
o issue equity securities which would dilute stockholders' percentage
ownership;
o incur substantial debt; or
o assume contingent liabilities.
Such actions by us could harm our operating results and cause the price of our
common stock to decline. We cannot assure you that we will be able to
successfully integrate any businesses, products, technologies or personnel that
we might acquire in the future, and our failure to do so could harm our
business, operating results and financial condition.
Problems arising from the use of our products together with other vendors'
products could disrupt our business and harm our financial condition.
Our products must interoperate with products from other vendors. As a result,
when problems occur in a network, it may be difficult to identify the source of
the problem. The occurrence of hardware and software errors, whether caused by
our products or another vendor's products, could result in the delay or loss of
market acceptance of our products, and any necessary revisions may require us to
incur significant expenses. The occurrence of any such problems would likely
have a material adverse effect on our business, operating results and financial
condition.
We may be subject to intellectual property infringement claims that are costly
to defend and may adversely affect our business and ability to compete.
Our industry is characterized by the existence of a large number of patents and
frequent claims and related litigation regarding patent and other intellectual
property rights. In particular, many leading network companies have extensive
patent portfolios with respect to networking technology. From time to time,
third parties, including leading companies, have asserted against us and others
exclusive patent, copyright, trademark and other intellectual property rights to
technologies and related standards that are important to us. Third parties may
assert claims or initiate litigation against us or our manufacturers, suppliers
or customers alleging infringement of their proprietary rights with respect to
our existing or future products. Any of these claims, with or without merit,
could be time-consuming, result in costly litigation and diversion of technical
and management personnel, or require us to develop non-infringing technology or
enter into royalty or license agreements. These royalty or license agreements,
if required, may not be available on acceptable terms, if at all. If there is a
successful claim of infringement or if we fail to develop non-infringing
technology or license the proprietary rights on a timely basis, we will be
unable to use this technology, and our business could be harmed.
If we fail to protect our intellectual property, or if others use our
proprietary technology without authorization, our competitive position may
suffer.
21
Our success and ability to compete are substantially dependent upon our
internally developed technology and know-how. We rely on a combination of
copyright, trademark and trade secret laws and restrictions on disclosure to
protect our intellectual property rights. However, we do not own any patents nor
do we have any patent applications pending that relate to our
NuWaveArchitechture products. We enter into confidentiality or license
agreements with our employees, consultants and corporate partners, and control
access to and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology. If so, we will lose any competitive advantage we have, and our
business will suffer.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash equivalents and short-term investments ("investments") are exposed to
financial market risk due to fluctuations in interest rates, which may affect
the interest income and the fair values of our investments. We manage the
exposure to financial market risk by performing ongoing evaluation of our
investments and investing in short-term, high quality debt securities, of which
the majority mature within 12 months. In addition, we do not use investments for
trading or other speculative purposes. As of December 31, 2000, the average rate
of return on the investments was approximately 6.4%. A hypothetical 10%
fluctuation in interest rates would change the interest income by approximately
$614,000 per annum. In addition, due to the relative short maturities of our
investments as of December 31, 2000, we expect that the impact of fluctuations
in interest rates on the fair values of investments is immaterial. However, from
time to time, we may adjust the average maturity of our investments, in order to
maximize the rate of return on investments considering the overall market
condition, as well as when our liquidity requirement changes. Such adjustment to
the average maturity may affect the magnitude of the fluctuation in the fair
value of our investments in the event interest rates increase or decrease.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements: Page
Report of Independent Accountants..................................... 24
Consolidated Balance Sheets at December 31, 2000 and 1999............. 25
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998................................... 26
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998................................... 27
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998................................... 28
Notes to Consolidated Financial Statements............................ 29
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the
Years Ended December 31, 2000, 1999 and 1998.................. 43
Schedules other than those listed above have been omitted since either they are
not required or the information is included in the financial statements included
herewith.
