-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SVACyjfLnM4vSMzllUmVWUgTqQLkBtXACtuwcLgjDBplBYMQ83F4Pw+/s0UijqXc Eu7BCiPc6L8kz17vfn83Cg== 0000950005-99-000283.txt : 19990323 0000950005-99-000283.hdr.sgml : 19990323 ACCESSION NUMBER: 0000950005-99-000283 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORK PERIPHERALS INC CENTRAL INDEX KEY: 0000922521 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 770216135 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23970 FILM NUMBER: 99569887 BUSINESS ADDRESS: STREET 1: 1371 MCCARTHY BLVD CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4083217300 MAIL ADDRESS: STREET 1: 1371 MCCARTHY BLVD CITY: MILPITAS STATE: CA ZIP: 95035 10-K 1 FORM 10-K 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, 1998 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 Incorporation or Organization) Identification Number) 1371 McCarthy Boulevard Milpitas, California 95035 (Address, including zip code of principal executive offices) (408) 321-7300 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(g) of the Act: Title of class Common Stock Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 5, 1999 was $82,541,679 based upon the closing price of the Registrant's Common Stock on the Nasdaq National Market System on that date. The number of shares of the Registrant's Common Stock outstanding as of March 5, 1999 was 12,342,681. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's proxy statement for its annual meeting of stockholders to be held on April 29, 1999 are incorporated by reference into Part III of this Annual Report on Form 10-K. 1 NETWORK PERIPHERALS INC. FORM 10-K TABLE OF CONTENTS PART I Page ITEM 1. Business............................................................ 3 ITEM 2. Properties.......................................................... 9 ITEM 3. Legal Proceedings................................................... 9 ITEM 4. Submission of Matters to a Vote of Security Holders................. 9 PART II ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters............................................. 10 ITEM 6. Selected Financial Data............................................. 11 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 12 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.......... 16 ITEM 8. Financial Statements and Supplementary Data......................... 17 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................ 33 PART III ITEM 10. Directors and Executive Officers of the Registrant.................. 34 ITEM 11. Executive Compensation.............................................. 34 ITEM 12. Security Ownership of Certain Beneficial Owners and Management...... 34 ITEM 13. Certain Relationships and Related Transactions...................... 34 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 35 Signatures.......................................................... 37 Supplemental Schedule............................................... 38 2 PART I ITEM 1. BUSINESS Network Peripherals Inc. (the "Company") was incorporated in California in March 1989 and reincorporated in Delaware in June 1994. The Company's principal office is located at 1371 McCarthy Boulevard, Milpitas, California 95035, and its telephone number is (408) 321-7300. BUSINESS The Company designs, manufactures, markets and supports a full range of 10/100/1000 Layer 2 and Layer 3 Ethernet switching products for workgroups, wiring closets and network backbones, and a full range of high performance FDDI adapters and switches. These products are designed to increase the available bandwidth and enhance the performance of corporate and departmental networks. The Company delivers the most advanced high-speed network technologies to preserve its customer's existing Ethernet investments. The Company introduced its first FDDI network adapter products in 1990 and has since established a leading share of the installed FDDI adapter market. The Company also introduced its first FDDI concentrator product in 1991 and began commercial shipments of its first FDDI LAN (local area network) switching product, the EIFO series, in the first quarter of 1994. In 1995, the Company announced its Fast Ethernet product line and made initial shipments of its Fast Ethernet LAN switching products in early 1996. In 1997, the Company introduced switches designed to interconnect workgroups to enterprise backbone networks, switches with 10/100 auto-sensing features, and standard and custom OEM adapters based on the industry standard PCI bus architecture. In the price-sensitive market for Layer 2 switches, the Company in 1998 developed and shipped a full range of 12-port, 16-port and 24-port Fast Ethernet hubs and switches with advanced management features. In March 1996, the Company acquired NuCom Systems, Inc. ("NuCom"), a Taiwan-based networking company focused on Fast Ethernet switching products. This acquisition enabled the Company to introduce a number of new Layer 2 Fast Ethernet switching products during that year. A majority of the Company's current Fast Ethernet product offerings are based on the switch architecture developed by the research and development activities in Taiwan. In April 1997, the Company acquired NetVision Corporation ("NetVision"), a privately held company located in Long Island, New York. NetVision specialized in the development of very high bandwidth Layer 3 LAN switching and gigabit Ethernet technologies. This acquisition positioned the Company to develop its next generation of Ethernet switching products to be introduced in mid-1999. The Company markets its products worldwide through OEMs, distributors, VARs and system integrators. PRODUCTS The Company's current line of products consists of a range of Fast Ethernet and FDDI LAN switches and hubs, FDDI to Fast Ethernet bridges, FDDI Network Interface Cards, and network management software. Most of these products are based on core technology and proprietary ASIC components designed by the Company. The products are offered in a variety of models, configurations and forms. The information in the following paragraphs contains forward-looking statements describing new products that are expected to be available for shipment to the Company's customers during 1999. The successful completion and shipment of these products is subject to a number of uncertainties, including verification testing to confirm that the products meet the Company's standards for quality, reliability and interoperability; availability of components; pricing actions by competitors that may render it unprofitable to introduce the products; market acceptance of the products; and the emergence or broad acceptance of new technologies that may render the products obsolete. In the early stages of 1999, the Company once again consolidated its product development efforts to better leverage core competencies and to bring consistency and continuity to these efforts. Although the Company will continue its sustaining engineering efforts of its legacy products, especially support of its OEM base, the bulk of its engineering resources will concentrate on development efforts to bring the NuWave Architecture Layer 3 gigabit family of switches to market. The Company intends to introduce gigabit Ethernet solutions aimed at the small-to-medium enterprises (SME) in mid-1999. 3 NuSwitch Product Line Network Adapter Products The Company's line of FDDI network adapters connects high-performance servers or desktop computers directly to 100 Mbps FDDI networks. The adapters support both fiber and unshielded twisted pair (UTP) copper wiring and are available for popular platform bus architectures, including SBus and PCI. Customized versions have been developed for resale under OEM arrangements with Sun Microsystems and Network Associates. The adapters and software developed for Sun Microsystems are based on the Company's standard SBus architecture and PCI architecture. They support Sun Microsystems' SPARC and UltraSPARC work station and server product lines, including their current lines of PCI based workstations. The Network Associates product is a customized version of the Company's PCI adapter with enhanced features for use with the Network Associates Sniffer Network Analyzer. The Company's adapters incorporate software drivers for leading network operating systems including Novell NetWare, Microsoft NT, and Sun Microsystems' Solaris. The Company provides a standard set of diagnostics, connection management (CMT) and station management (SMT) software tools. CMT software continuously monitors network connections for bit errors and network faults, while SMT software provides network management and gathering of network performance statistics. LAN Switching Products LAN Switches. In 1998, the Company added a number of new Fast Ethernet LAN switching products to its NuSwitch product line that offers solutions ranging from desktop to backbone connectivity, including the DS-12A and the DS-16, both Layer 2 Ethernet switches. These two products are 10/100Mbps auto-sensing, 12-port and 16-port switches, with optional connections to either fiber or UTP. They are designed to satisfy the requirements of mission critical networks running