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Network Peripherals Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Network Peripherals Inc. and its subsidiaries at December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America 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.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 26, 2001, except as to Note 13
which is as of March 30, 2001
24
NETWORK PERIPHERALS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
2000 1999
- ---------------------------------------------------------------------------- --------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 33,810 $ 4,730
Short-term investments 62,191 4,985
Accounts receivable, net of allowance for doubtful accounts and
returns of $259 and $364 1,479 428
Receivable from sale of assets - 720
Inventories 10,626 3,830
Prepaid expenses and other current assets 1,776 815
--------------- --------------
Total current assets 109,882 15,508
Property and equipment, net 5,547 4,984
Other assets 285 360
--------------- --------------
$ 115,714 $20,852
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,902 $ 1,534
Accrued liabilities 2,908 1,409
--------------- --------------
Total current liabilities 4,810 2,943
--------------- --------------
Commitments (Note 6)
Stockholders' equity:
Preferred Stock, $0.001 par value, 2,000,000 shares authorized;
no shares issued or outstanding - -
Common Stock, $0.001 par value, 60,000,000 shares authorized;
12,907,000 and 12,749,000 shares issued and outstanding 16 13
Additional paid-in capital 234,820 65,955
Accumulated deficit (70,301) (48,059)
Accumulated other comprehensive income 106 -
--------------- --------------
164,641 17,909
Treasury stock, 3,485,000 shares of Common Stock, at cost (53,737) -
--------------- --------------
Total stockholders' equity 110,904 17,909
--------------- --------------
$ 115,714 $20,852
=============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
25
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended December 31,
2000 1999 1998
- ---------------------------------------------------------- ---------------- ----------------- ----------------
Net sales $ 7,514 $ 10,231 $28,585
Cost of sales 9,144 9,410 17,250
---------------- ----------------- ----------------
Gross profit (loss) (1,630) 821 11,335
---------------- ----------------- ----------------
Operating expenses:
Research and development 11,233 7,803 11,485
Marketing and selling 10,672 6,437 6,010
General and administrative 4,749 3,503 3,234
Restructuring expense 600 - -
Loss (gain) on sale of assets 620 (1,055) -
---------------- ----------------- ----------------
Total operating expenses 27,874 16,688 20,729
---------------- ----------------- ----------------
Loss from operations (29,504) (15,867) (9,394)
Interest income 7,262 908 1,505
---------------- ----------------- ----------------
Loss before income taxes (22,242) (14,959) (7,889)
Income taxes - - -
---------------- ----------------- ----------------
Net loss $ (22,242) $(14,959) $(7,889)
================ ================= ================
Net loss per share:
Basic and diluted $ (1.56) $ (1.19) $ (0.64)
================ ================= ================
Weighted average common shares:
Basic and diluted 14,224 12,584 12,281
================ ================= ================
The accompanying notes are an integral part of these
consolidated financial statements.
26
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock Accumulated
------------------ Additional Other
Number of Paid-in Accumulated Comprehensive Treasury
Shares Amount Capital Deficit Income Stock Total
- --------------------------------- --------- ------ ----------- ----------- ------------- ---------- -----------
Balance at December 31, 1997 12,252 $12 $ 63,878 $ (25,211) $ - $ - $ 38,679
Issuance of Common Stock upon
exercise of stock options 8 - 38 - - - 38
Issuance of Common Stock under
employee stock purchase plan 32 - 144 - - - 144
Net loss - - - (7,889) - - (7,889)
------- ------- ----------- ----------- ------------- ---------- -----------
Balance at December 31, 1998 12,292 12 64,060 (33,100) - - 30,972
Issuance of Common Stock upon
exercise of stock options 457 1 1,895 - - - 1,896
Net loss - - - (14,959) - - (14,959)
------- ------- ----------- ----------- ------------- ---------- -----------
Balance at December 31, 1999 12,749 13 65,955 (48,059) - - 17,909
Issuance of Common Stock in
follow-on public offering 2,875 3 165,361 - - - 165,364
Issuance of Common Stock upon
exercise of stock options 768 - 3,504 - - - 3,504
Common Stock repurchased (3,485) - - - - (53,737) (53,737)
Net loss - - - (22,242) - - (22,242)
Change in unrealized gain on
investments - - - - 106 - 106
----------
Comprehensive loss - - - - - - (22,136)
------- ------- ----------- ----------- ------------- ---------- ----------
Balance at December 31, 2000 12,907 $16 $ 234,820 $ (70,301) $106 $(53,737) $110,904
======= ======= =========== =========== ============= ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
27
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
2000 1999 1998
- ------------------------------------------------------------------ ------------- ------------- ------------
Cash flows from operating activities:
Net loss $(22,242) $ (14,959) $ (7,889)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,495 1,826 2,000
Loss (gain) of sale of assets 620 (1,055) -
Changes in assets and liabilities:
Accounts receivable (1,051) 3,002 1,740
Inventories (6,796) (706) (1,707)
Income tax refund receivable - - 3,983
Prepaid expenses and other assets (926) (131) (146)
Accounts payable 368 (916) 779
Accrued liabilities 1,499 (718) (2,956)
------------- ------------- ------------
Net cash used in operating activities (26,033) (13,657) (4,196)
------------- ------------- ------------
Cash flows from investing activities:
Purchases of short-term investments (57,100) - (3,443)
Purchases of property and equipment (3,836) (2,559) (2,644)
Proceeds from sale of assets, net of expenses 918 684 -
Proceeds from sales or maturity of short-term investments - 12,829 -
Holdback amount from acquisition - - (456)
------------- ------------- ------------
Net cash provided by (used in) investing activities (60,018) 10,954 (6,543)
------------- ------------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs 168,868 1,896 182