high-demand applications in campus environments. LAN Network Management Software. The Company believes that network management software is an important tool for network administrators who need to manage, maintain and control the operation of client/server remotely. The Company provides standards-based network management software in all of its managed products. The Company's LAN switching products come standard with SNMP and RMON software that allows its switches to be configured and monitored from a management station. In 1998, the Company introduced some revisions to its NuSight SNMP management platform, which now provides RMON Manager tools for network diagnostics and performance monitoring. NuSight 2.0 provides a graphical view of the switching product to enable the network administrator to manage network connections and configuration, gather statistics to monitor network traffic and plan for future growth. It operates in a Microsoft Windows environment, including Windows 95, Windows NT Workstation 4.0 and Windows NT Server 4.0. The Company intends to introduce a number of new products in 1999 based on its revolutionary NuWave Architecture. NuWave products will be aimed at the rapidly growing Layer 3 Fast Ethernet and gigabit switching markets. These products will be high-density, low cost 10/100/1000 auto-sensing switches for use in departmental networks and large corporate backbone networks. NuWave Product Line NuWave is an innovative line of Ethernet, Fast Ethernet, and gigabit Ethernet solutions being designed for the SME market based on technology and ASICs developed primarily by the Company. The NuWave product family is expected to consist of very high bandwidth switching platforms in flexible, "building block" form that offer high-density switched/hub ports that are stackable and scaleable in performance and configurations for networks up to 1,500 nodes with complex and stringent network requirements. Networks of this scale require reliability, scalability and flexibility since as many as 30% of their nodes move or change annually. Thus, the devices themselves need to be intelligent, fault-tolerant and flexible in their configurations while being affordable and simple to use. The NuWave family of 10/100 and gigabit Ethernet switching solutions is being designed with a 64-Gbps switching fabric to deliver wire-speed Layer 2 and Layer 3 (IP/IPX) switching for 10/100/1000 Mbps Ethernet networks in a scaleable and non-blocking stackable form factor. The new platform is designed to accommodate options such as high-speed LAN/WAN uplinks, advanced web-based management functions, with intuitive, policy-based network management software, redundant power supplies and flexible media connections -- capabilities that are found currently only in expensive, large-scale enterprise systems. 4 The NuWave switching family, with a very high bandwidth architecture and flexible configuration plus a comprehensive collection of advanced switching and network management functionalities, offers networking and system OEM customers a next generation switching platform. The Company plans to use the NuWave Architecture product line to penetrate the rapidly emerging gigabit and stackable Layer 2/3 10/100 Ethernet switching market in 1999. MARKETING, SALES AND SUPPORT The Company sells its product worldwide through OEMs, VARs, distributors and system integrators. As of December 31, 1998, the Company employed 24 full-time technically trained marketing, sales and support personnel located in the United States, the Netherlands, Singapore and Taiwan. These personnel, in addition to traditional marketing and sales functions, are responsible for initiating and developing relationships with major end-user accounts and with OEM leaders in the computer networking industry. The Company believes that such relationships are crucial to early development and deployment of optimal solutions for network applications. The majority of the Company's historical and current sales are to OEM customers with the balance of the sales to distributors and VARs. While the Company does not generally obtain long-term purchase commitments from its OEM customers, it does customarily enter into contracts with OEM customers to establish the terms and conditions of sales made pursuant to orders from OEMs. The Company's standard products are distributed globally through the reseller channels in North America, Asia and Europe. In addition to North America, the Company's products are currently distributed internationally, primarily in Europe and Asia. The Company has international sales offices in the Netherlands, Taiwan and Singapore. Sales to customers outside of North America represented 31% of the Company's net sales in 1998. The geographic regions with the major portions of export sales in 1998, and the approximate respective percentages represented by each, were Europe, 10% and Asia, 21%. All payments for sales outside the United States are made in U.S. dollars. Sun Microsystems accounted for 35% of net sales in 1998. In the past, the Company has experienced fluctuations in the volume of activity with individual OEM customers and distributors as well as changes in its OEM customer and distributor base, and it expects such fluctuations and changes to continue in the future. The loss of a major customer, reductions of a major order or delay in a major shipment could adversely affect the Company's business and financial performance. OEM customers typically provide the Company with a rolling forecast placed two to three months in advance of shipment, while resellers typically provide the Company with orders placed 30 days or less in advance of shipment. However, due to order cancellations and order changes and depending on the mix between OEM and reseller orders and the ability or resources of the Company to meet demand schedules, the Company's backlog may or may not be indicative of revenue in the future periods. The information in the following paragraph contains forward looking statements describing the Company's sales and marketing strategy. There are a number of uncertainties that could affect the success of the plan including the timely availability of new products by the Company, reliability, price and performance characteristics of the components, new and existing products, the introduction of similar products by competitors, pricing actions by competitors and the inability of the Company to recruit and retain required sales and marketing staff with the needed skills. In 1999, the Company's sales and marketing strategy for its Layer 3 Fast Ethernet and gigabit Ethernet switching products will emphasize on developing an OEM customer base, a potentially lucrative market. The Company will continue its commitment to support its existing base of resellers and seek new opportunities in its reseller channels. RESEARCH AND DEVELOPMENT The information in this section contains forward-looking statements describing the Company's product development plans for 1999 and beyond. The successful development and introduction of new products is subject to a number of uncertainties, including the ability of the organization to recruit, train and retain adequate numbers of professional engineers, successful design of proprietary application specific integrated circuits and computer software, design, development and verification testing to confirm that the products meet the Company's standards for quality, reliability and interoperability, availability of components, pricing actions by competitors that may render it unprofitable to introduce the products, unanticipated technical obstacles or delays, and the emergence or wide acceptance of new technologies that could render the products obsolete. 5 The Company has developed certain core competencies applicable to multiple network technologies such as FDDI and Ethernet, ASIC design, and client/server operating system drivers and software modules. The Company believes its focus on core competencies such as these has been, and will continue to be, a significant factor in its competitive ability to bring emerging network solutions to the market in a timely manner. Network Bandwidth Switching. The majority of the Company's research and development efforts has been and will continue to be on developing its NuWave family of products. The Company is designing a range of high-density ASICs that provide the Company's NuWave architectural platform with a 64 Gbps switching fabric for gigabit and stackable Layer 2 and 3 10/100/1000 Ethernet switches. Through its acquisition of NetVision Corporation in April 1997, the Company obtained a team of technologists experienced in very high bandwidth switching architecture, specifically in Layer 3 gigabit Ethernet switching technology. The Company has also implemented its Distributed Memory Switching Architecture and ASIC expertise in products based on both FDDI and Fast Ethernet. Semiconductor foundries, such as NEC, UMC, MMC and ATMEL, manufacture the Company's ASIC components. System Architecture Interfaces and Network Protocol Software. Through the development of its collection of 100 Mbps network adapters, the Company has gained expertise in hardware and software support for a variety of standard and proprietary system bus architectures and network operating systems. Server Bandwidth Optimization. The Company has designed its network operating system software to address the specific characteristics of each type of adapter and server architecture. This design provides optimal network bandwidth to high power servers. As new versions of network operating systems are introduced, the Company plans to devote development efforts not only to maintain compatibility with existing versions but also to take advantage of enhanced features and performance improvements. As of December 31, 1998, the Company employed 38 personnel in research and development. The Company has developed products designed for integration in the proprietary systems of major networking companies including Sun Microsystems, Newbridge Networks, Network Associates, NetFRAME, NCR, and 3Com. The Company believes that its relationships with these network technology leaders establish credibility with end-user customers who demand interoperability of their networking devices. The Company has active development relationships with Novell, Microsoft and Sun Microsystems for advanced products for NetWare, Windows NT and Solaris, respectively. MANUFACTURING Throughout 1998 and in the early stages of 1999, the Company partnered with an established turnkey manufacturer in the Silicon Valley to produce and ship the Company's FDDI products. The Company also has an in-house manufacturing team in Taiwan with recently purchased state-of-the-art manufacturing equipment, which produced its Ethernet products. In the first half of 1999, the Company intends to transition its entire manufacturing operations to Taiwan. The team of 51 full-time personnel in this manufacturing facility is highly experienced in advanced manufacturing and test engineering in ongoing reliability/quality assurance. The manufacturing operation is ISO certified. Dependent upon volumes in 1999, the Company expects to reduce the cost of products substantially as a direct result of this transition. Certain key components used in the Company's products such as ASICs, microprocessors and controller chips, media interface components and power supplies are currently available only from single or limited sources. The Company also has developed proprietary ASICs used in existing products and in the NuWave Architecture, which will be sourced from a single foundry. While the Company believes it would be able to obtain alternative sources for key components and for the ASICs, difficulty in obtaining these supplies could have a material adverse effect on the Company's results of operations. COMPETITION The Company believes that the principal competitive factors in the networking market include the completeness of product offerings, product quality, price and performance, adherence to industry standards, the degree of interoperability with other networking equipment and time to market for new products. The computer networking industry is intensely competitive and is significantly affected by product introductions and market activities of industry participants. A number of competitors offer products which compete, both in price and functionality, favorably with one or more of the Company's products. Many of the Company's current and potential competitors have significantly broader product offerings, greater financial, technical, marketing and other resources, and larger installed bases than the Company. Increased competition could result in price reductions, reduced margins and loss 6 of market share, all of which would materially adversely affect the Company's business, operating results and financial condition. In a declining market, the Company's FDDI network adapters compete on a product-by-product basis with products offered primarily from Interphase, SysKonnect and 3Com. In a maturing market, the Company's Layer 2 Fast Ethernet switching solutions compete with products offered by Cisco, 3Com, Nortel, Cabletron and others. A number of companies developing similar technologies have been acquired by the Company's larger competitors. These acquisitions are likely to permit the Company's competitors to devote significantly greater resources to the development and marketing of new competitive products and the marketing of existing products to their installed bases. The Company expects that competition will increase as a result of these and other industry consolidations and alliances. These competitive pressures could adversely affect the Company's business and operating results. The Layer 3 Fast Ethernet and gigabit switching markets are in the early stages of development with competition for these market coming from relatively new market entrants such as Extreme Networks and Foundry Networks, as well as from the more established companies such as Nortel, Cisco and 3Com. The Company believes that this market will consolidate over time and that this consolidation could adversely effect the Company's ability to compete effectively with its larger competitors. PROPRIETARY RIGHTS The Company's success is dependent upon its proprietary technology. To date, the Company has relied principally upon patent, copyright, and trade secret laws to protect its proprietary technology. The Company generally enters into confidentiality or license agreements with its employees, distributors, customers and potential customers and limits access to, and distribution of, the source code to its software and other proprietary information. The Company has been issued one U.S. patent and has filed three additional U.S. patent applications covering certain aspects of its technology. The process of obtaining patents can be expensive, and there can be no assurance that the patent application will result in the issuance of patents, that any issued patents will provide the Company with meaningful competitive advantages, or that challenges will not be issued against the validity or enforceability of any patent issued to the Company. The Company has entered into patent license agreements relating to certain technologies used in FDDI networks. The Company believes that the terms of such licenses are comparable to those made available to other companies in the networking industry. In addition, certain technology used in the Company's products is licensed from third parties, generally on a non-exclusive basis. These licenses generally require the Company to pay royalties and to fulfill confidentiality obligations. Termination of such licenses could adversely affect the Company's business and operating results. The Company has agreed in certain cases to indemnify its customers for liability incurred in connection with the infringement of a third party's intellectual property rights. Although the Company has not received notice from any of its customers advising the Company of any alleged infringement of a third party's intellectual property rights, there can be no assurance that such indemnification of alleged liability will not be required from the Company in the future. 7 EXECUTIVE OFFICERS * The executive officers of the Company and their ages are as follows: Name Age Position - -------------------------------------------------------------------------------- William Rosenberger 49 President, Chief Executive Officer, and Director Wilson Cheung 35 Vice President - Finance and Chief Financial Officer Jerry McDowell 53 Vice President - Marketing James Sullivan 46 Vice President - Sales Robert Zecha 41 Vice President - Research and Development Mr. Rosenberger has served as the President, Chief Executive Officer and a director of the Company since July 1998. From January 1996 to June 1998, Mr. Rosenberger was President and Chief Executive Office of NetAccess, Inc., a wide area networking equipment manufacturer. From October 1995 to December 1995, Mr. Rosenberger was Vice President of sales and business development for NetVision Corporation, an Ethernet switching company. From March 1993 to June 1995, Mr. Rosenberger was General Manager of ACSYS, Inc., a networking equipment manufacturer. Prior to March 1993, Mr. Rosenberger was President and Chief Executive Officer of Netronix, Inc., a networking hardware designer and manufacturer. Mr. Cheung has served as an executive officer since October 1998. Preceding the appointment to this office, Mr. Cheung held various management positions since joining the Company in July 1995. Prior to joining the Company, Mr. Cheung was a financial analyst at Sybase Inc. from July 1994 through June 1995. From 1992 through June 1994, Mr. Cheung held various senior financial analyst positions at Raychem Corp. Mr. Cheung was also a senior auditor at Coopers & Lybrand. Mr. McDowell has served in executive positions and Boards of Directors for several data communications research and manufacturing firms prior to joining the Company in November, 1998. He was a co-founder, President and Executive Director of Research of The Robert Frances Group, Vice President of Marketing and Business Development at Objective Systems Integrators and Senior Director of Marketing and Business Development at Boole & Babbage. Prior to those positions, Mr. McDowell served in executive and management