Repurchase of common stock (53,737) - -
------------- ------------- ------------
Net cash provided by financing activities 115,131 1,896 182
------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents 29,080 (807) (10,557)
Cash and cash equivalents, beginning of year 4,730 5,537 16,094
------------- ------------- ------------
Cash and cash equivalents, end of year $ 33,810 $ 4,730 $ 5,537
============= ============= ============
Supplemental disclosure of cash flow information
Non-cash transactions:
Receivable from sale of assets $ - $ 720 $ -
The accompanying notes are an integral part of these
consolidated financial statements
28
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Network Peripherals Inc., a Delaware corporation (the "Company"), designs and
manufactures Layer 2 and Layer 3 functionality Ethernet and Gigabit Ethernet
switching products, which it markets primarily to original equipment
manufacturers, distributors, value-added resellers and system integrators. The
Company's switching products are designed for use in workgroups, wiring closets
and network 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 accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments purchased with an original
or remaining maturity of three months or less to be cash equivalents. The
Company's short-term investments consist of marketable debt securities,
substantially of which have maturities between three months and one year. All
marketable debt securities included in short-term investments have been
classified as available-for-sale and are carried at fair market value, and the
unrealized gains or losses on these investments are included as a separate
component of the stockholders' equity. For the years ended December 31, 1999 and
1998, there were no material unrealized gains or losses on investments.
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 maintains its cash, cash
equivalents and short-term investments with high credit quality financial
institutions and limits its 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 Company's on-going evaluation of its customers'
credit worthiness and the established long-term relationship with certain
customers.
Revenue Recognition
Revenue from product sales is recognized when pervasive evidence of an
arrangement exists, delivery has occurred, the price is fixed or determinable
and collectibility 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, product
returns, and retroactive price adjustments are recorded at the time products are
shipped based on past experience. Allowances for uncollectible accounts
receivable are provided at the time such receivable is deemed uncollectible.
In December 1999, the Securities and Exchange Commissions issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The adoption of SAB 101 in the fourth quarter of 2000 did not have a
material effect on the Company's results of operations or financial condition.
29
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 less accumulated depreciation and
amortization. Depreciation and amortization is computed using the straight-line
method over the estimated useful life of the asset, typically three years.
Depreciation of the Company's enterprise resource planning systems, its
information systems infrastructure, and certain manufacturing equipment is based
on an estimated useful life of five years. Amortization of leasehold
improvements is computed using the remaining lease term.
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, 2000 and 1999, goodwill, net of accumulated
amortization, was $53,000 and $93,000, 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. The Company has not capitalized any
software development costs to date.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs
totaled $2,293,000, $634,000 and $381,000 in 2000, 1999 and 1998, respectively.
Income Taxes
The Company accounts for income taxes under the asset and 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, and for net
operating loss and credit carryforwards. The Company records a valuation
allowance against deferred tax assets when it is more likely than not that such
assets will not be realized.
Foreign Currency Translation
The functional currency of the Company's subsidiaries in Taiwan and the
Netherlands is the U.S. dollar. Accordingly, gains or losses arising from the
translation of foreign currency financial statements and transactions are
included in determining consolidated results of operations.
Employee Benefit Plans
The Company has stock option plans and offers a 401(k) plan covering all of its
U.S. employees. The 401(k) plan provides for matching contributions determined
at the Company's discretion. The Company matched 50% of each employee's
contribution up to $3,000 in 2000 and $1,000 in 1999. The matching contributions
totaled $202,000 and $59,000 in 2000 and 1999, respectively. No such matching
contributions were made in 1998.
30
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 ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees", as permitted under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 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.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions involving
Stock Compensation." FIN 44 clarifies the application of APB Opinion No. 25
regarding (a) the definition of employee for purposes of applying APB Opinion
No. 25, (b) the criteria for determining whether a stock option plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 became effective on July 1, 2000, but certain conclusions
cover specific events that occurred after either December 15, 1998, or January
12, 2000. The adoption of FIN 44 did not have a material impact on the Company's
results of operations or financial condition.
Net Loss Per Share
Basic earnings per share are computed as net earnings divided by the weighted-
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur from common shares
issuable through stock-based compensation including stock options, restricted
stock awards, warrants, and other convertible securities using the treasury
stock method. During 2000, 1999 and 1998, the Company incurred net losses, such
that the inclusion of potential common shares would result in an antidilutive
per share amount. Accordingly, no adjustment is made to the basic net loss per
share to arrive at the diluted net loss per share.
Comprehensive Loss
For the year ended December 31, 2000, the Company's comprehensive loss included
net loss and the change in unrealized gain on investments. There were no
reconciling items between the Company's net loss and comprehensive loss for the
years ended December 31, 1999 and 1998.
Recent Accounting Pronouncement
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires an entity to recognize all derivatives
as either assets or liabilities on the balance sheet and measure those
instruments at fair value. In June 2000, SFAS No.133 was amended by SFAS No.
138, which amended or modified certain issues discussed in SFAS No. 133. The
Company will adopt SFAS No. 133 and SFAS No. 138 during the year ending December
31, 2001. To date, the Company has not engaged in derivative or hedging
activities. The adoption of SFAS No. 133 and SFAS No. 138 will have no material
impact on the Company's results of operations or financial condition.
Reclassifications
Certain reclassifications have been made to the prior years' amounts in order to
conform to the current year's presentation.
31
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (in thousands)
December 31,
December 31, 2000 1999
------------------------------------------ -------------
Unrealized
Amortized Holding Fair Market Fair Market
Cost Gain(Loss) Value Value
----------------------------------------- ------------- ------------- -------------- -------------
Cash and cash equivalents:
Cash and money market funds $ 14,037 $ - $ 14,037 $ 2,442
Corporate debt securities 19,773 - 19,773 2,288
------------- ------------- -------------- -------------
33,810 - 33,810 4,730
------------- ------------- -------------- -------------
Short-term investments:
Corporate debt securities 46,680 97 46,777 -
U.S. government agencies' securities 13,501 9 13,510 4,985
Municipal government securities 1,904 - 1,904 -
------------- ------------- -------------- -------------
62,085 106 62,191 4,985
------------- ------------- -------------- -------------
Total $ 95,895 $ 106 $ 96,001 $ 9,715
============= ============= ============== =============
The amortized cost at December 31, 1999 approximated fair market
value.
NOTE 4 - BALANCE SHEET COMPONENTS (in thousands)
December 31,
2000 1999
------------------------------------------------------- ------------- --------------
Inventories:
Raw materials $ 3,764 $ 2,285
Work-in-process 7 401
Finished goods 6,855 1,144
------------- --------------
$ 10,626 $ 3,830
============= ==============
Property and equipment:
Computers and equipment $ 9,408 $ 8,106
Leasehold improvements 993 528
Furniture and fixtures 760 750
------------- --------------
11,161 9,384
Accumulated depreciation (5,614) (4,400)
------------- --------------
$ 5,547 $ 4,984
============= ==============
Accrued liabilities:
Consulting expenses $ 1,588 $ 49
Salaries and benefits 583 592
Warranty 230 375
Others 507 393
------------- --------------
$ 2,908 $ 1,409
============= ==============
32
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - LINE OF CREDIT
The Company currently has a $5 million revolving bank line of credit, which
expires on June 1, 2001. The line of credit can be used for either letter of
credit or working capital purposes. Borrowings under the line of credit bear
interest at the bank's prime rate and are secured by the Company's short-term
investments of the same amount at the bank. There were no borrowings under the
line of credit in 2000 and 1999.
NOTE 6 - COMMITMENTS
The Company has various operating leases related to its facilities, including
its corporate headquarters in Fremont, California, which expires in October
2004, and its research and development facility in Long Island, New York, which
expires in October 2007. Rent expense for all of the Company's facilities
totaled $880,000, $760,000, and $764,000 in 2000, 1999 and 1998, respectively.
Future minimum lease payments under operating leases as of December 31, 2000 are
as follows (in thousands):
Years ending December 31,
2001 $ 827
2002 895
2003 831
2004 777
2005 511
Thereafter 989
-------------
$ 4,830
=============
NOTE 7 - CAPITAL STOCK
Authorized Shares of Common Stock
On April 25, 2000, the Company's stockholders approved an increase in the number
of authorized shares of Common Stock from 20 million to 60 million shares.
Follow-on Public Offering
In March 2000, the Company completed a follow-on public offering of 2,875,000
shares of its Common Stock at a price of $60.875 per share, resulting in net
proceeds to the Company of approximately $165 million, after deducting offering
costs.
Treasury Stock
In 2000, the Company's Board of Directors approved a common stock repurchase
program, pursuant to which the Company may repurchase up to five million shares
of its Common Stock in the open market. As of December 31, 2000, the Company has
repurchased 3,485,000 shares of its Common Stock with a total purchase price of
approximately $53.7 million.