positions at Dataquest, The Meta Group, Wang Laboratories Paradyne and others. Mr. Sullivan has served as an executive officer since joining the Company in July 1997. Prior to joining the Company, he was with Novell, Inc. from July 1995 to July 1997 where he held several sales management positions, including Vice President of Worldwide OEM Sales and Senior Director of North American Channel Sales. Prior to joining Novell, he held various sales positions with Arrow Electronics, Canon and Lanier Business Products. Mr. Zecha has served as Vice President of Research and Development since April 1997. From January 1997 to April 1997, Mr. Zecha served as President and Chief Technology Officer of NetVision Corporation, an Ethernet switching company. From November 1993 to January 1997, Mr. Zecha was a Vice President and Chief Technology Officer of NetVision Corporation. Mr. Zecha co-founded and held a Board of Director position with NetVision Corporation from November 1993 through April 1997. Prior to November 1993, Mr. Zecha held engineering management positions at Standard Microsystems Corporation, a networking company. * As of December 31, 1998 8 EMPLOYEES As of December 31, 1998 the Company employed 133 persons including 38 in research and development activities, 51 in manufacturing and support, 24 in sales, marketing and technical support, and 20 in finance and administration. Approximately 70 employees were in international locations. None of the Company's employees are currently represented by a labor union. The Company considers its relations with its employees to be good. The Company attempts to maintain competitive compensation benefits, equity participation and work environment policies to assist in attracting and retaining qualified personnel. Competition for employees in the Company's industry and geographical area is intense and there can be no assurance that the Company will be successful in attracting and retaining such personnel. ITEM 2. PROPERTIES The Company's principal executive offices are located in Milpitas, California and consist of approximately 18,000 square feet under lease that will expire in October 2000. Additionally, the Company has research and development facilities in Taiwan and Long Island, New York. The Company has international sales offices in the Netherlands, Singapore, and Taiwan. The Company believes that its existing facilities and equipment are generally adequate to meet its immediate and foreseeable needs. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1998. 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded in the over-the-counter market on the Nasdaq National Market. As of March 5, 1999, there were approximately 4,000 stockholders of record. The following table sets forth, for the fiscal periods indicated, the high and low closing prices for the Common Stock, all as reported by Nasdaq. 1996 High Low ---------------------------------------------------------------- First Quarter $ 14.75 $ 10.25 Second Quarter 18.63 13.00 Third Quarter 16.63 12.25 Fourth Quarter 17.75 14.63 1997 ---------------------------------------------------------------- First Quarter $ 20.88 $ 8.63 Second Quarter 10.94 6.50 Third Quarter 7.94 5.38 Fourth Quarter 7.25 4.94 1998 ---------------------------------------------------------------- First Quarter $ 8.69 $ 6.25 Second Quarter 6.94 3.75 Third Quarter 4.88 3.00 Fourth Quarter 4.88 2.31 The Company has never paid or declared any cash dividends. It is the present policy of the Company to retain earnings to finance the growth and development of the business and, therefore, the Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. 10 ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31, 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands, except per share amounts) Statement of Operations Data: Net sales $ 28,585 $ 34,798 $ 53,080 $ 47,144 $ 33,463 Cost of sales 17,250 25,341 28,590 24,690 17,507 ----------------------------------------------------------------------- Gross profit 11,335 9,457 24,490 22,454 15,956 ----------------------------------------------------------------------- Operating expenses: Research and development 11,485 9,757 8,570 4,811 3,473 Marketing and selling 6,010 13,242 11,849 7,319 4,361 General and administrative 3,234 3,982 3,378 2,226 1,618 Acquired research and development in process and product integration costs -- 6,462 13,732 -- -- Restructuring expense -- 3,662 -- -- -- ----------------------------------------------------------------------- Total operating expenses 20,729 37,105 37,529 14,356 9,452 ----------------------------------------------------------------------- Income (loss) from operations (9,394) (27,648) (13,039) 8,098 6,504 Interest income, net 1,505 1,680 1,745 2,236 577 ----------------------------------------------------------------------- Income (loss) before income taxes (7,889) (25,968) (11,294) 10,334 7,081 Provision for (benefit from) income taxes -- (3,526) 608 3,617 1,416 ----------------------------------------------------------------------- Net income (loss) $ (7,889) $(22,442) $(11,902) $ 6,717 $ 5,665 ======================================================================= Net income (loss) per share: Basic $ (0.64) $ (1.85) $ (1.01) $ 0.60 $ 1.72 ======================================================================= Diluted $ (0.64) $ (1.85) $ (1.01) $ 0.57 $ 0.64 ======================================================================= Weighted average common shares: Basic 12,281 12,154 11,760 11,147 3,302 ======================================================================= Diluted 12,281 12,154 11,760 11,736 8,906 =======================================================================
December 31, 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------- (in thousands) Balance Sheet Data: Working capital $26,070 $34,439 $54,997 $63,269 $55,720 Total assets 35,549 45,889 71,434 70,111 65,209 Stockholders' equity 30,972 38,679 59,857 65,709 57,758 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following forward-looking statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The future events described in such statements involve risks and uncertainties, including: o the timely development and market acceptance of new products; o the market demand by customers for the Company's existing products, including demand by OEM customers for custom products; o competitive actions, including pricing actions and the introduction of new competitive products, that may affect the volume of sales of the Company's products; o uninterrupted supply of key components, including semiconductor devices and other materials, some of which may be sourced from a single supplier; o uninterrupted service by subcontractors; o the ability of the Company to recruit, train and retain key personnel, including engineers and other technical professionals; o the development of new technologies rendering existing technologies and products obsolete; o the economies of countries where the Company's products are distributed; and o general market conditions. In evaluating these forward-looking statements, consideration should also be given to the Business Risks discussed in a subsequent section of this annual report. RESULTS OF OPERATIONS Net Sales Net sales were $28.6, $34.8 and $53.1 million in 1998, 1997 and 1996, respectively. The sequential decrease in sales from 1996 to 1998 was primarily attributed to decreased shipments of products based on the FDDI technology. Net sales of FDDI products totaled $17.5 million in 1998, compared to $22.9 million in 1997. Net sales of Fast Ethernet switching products remained relatively consistent: net sales totaled $11.1 million in 1998 and $11.9 million in 1997. Unit shipments of Fast Ethernet switching products increased slightly in 1998 primarily due to the introduction of the Fast Ethernet commodity-like products in 1998. However, the increase was offset by the declining average unit sales price due to price competition in the commodity-like products market. Sales to OEM customers were $19.4, $22.0 and $30.5 million in 1998, 1997 and 1996, respectively. As a percentage of net sales, shipments to OEM customers represented 68%, 63% and 57% in 1998, 1997 and 1996, respectively. The balance of sales was made to distribution channels. Distribution sales were $9.2, $12.8 and $22.6 million in 1998, 1997 and 1996, respectively. Sales to customers in North America were $19.7, $25.8 and $42.0 million in 1998, 1997 and 1996, respectively. The balance of sales to customers in Asia and Europe totaled $8.9, $9.0 and $11.1 million in 1998, 1997 and 1996, respectively. The decrease in sales to OEM customers and customers in North America in 1998 and 1997 reflected decreased shipments of FDDI products as discussed above. The decrease in distribution sales as well as international sales was primarily attributed to the Company's refocusing its effort to strengthen OEM relationships, weakness in the Asian economies and the maturity of the Fast Ethernet products in general. As the factors attributable to the decrease in sales continue to exist, the Company does not expect noticeable growth in sales until the volume shipment of the next generation Layer 3 gigabit-class