Employee Stock Purchase Plan
Effective May 1998, the Company terminated its Employee Stock Purchase Plan,
which allowed eligible employees to purchase the Company's Common Stock at a
discount through payroll deductions. Prior to the termination of the Employee
Stock Purchase Plan, the Company reserved 250,000 shares of Common Stock for
issuance thereunder, and the Company has issued 223,606 shares of Common Stock
for an aggregate purchase price of $1,434,000.
33
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Option Plans
The Company's 1999 Stock Plan, as amended, (the "1999 Plan") provides for the
granting of nonstatutory stock options and restricted stock awards to eligible
employees and consultants. Pursuant to the 1999 Plan, the Company has reserved
2,500,000 shares of the Company's Common Stock for issuance, and the terms and
conditions of nonstatutory stock options and restricted stock awards are
determined by the Company's Board of Directors, provided that the exercise price
for a nonstatutory stock option is not less than 85% of the fair market value of
the Company's Common Stock on the date of the grant. As of December 31, 2000,
options to purchase 644,384 shares of Common Stock were outstanding, 1,855,616
shares were available for future grant, and 2,500,000 shares were authorized but
unissued under the 1999 Plan.
The Company's 1997 Stock Plan, as amended, (the "1997 Plan") provides for the
granting of incentive and nonstatutory stock options and restricted stock awards
to eligible employees, directors and consultants. The Company has reserved
3,500,000 shares of the Company's Common Stock for issuance under the 1997 Plan.
Pursuant to the 1997 Plan, the terms and conditions of stock options are
determined by the Company's Board of Directors, provided that (i) the exercise
price for incentive stock options is not less than the fair market value of the
Company's Common Stock on the date of grant and (ii) the exercise price for
nonstatutory stock options is not less than 85% of the fair market value of the
Company's Common Stock on the date of 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, 2000, options to purchase 2,411,844 shares of Common
Stock were outstanding, 341,465 shares were available for future grant, and
2,753,309 shares were authorized but unissued under the 1997 Plan.
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 or
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, 2000, options to purchase a total of
353,567 shares of Common Stock were outstanding under the 1993 Plan and the 1996
Plan.
The 1994 Outside Directors Stock Option Plan, as amended, (the "1994 Plan")
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 at the time
of their appointment and to each Outside Director an additional 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. As of December 31, 2000, options to purchase 70,000 shares of
Common Stock were outstanding, 69,584 shares were available for future grant,
and 139,584 shares of Common Stock were authorized but unissued under the 1994
Plan.
Stock options generally expire 10 years from the date they are granted.
34
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes stock option activity for all of the Company's
stock option plans (in thousands, except per share amounts):
Options Weighted Average
Outstanding Exercise Price
----------------------------------------------------------- --------------- ----------------
Balance at December 31, 1997 2,597 $ 5.41
Granted 1,298 4.11
Exercised (9) 4.23
Canceled (1,087) 6.17
---------------
Balance at December 31, 1998 (913 shares exercisable at
a weighted average price of $4.71 per share) 2,799 4.52
Granted 688 15.62
Exercised (457) 4.14
Canceled (230) 6.70
---------------
Balance at December 31, 1999 (1,177 shares exercisable
at a weighted average price of $4.72 per share) 2,800 7.13
Granted 2,092 16.28
Exercised (768) 4.54
Canceled (644) 9.28
---------------
Balance at December 31, 2000 (1,051 shares exercisable
at a weighted average price of $6.88 per share) 3,480 $12.90
===============
The Company has elected to continue to follow APB Opinion No. 25 to account for
its employee stock options and adopted the disclosure-only requirements of SFAS
No. 123. SFAS No. 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 No. 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: expected
volatilities of 110% in 2000, 93% in 1999 and 82% in 1998; risk-free interest
rates of 5.1% in 2000, 6.2% in 1999 and 4.6% in 1998; expected lives of 3.5
years in 2000 and 1999 and 2.5 years in 1998; and no dividend yield for all
periods.
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 No. 123, the Company's net loss and net loss per share
would have been as follows (in thousands, except per share amounts):
Years ended December 31,
2000 1999 1998
------------------------------------ -------------- -------------- -------------
Net loss - as reported $ (22,242) $ (14,959) $ (7,889)
Net loss - pro forma (29,756) (18,523) (11,368)
Net loss per share:
Basic and diluted- as reported (1.56) (1.19) (0.64)
Basic and diluted- pro forma (2.09) (1.47) (0.93)
The weighted average estimated grant date fair values, as defined by SFAS No.
123, for options granted under the stock option plans during 2000, 1999 and 1998
were $11.46, $10.25 and $1.98, respectively.
35
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 2000 (in thousands, except per share amounts):
Outstanding Exercisable
--------------------------------------------------- ----------------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
(in years)
- ------------------- -------------- --------------------- -------------- ------------- --------------
$2.63 - $4.50 235 7.6 $3.66 202 $3.66
4.56 - 4.94 776 6.1 4.92 632 4.93
5.25 - 8.25 375 9.2 7.50 53 6.73
9.11 - 11.88 768 9.7 11.12 13 10.71
12.50 - 13.38 433 9.7 13.35 1 13.00
14.00 - 19.72 439 8.8 16.14 112 15.99
21.63 - 73.06 454 9.1 35.24 38 28.41
-------------- -------------
3,480 8.5 12.90 1,051 6.88
============== =============
NOTE 8 - INCOME TAXES
The following is a geographical breakdown of consolidated loss before income
taxes (in thousands):
Years ended December 31,
2000 1999 1998
------------------------------------------------------ ------------- ------------- --------------
Domestic $ (19,731) $ (13,898) $ (7,302)
Foreign (2,511) (1,061) (587)
------------- ------------- --------------
$ (22,242) $ (14,959) $ (7,889)
============= ============= ==============
No federal or state income taxes or income tax benefits were recorded for the
years ended December 31, 2000, 1999 and 1998, as the Company incurred net
operating losses during these periods and potential deferred tax benefits
associated with net operating loss carryforwards were completely offset by a
full valuation allowance.
Deferred tax assets consist of the following (in thousands):
December 31,
2000 1999
------------------------------------------------------ ------------- -------------
Net operating loss and credit carryforwards $18,315 $11,635
Reserves and accruals not currently deductible 984 987
Capitalized research and development costs 910 367
Inventories 456 585
Other 631 251
------------- -------------
Gross deferred tax assets 21,296 13,825
Valuation allowance (21,296) (13,825)
------------- -------------
Net deferred tax assets $ - $ -
============= =============
Management believes that, based on a number of factors, it is more likely than
not that the deferred tax assets will not be realized, such that a full
valuation allowance has been recorded.
As of December 31, 2000, the Company has federal net operating loss
carryforwards of approximately $44 million, which will expire beginning in 2013.
For state tax purposes, the Company has net operating loss carryforwards of
approximately $15.5 million, which will expire beginning in 2002.
36
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - RESTRUCTURING
In August 2000, the Company approved and announced a plan to divest its
manufacturing facility in Taiwan. A turnkey manufacturer will manufacture all of
the Company's products after the divestiture. The objective of the divestiture
is to reduce manufacturing overhead and improve gross margins by taking
advantage of the turnkey manufacturer's economies of scale in materials
procurement and production capacity. The divestiture plan consisted of
terminating 57 employees in the manufacturing and the general and administrative
functions, selling manufacturing equipment and closing the manufacturing
facility. These actions resulted in a restructuring expense of $600,000, which
included $550,000 for severance and $50,000 for facility related charges. The
Company completed the divestiture in the first quarter of 2001. The following
table summarizes the activities of the accrual for restructuring expense in 2000
(in thousands):
Closure of
Severance Facility Total
---------------------------------------- ------------- ------------- -------------
Reserve provided $ 550,000 $ 50,000 $ 600,000
Reserve utilized (391,000) (19,000) (410,000)
------------- ------------- -------------
Balance at December 31, 2000 $ 159,000 $ 31,000 $ 190,000
============= ============= =============
NOTE 10 - SALE OF ASSETS
During the fourth quarter of 2000, the Company recorded a net loss on sale of
assets of $620,000 in connection with the closure of its manufacturing facility
in Taiwan discussed in Note 9 above. In June 1999, the Company sold its research
and development facility located in Hsin Chu, Taiwan, for a total of $1,620,000,
of which $900,000 was received in 1999, and the remaining balance of $720,000
was received in July 2000. In connection therewith, the Company recorded a gain
of $1,055,000, net of payments of broker fees and severance of $216,000.
NOTE 11 - GEOGRAPHIC INFORMATION
The Company operates in one business segment, which is the design, development,
production, marketing and support of high performance networking solutions.
Geographic information relating to the Company's net sales and long-lived assets
is reported in the tables below.
Net sales based on customers' locations are as follows (in thousands):
Years ended December 31,
2000 1999 1998
----------------------- ------------- -------------- -------------
North America $ 5,569 $ 5,732 $ 19,695
Asia 1,086 3,047 5,900
Europe 859 1,452 2,990
------------- -------------- -------------
$ 7,514 $ 10,231 $ 28,585
============= ============== =============
No one foreign country accounted for more than 10% of the Company's net sales in
2000. Sales to Taiwan-based customers accounted for 17% of the Company's net
sales in 1999 and 1998.