switches, NuWave, commences in mid-1999. The majority of the NuWave products are expected to be sold to OEM customers. Gross Profit/Margin The gross margin in 1998 was 40%, compared to gross margins of 27% and 46% in 1997 and 1996, respectively. The gross margin in 1998 improved from 1997 due to the absence of significant inventory charges recorded in 1997. However, the 1998 gross margin was below the historical level (prior to 1997) due to decreased sales of higher-margin FDDI products, competitive pricing on the Fast Ethernet switching products, and the introduction of the lower-priced Fast Ethernet commodity-like products in 1998. The gross margin in 1997 was exceptionally low, which reflected a write-off of slow- 12 moving and obsolete inventories totaling $5.1 million and one-time charges associated with the transfer of production of FDDI products to turnkey manufacturers. The Company expects that, prior to the introduction of the NuWave products in mid-1999, the gross margin may decrease slightly from the 1998 level primarily due to the declining sales of FDDI products and continued price competition. To reduce manufacturing costs, the Company intends to terminate its turnkey manufacturing model in the U.S. and relocate all manufacturing operations to its facilities in Taiwan during the first half of 1999. This transition, in conjunction with potentially higher margins of the NuWave products commencing shipment in mid-year, is expected to yield a higher gross margin in 1999. Research and Development Research and development expenses were $11.5, $9.8 and $8.6 million, in 1998, 1997 and 1996, respectively. As a percentage of the respective net sales, expenses were 40%, 28% and 16%. Expenses in 1997 and 1996 were net of contract funding of $217,000 and $556,000, respectively. No contract funding was received in 1998. The increase in expenses in 1998 and 1997 was primarily attributed to increased resources expended in the development of the Company's next generation Layer 3 gigabit-class switches, NuWave. Significant expenditures, including outside consultant fees and non-recurring engineering charges, were incurred to develop the NuWave ASICs (Application-Specific Integration Circuits). In addition, the Company incurred a one-time charge of approximately $500,000 in the third quarter of 1998 in connection with the elimination of certain non-critical personnel in research and development, in an effort to further streamline operations. The Company continues to invest a substantial amount of its resources in developing the NuWave products. However, the Company expects that the research and development expenses will gradually decline from the current level after the development of the ASICs is completed and the volume shipment of the NuWave products commences in mid-1999. Marketing and Selling Marketing and selling expenses were $6.0, $13.2 and $11.8 million in 1998, 1997 and 1996, respectively. As a percentage of the respective net sales, expenses were 21%, 38% and 22%. The decrease in expenses in 1998 was attributed to the reduction in staff and closure of regional sales offices in conjunction with the Company's restructuring of its business in 1997. The restructuring effort was in alliance with the Company's strategy to focus on the broadening of its OEM customer base, which required less sales and marketing resources. The increase in expenses in 1997 primarily reflected an overall increase in payroll and overhead costs as a result of the acquisition of NuCom and an escalated effort to expand the existing distribution channel through mid-1997. The Company expects to increase spending in marketing and selling activities in 1999 in order to launch the NuWave product line and to establish a leadership presence within the industry through various advertising campaigns, direct mailings and trade show exhibitions. General and Administrative General and administrative expenses were $3.2, $4.0 and $3.4 million in 1998, 1997 and 1996, respectively. As a percentage of net sales, expenses were 11% for both 1998 and 1997 and 6% for 1996. The decrease in expenses in 1998 reflected a reduction in payroll costs as a result of the restructuring in 1997 and a diminished utilization of outside consultants. The increase in expenses in 1997 from 1996 reflected additional payroll and other overhead costs associated with the acquisition of NuCom. The Company expects general and administrative expenses in 1999 to remain relatively consistent with 1998. Acquired Research and Development In Process and Product Integration Costs In April 1997, the Company acquired NetVision Corporation, a company specializing in LAN switching and gigabit Ethernet technologies. The Company expensed $6.5 million of acquired research and development in process as a result of the acquisition. In March 1996, the Company acquired NuCom Systems, Inc., a Taiwan-based company developing Fast Ethernet LAN switching products. The Company expensed $13.7 million of acquired research and development in process and product integration costs as a result of the acquisition. See Note 8 of Notes to Consolidated Financial Statements for more details in connection with the acquisitions discussed above. 13 Restructuring In the third quarter of 1997, the Company incurred a charge of $3.7 million for the restructuring of its business. The restructuring included a reduction in work force, closure of certain sales and manufacturing facilities, retirement of impaired assets and write-off of goodwill associated with the acquisition of NuCom. The Company completed the restructuring in the second quarter of 1998. See Note 9 of Notes to Consolidated Financial Statements. Interest Income Interest income was $1.5 million in 1998, compared to $1.7 million in 1997 and 1996. The decrease was primarily due to a lower aggregate balance of cash, cash equivalents and short-term investments in 1998. The Company maintained a comparable return on investment of $1.7 million in 1997 compared to 1996, despite a lower invested fund balance in 1997. This higher rate of return reflected a shift from short-term investments in tax-exempt securities to taxable corporate securities in mid-1997. Income Taxes The Company did not record a tax benefit associated with the net loss incurred in 1998, as the realization of deferred tax assets is deemed uncertain based on evidence currently available and, accordingly, a full valuation allowance has been provided. During 1998, the Company received an income tax refund of $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. The Company's effective tax rate for 1997 and 1996 was a benefit of 13.6% and a provision of 5.4%, respectively. The effective tax rate for 1997 reflected a net loss and was reduced by a full valuation allowance provided against deferred tax assets. The effective tax rates for 1997 and 1996 excluded the charges of acquired research and development in process, which are non-deductible for income tax purposes. Euro Conversion The Company has a wholly owned subsidiary in the Netherlands, which is one of the 11 European countries participating in the adoption of a common currency, the Euro, on January 1, 1999. Following the introduction of the Euro, the legacy currency in each participating country remains as legal tender until January 1, 2002. During the transition period, either the Euro or the legacy currency may be used to pay for goods and services. Beginning January 1, 2002, participating countries will issue new Euro-denominated bills and coins, and the legacy currency will no longer be the legal tender for any transactions after July 1, 2002. The Company's subsidiary in the Netherlands is a sales office for the entire European region. Sales made to all European countries are denominated in US dollars. Expenses incurred by this subsidiary are currently paid in guilders, the legacy currency. In 1998, sales to all European customers accounted for 10% of the Company's total sales, and 6% of the Company's total operating expenses were attributable to this subsidiary. Due to the immateriality of the Netherlands subsidiary relative to the Company's operations as a whole, the Company believes the Euro conversion will not have any significant impact to the Company's results of operations during and after the transition period. Year 2000 Compliance Many computer systems were designed using two digits rather than four digits to define a specific year. Thus as the Year 2000 approaches, the improper identification of the year could result in system failures or erroneous calculations. To address this issue, the Company is conducting a program (the Program) to assess and address Year 2000 issues for its products, information systems, operational infrastructure, and suppliers. The Company has completed an assessment of its current and installed base of products. The Company believes that substantially all products manufactured on or after August 1, 1997 are Year 2000 compliant, with the exception of the EIFO family of switches, which sold minimally in 1997 and 1998. For the older products and the EIFO products, which are deemed not in compliance, the Company believes they will continue to perform all essential and material functions after the year 2000; but in limited circumstances, they may incorrectly display or report the date within the network management software. Given that the installed base of non-compliant products has diminished as time elapsed and that the non-compliant products will perform their standard functions, the Company expects most of its end-users will not have issue with the Company's products in the year 2000. 14 The Company has substantially completed its assessment and remediation of its information systems. With the recent implementation of an ERP (enterprise resource planning) and standardization of its network and desktop applications completed in 1998, the Company believes its information systems in its headquarters are in compliance with year 2000. Similarly, the Company's remote locations, in New York and in the Netherlands, have completed an update of its information systems and are also believed to be in compliance. The Company's manufacturing facility in Taiwan is in its final stages of upgrading its information systems, including ERP, and is expected to be in compliance by June 1999. In 1998, the Company purchased and put into operation a new SMT (surface mount technology) line in its manufacturing facility where substantially all of its manufacturing will be performed in 2000 and beyond. Certification from the manufacturer of the equipment has not yet been received. However, due to the newness of the equipment, the Company believes that embedded chips in this equipment are likely to be year 2000 compliant. The Company's telecommunication systems, security system, electrical power system and other mission critical systems in its operational infrastructure in all locations are currently being assessed for compliance. Completion of this phase of the Program is expected in June 1999. The Company is conducting a survey of all its suppliers and third parties for their year 2000 readiness and is expected to complete this assessment by June 1999. The Company is currently developing a plan to address circumstances of non-compliance of a supplier or third party. A contingency plan is being established and is expected to be completed by June 1999. As the Company's Program is substantially complete, the incremental cost to fully complete the Program in 1999 is expected to be less than $100,000. Despite the Company's efforts (1) to identify the Year 2000 compliance of its products and the effects of any non-compliance, (2) to assess and mitigate non-compliance of its information systems and its operational infrastructure, and (3) to address suppliers readiness, the Company cannot be certain that all areas have been identified or that the solutions implemented to address non-compliance will be successful. There remains a risk that the failures and difficulties encounter in the Program may disrupt operations and cause material adverse effects on the Company's result of operations and financial condition. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital was $26.1 million and $34.4 million at December 31, 1998 and December 31, 1997, respectively, and the current ratio (ratio of current assets to current liabilities) was 6.7 to 1 and 5.8 to 1, respectively. The aggregate balance of cash, cash equivalents and short-term investments, which decreased to $23.4 million at December 31, 1998 from $30.5 million at December 31, 1997, was used primarily to finance the Company's operations and capital expenditures. In 1998, net cash used in operating activities was $4.2 million, which was principally attributed to the net loss for the year of $7.9 million, partially offset by an income tax refund of $4 million. In 1997, net cash used in operating activities was $6.9 million, which was attributed to the net loss for the year of $22.4 million, partially offset by non-cash charges of $12.1 million in total and a decrease in inventories of $6.8 million. The Company expects the deficiency in cash flow from operations to continue until after the volume shipment of the NuWave products starts in mid-1999 and overall sales begin to improve. The Company's capital expenditures totaled $2.6 million and $2.3 million in 1998 and 1997, respectively, and were related to purchases of equipment used in production and development activities and other computer software and equipment for the upgrade and enhancement of the information systems. In 1999, the Company plans to incur capital expenditures of approximately $1.3 million. The Company's principal sources of liquidity are its cash, cash equivalents and short-term investments. The Company also has a revolving line of credit agreement, which provides for borrowings up to $5 million, none of which has been drawn down. The Company was in compliance with all financial covenants under the line-of-credit agreement. The Company believes that its current balance of cash, cash equivalents, and short-term investments and its borrowing capacity are sufficient to satisfy the Company's working capital and capital expenditure requirements for the next 12 months. BUSINESS RISKS In addition to the factors addressed in the preceding sections, certain characteristics and dynamics of the Company's markets, technologies and operations create risks to the Company's long-term success and to predictable quarterly results. These risks will also affect the Company's ability to achieve the results anticipated by the forward-looking statements contained in this report. The Company's quarterly results have in the past varied and are expected in the future to vary 15 significantly as a result of factors such as the timing and shipment of significant orders, new product introductions or technological advances by the Company and its competitors, market acceptance of new or enhanced versions of the Company's products, changes in pricing policies by the Company and its competitors, the mix of distribution channels through which the Company's products are sold, the mix of products sold, the accuracy of resellers' and OEM's forecast of end-user demand, the ability of the Company to obtain sufficient supplies of sole or limited source components for the Company's products, the ability of turnkey manufacturers to meet the Company's demand, and general economic conditions. In response to competitive pressures or new product introductions, the Company may take certain pricing or marketing actions that could materially and adversely affect the Company's operating results. In the event of a reduction in the prices of its products, the Company has committed to providing retroactive price adjustments on inventories held by its distributors, which could have the effect of reducing margins and operating results. In addition, changes in the mix of products sold and the mix of distribution channels through which the Company's products are sold may cause fluctuations in the Company's gross margins. The Company's expense levels are based, in part, on its expectations of its future revenue and, as a result, net income would be disproportionately affected by a reduction in revenue. Due to the potential quarterly fluctuation in operating results, the Company believes that quarter-to-quarter comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance. The markets for the Company's products are characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and short product life cycles. These changes can adversely affect the business and operating results of industry participants. The Company's success will depend upon its ability to enhance its existing products and to develop and introduce, on a timely and cost-effective basis, new products that keep pace with technological developments and emerging industry standards and address increasingly sophisticated customer requirements. The inability to develop and manufacture new products in a timely manner, the existence of reliability, quality or availability problems in the products or their component parts, failure by its foundry to fabricate and supply proprietary ASICs, the failure to obtain reliable subcontractors for volume production and testing of mature products, or the failure to achieve market acceptance would have a material adverse effect on the Company's business and operating results. The markets in which the Company competes are also characterized by intense competition. Several of the Company's competitors have significantly broader product offerings and greater financial, technical, marketing and other resources and finished installed bases than the Company. These larger competitors may also be able to obtain higher priority for their products from distributors and other resellers that carry products of many companies. A number of the Company's competitors were recently acquired, which is likely to permit these competitors to devote significantly greater resources to the development and marketing of competitive products. These competitive pressures could adversely affect the Company's business and operating results. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's cash equivalents and short-term investments ("investments") are exposed to financial market risk due to fluctuation in interest rates and foreign exchange rates, which may affect its interest income and the fair values of its investments. The Company manages the exposure to financial market risk by performing ongoing evaluation of its investment portfolio and investing in short-term investment grade corporate securities, which mature within the next 12 months. In addition, the Company does not use investments for trading or other speculative purposes. The effect of fluctuation in foreign exchange rates is immaterial as the majority of the investments held by its foreign subsidiaries are denominated in US dollars. For the year ended December 31, 1998, the average rate of return on the investments was approximately 5.5%. A hypothetical 10% fluctuation in interest rate in 1999 may change the interest income by approximately $130,000. Due to the short maturities of its investments, the carrying value approximates the fair value, and the impact of the fluctuation in interest rate to the carrying value is deemed immaterial. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Financial Statements: Page Report of Independent Accountants....................................... 18 Consolidated Balance Sheets at December 31, 1998 and 1997............... 19 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996.................................................. 20 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996..................................... 21 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996.................................................. 22 Notes to Consolidated Financial Statements.............................. 23 Financial Statement Schedule: For the three years ended December 31, 1998, 1997 and 1996 Schedule II - Valuation and Qualifying Accounts...................... 38 Schedules other than those listed above have been omitted since either they are not required or the information is included in the financial statements included herewith. 17 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Network Peripherals Inc. In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the consolidated financial position of Network Peripherals Inc. and its subsidiaries at December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP San Jose, California January 25, 1999 18 NETWORK PERIPHERALS INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
December 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 5,537 $ 16,094 Short-term investments 17,814 14,371 Accounts receivable, net of allowance for doubtful accounts and returns; 1998, $523, and 1997, $1,184 3,430 5,170 Inventories 3,124 1,417 Income tax refund receivable -- 3,983 Prepaid expenses and other current assets 742 614 ---------------------------- Total current assets 30,647 41,649 Property and equipment, net 4,560 3,876 Other assets 342 364 ---------------------------- $ 35,549 $ 45,889 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,450 $ 1,671 Accrued liabilities 2,127 5,539 ---------------------------- Total current liabilities 4,577 7,210 ---------------------------- Commitments (Note 5) Stockholders' equity: Preferred Stock, $0.001 par value, 2,000,000 shares authorized; no shares issued or outstanding -- -- Common Stock, $0.001 par value, 20,000,000 shares authorized; 1998, 12,292,000, and 1997, 12,252,000 shares issued and outstanding 12 12 Additional paid-in capital 64,060 63,878 Accumulated deficit (33,100) (25,211) ---------------------------- Total stockholders' equity 30,972 38,679 ---------------------------- $ 35,549 $ 45,889 ============================ The accompanying notes are an integral part of these financial statements.
19 NETWORK PERIPHERALS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $ 28,585 $ 34,798 $ 53,080 Cost of sales 17,250 25,341 28,590 ---------------------------------------------- Gross profit 11,335 9,457 24,490 ---------------------------------------------- Operating expenses: Research and development 11,485 9,757 8,570 Marketing and selling 6,010 13,242 11,849 General and administrative 3,234 3,982 3,378 Acquired research and development in process and product integration costs -- 6,462 13,732 Restructuring expense -- 3,662 -- ---------------------------------------------- Total operating expenses 20,729 37,105 37,529 ---------------------------------------------- Loss from operations (9,394) (27,648) (13,039) Interest income 1,505 1,680 1,745 ---------------------------------------------- Loss before income taxes (7,889) (25,968) (11,294) Provision for (benefit from) income taxes -- (3,526) 608 ---------------------------------------------- Net loss $ (7,889) $(22,442) $(11,902) ============================================== Net loss per share: Basic $ (0.64) $ (1.85) $ (1.01) ============================================== Diluted $ (0.64) $ (1.85) $ (1.01) ============================================== Weighted average common shares: Basic 12,281 12,154 11,760 ============================================== Diluted 12,281 12,154 11,760 ============================================== The accompanying notes are an integral part of these financial statements.
20 NETWORK PERIPHERALS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
Retained Additional Earnings Common Stock Paid-In Notes (Accumulated Shares Amount Capital Receivable Deficit) Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 11,268 $ 11 $ 56,579 $ (14) $ 9,133 $ 65,709 Repayment of stockholders' notes receivable -- -- -- 14 -- 14 Issuance of Common Stock upon exercise of stock options 200 -- 228 -- -- 228 Issuance of Common Stock under employee stock purchase plan 45 -- 385 -- -- 385 Income tax benefit associated with nonqualified stock options -- -- 28 -- -- 28 Issuance of Common Stock for acquisition of NuCom Systems 441 1 5,341 -- -- 5,342 Foreign currency translation -- -- 53 -- -- 53 adjustment Net loss -- -- -- -- (11,902) (11,902) -------------------------------------------------------------------------------- Balance at December 31,1996 11,954 12 62,614 -- (2,769) 59,857 Issuance of Common Stock upon exercise of stock options 224 -- 410 -- -- 410 Issuance of Common Stock under employee stock purchase plan 74 -- 451 -- -- 451 Income tax benefit associated with nonqualified stock options -- -- 403 -- -- 403 Net loss -- -- -- -- (22,442) (22,442) -------------------------------------------------------------------------------- Balance at December 31, 1997 12,252 12 63,878 -- (25,211) 38,679 Issuance of Common Stock upon exercise of stock options 8 -- 38 -- -- 38 Issuance of Common Stock under employee stock purchase plan 32 -- 144 -- -- 144 Net loss -- -- -- -- (7,889) (7,889) -------------------------------------------------------------------------------- Balance at December 31, 1998 12,292 $ 12 $ 64,060 $ -- $(33,100) $ 30,972 ================================================================================ The accompanying notes are an integral part of these financial statements.
21 NETWORK PERIPHERALS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (in thousands)
Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net loss $ (7,889) $(22,442) $(11,902) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,960 1,969 2,111 Amortization of goodwill 40 1,350 665 Acquired research and development in process -- 6,462 13,032 Deferred income taxes -- 2,289 (56) Changes in assets and liabilities: Accounts receivable 1,740 3,189 (1,845) Inventories (1,707) 6,811 (664) Income tax refund receivable 3,983 (3,580) -- Prepaid expenses and other assets (146) 1,026 862 Accounts payable 779 (1,321) 1,439 Accrued liabilities (2,956) (2,644) 1,623 -------------------------------------------- Net cash provided by (used in) operating activities (4,196) (6,891) 5,265 -------------------------------------------- Cash flows from investing activities: Purchases of property and equipment (2,644) (2,270) (2,927) Purchases of short-term investments (3,443) -- -- Proceeds from sales or maturity of short-term investments -- 7,979 2,581 Cash paid for acquisition, net of cash acquired -- (6,449) (10,401) Holdback amount from acquisition (456) (659) 1,115 -------------------------------------------- Net cash used in investing activities (6,543) (1,399) (9,632) -------------------------------------------- Cash flows from financing activities: Proceeds from issuance of Common Stock 182 861 613 Repayment of stockholders' notes receivable -- -- 14 -------------------------------------------- Net cash provided by financing activities 182 861 627 -------------------------------------------- Effect of exchange rate changes on cash -- -- 53 -------------------------------------------- Net decrease in cash and cash equivalents (10,557) (7,429) (3,687) Cash and cash equivalents, beginning of year 16,094 23,523 27,210 -------------------------------------------- Cash and cash equivalents, end of year $ 5,537 $ 16,094 $ 23,523 ============================================ Supplemental disclosure of cash flow information Cash paid during the year for: Income taxes $ 67 $ 158 $ 245 Non-cash transactions: Income tax benefit associated with nonqualified stock $ -- $ 403 $ 28 options Common Stock issued for acquisition of NuCom $ -- $ -- $ 5,342 The accompanying notes are an integral part of these financial statements.