37
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-lived assets, which consist of property and equipment and other assets, are
reported below based on the location of an asset (in thousands):
December 31,
2000 1999
----------------------- ------------- --------------
North America $5,708 $3,593
Asia 117 1,728
Europe 7 23
------------- --------------
$5,832 $5,344
============= ==============
NOTE 12 - CONCENTRATIONS
The Company's proprietary ASICs (Application-Specific Integrated Circuits) are
currently manufactured by a single foundry. In addition, subsequent to the
closure of the Company's manufacturing facility in Taiwan in the fourth quarter
of 2000, all of the Company's products are manufactured by one turnkey
manufacturer. In the event that the foundry or the turnkey manufacturer fails to
deliver the expected volumes or meet the required quality standard, the Company
may experience delay in production of its products and loss of revenues, which
could adversely impact the Company's operating results
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,
2000 1999 1998
----------------------- ------------- -------------- -------------
Customer A 32% 36% 35%
Customer B 11% - -
Customer C - - 11%
NOTE 13 - SUBSEQUENT EVENT
On March 30, 2001, the Company entered into a series of related agreements with
FalconStor, Inc. ("FalconStor"), a privately held company, pursuant to which the
Company purchased Series C Preferred Stock of FalconStor having an aggregate
purchase price of $25,000,000, and obtained an exclusive option to merge with
FalconStor. FalconStor develops and markets network storage infrastructure
software that enables storage over IP using standard industry components such as
Gigabit Ethernet, Fibre Channel and SCSI, with planned support for iSCSI and
Infiniband. The investment agreements provide that the Company has the right to
designate one member of FalconStor's board of directors and entitle the Company
to liquidation, registration, voting and preemptive rights customary for venture
capital style investments.
The option agreement gives the Company the right to merge with FalconStor. The
form of merger agreement provides that, as consideration for all outstanding
shares of FalconStor's stock, the Company would issue a number of newly issued
shares of its common stock determined in accordance with a formula. The number
of shares issuable in the merger would depend upon a number of variable factors,
including the trading price per share of the Company's common stock at the time
of the merger, the Company's assets at the time of the merger and other factors.
The actual number of shares is expected to result in the Company's current
stockholders having a one-third interest in the combined entity. In addition,
the Company would assume all outstanding options to acquire shares of
FalconStor's common stock, which would result in the potential issuance of
approximately 4,500,000 shares if those options vested and were exercised. The
merger would be structured as a tax free reorganization and would be accounted
for as a purchase. Completion of the merger would be subject to the expiration
of the applicable Hart-Scott-Rodino waiting period, stockholder approval and
other customary closing conditions. In the event that the Company does not
exercise the option, and under certain other circumstances, the Company may be
required to pay FalconStor a penalty of $3,000,000.
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There is no reportable information under this item.
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 our Proxy Statement for the 2001 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 our Proxy Statement for the 2001 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 our Proxy
Statement for the 2001 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under "Compensation Committee
Interlocks and Insider Participation in Compensation Decisions" in our Proxy
Statement for the 2001 Annual Meeting.
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The information required by subsections (a)1 and (a)2 of this item are included
in the response to Item 8 of Part II of this Annual Report on Form 10-K.
(a) Exhibits
--------
3.1 (1) Amended and Restated Certificate of Incorporation.
3.2 (1) By-Laws.
3.3 (14) Certificate of Amendment of the Certificate of Incorporation.
4.1 (1) Fourth Amended and Restated Investor Rights Agreement dated July 15, 1993.
10.1 (1) Form of Indemnity Agreement for directors and officers.
10.2 (1)* Amended and Restated 1993 Stock Option Plan and forms of agreement thereunder.
10.4 (1)* 1994 Outside Directors Stock Option Plan and form of agreement thereunder.
10.18 (4) Purchase Agreement among Network Peripherals Inc., Network Peripherals, Ltd., NuCom
Systems, Inc., and the shareholders of NuCom, dated January 31, 1996.
10.23 (5)* Agreement with Glenn Penisten dated May 15, 1996.
10.26 (7) Purchase Agreement among Network Peripherals Inc., NetVision Corporation, and the
shareholders of NetVision , dated April 29, 1997.
10.28 (6)* Amended 1994 Outside Directors Option Plan.
10.29 (8)(10) Development and Purchase Agreement with Sun Microsystems, Inc., dated February 25, 1994.
10.30 (8)(10) Corporate Supply Agreement with Sun Microsystems, Inc., dated March 31, 1997.
10.35 (9)* Salary Continuation Agreement with Glenn Penisten dated October 31, 1997.
10.37 (9)* Salary Continuation Agreement with James Sullivan dated October 31, 1997.
10.39 (10)* Amended 1997 Stock Plan.
10.41 (10)* Employment Agreement with William Rosenberger dated June 11, 1998, and subsequent
amendment dated October 19, 1998.
10.42 (10)* Salary Continuation Agreement with Jerry McDowell dated October 19, 1998.
10.43 (10)* Salary Continuation Agreement with Wilson Cheung dated January 13, 1999.
10.44 (10)* Salary Continuation Agreement with Robert Zecha dated January 13, 1999.
10.45 (11) Agreement for Purchase and Sale of Assets dated June 14, 1999.
10.46 (12) Lease Agreement dated August 31, 1999.
10.47 (13)* Salary Continuation Agreement with Joseph Botta dated June 21, 1999.
10.49 (13)* 1999 Stock Plan.
10.50 (14)* Amended Employment Agreement with William Rosenberger.
10.51 (14) Lease Agreement with Fortunato Development dated March 30, 2000.
10.52 (15) Line of Credit Agreement with Wells Fargo Bank dated June 1, 2000.
10.53 (15)* Amended 1997 Stock Plan.
10.54 (16)* Employment Agreement with James Regel dated September 12, 2000.
10.55 * Amended 1999 Stock Plan.
10.56 * Employment Agreement with Ronald Rutherford dated October 17, 2000.
10.57 * Employment Agreement with James Williams dated December 13, 2000.
10.58 * Employment Agreement with James Baker dated December 13, 2000.
10.59 * Letter to Joseph Botta dated December 18, 2000 regarding executive retention plan.
21 (10) Subsidiaries of the Registrant.
23.4 Consent of Independent Accountants.
40
(b) Reports on Form 8-K
-------------------
None
(1) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 33-78350).
(2) Confidential treatment has been granted as to part of this
Exhibit.
(3) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1994 (File
No. 0-23970).
(4) Incorporated by reference to the Registrant's report on Form 8-K
filed on March 31, 1996 (File No. 0-23970).
(5) Incorporated by reference to the corresponding exhibit in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 0-23970).
(6) Incorporated by reference to the corresponding exhibit in the
Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 1997 (File No. 0-23970).
(7) Incorporated by reference to the Registrant's report on Form 8-K
filed on May 14, 1997 (File No. 0-23970).
(8) The Registrant has filed portions of these agreements separately
with the Commission and has requested that those portions be
afforded confidential treatment.
(9) Filed with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
(10) Filed with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998.
(11) Incorporated by reference to the corresponding exhibit in the
Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 1999.
(12) Incorporated by reference to the corresponding exhibit in the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1999.
(13) Incorporated by reference to the corresponding exhibit in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999.
(14) Incorporated by reference to the corresponding exhibit in the
Registrant's Quarterly Report on Form 10-Q for the period ended
March 31, 2000.
(15) Incorporated by reference to the corresponding exhibit in the
Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 2000.
(16) Incorporated by reference to the corresponding exhibit in the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 2000.
* Management contract or compensatory plan.
41
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 on April 2, 2001.
NETWORK PERIPHERALS INC.
By: /s/ JAMES REGEL
-----------------------------------
James Regel
President and Chief Executive 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 April 2, 2001.
Signature Title
- --------- -----
/s/ James Regel President, Chief Executive Officer and Director
- ----------------------------------- (Principal Executive Officer)
James Regel
/s/ James Williams Senior Vice President of Finance and Administration,
- ----------------------------------- Secretary, Treasurer and Chief Financial Officer
James Williams (Principal Financial and Accounting Officer)
/s/ Glenn Penisten Chairman of the Board
- -----------------------------------
Glenn Penisten
/s/ Thomas Brown Director
- -----------------------------------
Thomas Brown
/s/ Michael Gardner Director
- -----------------------------------
Michael Gardner
/s/ Charles Hart Director
- -----------------------------------
Charles Hart
42
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, 1998
Allowance for doubtful accounts $ 298 $ - $ - $(215) $ 83
Allowance for sales returns and other 886 82 - (528) 440
credits
------------- ------------ ------------ ------------- ------------
Total allowances for doubtful accounts
and sales returns 1,184 82 - (743) 523
Year ended December 31, 1999
Allowance for doubtful accounts 83 47 - (71) 59
Allowance for sales returns and other 440 - - (135) 305
credits
------------- ------------ ------------ ------------- ------------
Total allowances for doubtful accounts
and sales returns 523 47 - (206) 364
Year ended December 31, 2000
Allowance for doubtful accounts 59 220 - (240) 39
Allowance for sales returns and other 305 - - (85) 220
credits
------------- ------------ ------------ ------------- ------------
Total allowances for doubtful accounts
and sales returns $ 364 $220 $ - $(325) $259
============= ============ ============ ============= ============
43