22 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - THE COMPANY Network Peripherals Inc., a Delaware corporation (the "Company"), designs, develops, and manufactures high performance networking solutions, which it markets primarily to original equipment manufacturers, distributors, value-added resellers and system integrators. The Company's solutions are designed for use in workgroups, wiring closets and backbones. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash, Cash Equivalents and Short-Term Investments The Company considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. The Company's short-term investments, which consist of debt securities with maturities greater than 90 days and less than one year, have been classified as available-for-sale. For the years ended December 31, 1998 and 1997, there were no material unrealized gains or losses. Substantially all short-term investments are held in the Company's name by major financial institutions. Revenue Recognition Revenue from product sales is recognized upon product shipment, provided that no significant obligations remain and collectability is probable. The Company provides to certain distributors limited rights of return and price protection on unsold inventory when specific conditions exist. Provisions for estimated costs of warranty repairs, returns and allowances, and retroactive price adjustments are recorded at the time products are shipped (see Sales Reserves below). Funding under certain development contracts is recognized based upon the achievement of specified contract milestones. Such funding is recognized as a reduction of the related development costs and totaled approximately $217,000 and $556,000 in 1997 and 1996, respectively. No such funding was recognized in 1998. Sales Reserves The Company provides allowances for accounts receivables deemed uncollectible and for sales returns and other credits, including credits for retroactive price adjustments on sales transacted within 90 days prior to the period-end. As of December 31, 1998 and 1997, the Company's allowances for such potential events totaled approximately $523,000 and $1,184,000, respectively. As a percentage of sales transacted within 90 days prior to December 31, 1998 and 1997, the allowances for sales returns and other credits were 8% and 18%, respectively. 23 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, cash equivalents, short-term investments and trade receivables. The Company's cash investment policies limit investments to those that are short-term and low risk. Concentration of credit risk with respect to trade receivables is generally limited due to the large number of customers comprising the Company's customer base, their dispersion across many different geographies, the Company's on-going evaluation of its customers' credit worthiness, and the established long-term relationship with certain customers. Inventories Inventories are stated at the lower of cost, using the first-in, first-out method, or market. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful life of the asset, typically three years. Depreciation of the Enterprise Resource Planning systems, the information systems infrastructure, and certain manufacturing equipment is based on an estimated useful life of five years. Goodwill Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired and is amortized on a straight-line basis over the expected period of benefit, generally five years. Periodically, the Company evaluates the goodwill for impairment and estimates the future undiscounted cash flows of the acquired business to ensure that the carrying value has not been impaired. As of December 31, 1998 and 1997, goodwill, net of accumulated amortization, was $133,000 and $173,000, respectively, and was included in other assets. Software Development Costs The Company's software products are integrated into its hardware products and are typically available for general release to customers within 30 days after technological feasibility has been achieved. Accordingly, the production costs incurred after the establishment of technological feasibility and before general release to customers are immaterial, thus the Company does not capitalize any software development costs. Income Taxes The Company accounts for income taxes under the liability method, which recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their financial statement reported amounts. Foreign Currency Translation 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. No such matching contributions were made in 1998, 1997 and 1996. The Company does not have postretirement or postemployment benefit plans; therefore, Statements of Financial Accounting Standards ("SFAS") No. 87, 106 and 112 regarding pension, other postretirement and postemployment benefit plans do not affect the Company's financial statements. 24 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock-based Compensation The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), as permitted under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under APB 25, if the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Net Income Per Share Basic earnings per share ("EPS") are computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation including stock options, restricted stock awards, warrants, and other convertible securities using the treasury stock method. At December 31, 1998, options to purchase 2,798,603 shares of the Company's common stock were outstanding. During 1998, the Company incurred losses, such that the inclusion of potential common shares would result in an antidilutive per share amount. As such, no adjustment is made to the basic EPS to arrive at the diluted EPS. Recently Issued Accounting Standards In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for financial statements issued for periods beginning after December 15, 1997. SFAS 131 establishes standards for public companies to report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. In accordance with the provisions of SFAS 131, the Company operated in one business segment in 1998 and 1997. Reclassifications Certain reclassifications have been made to the prior years' amounts in order to conform to the current year's presentation. 25 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - BALANCE SHEET COMPONENTS (in thousands) December 31, 1998 1997 - -------------------------------------------------------------------------------- Cash, cash equivalents, and short-term investments: Cash and cash equivalents Cash and money market accounts $ 2,508 $ 2,532 Corporate debt securities 3,029 13,562 -------------------- 5,537 16,094 Short-term investments Corporate debt securities 17,814 14,371 -------------------- $ 23,351 $ 30,465 ==================== Inventories: Raw materials $ 882 $ 158 Work-in-process 572 898 Finished goods 1,670 361 -------------------- $ 3,124 $ 1,417 ==================== Property and equipment: Computer and equipment $ 8,267 $ 6,918 Furniture and fixtures 920 895 Leasehold improvements 306 303 -------------------- 9,493 8,116 Accumulated depreciation (4,933) (4,240) -------------------- $ 4,560 $ 3,876 ==================== Accrued liabilities: Salaries and benefits $ 973 $ 1,750 Warranty 450 513 Co-op advertising and market development funds 386 298 Royalty 250 746 Reserve for contract settlements -- 1,000 Restructuring expense -- 597 Holdback amount from acquisition -- 456 Other 68 179 -------------------- $ 2,127 $ 5,539 ==================== 26 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - LINE OF CREDIT The Company currently has a $5 million revolving bank line of credit, which expires on July 31, 1999. Borrowings under the line of credit bear interest at the lower of the bank's prime rate or the London Interbank Offered Rate plus 2.5% and are secured by the Company's receivables, inventory, and other tangible assets. There were no borrowings under the line of credit in 1998 and 1997. As of December 31, 1998, the Company was in compliance with the financial covenants required by the line of credit agreement. NOTE 5 - COMMITMENTS The Company leases its corporate headquarters under an operating lease that expires in October 2000. The Company also has research and development facilities in New York and manufacturing facilities in Taiwan under various operating leases expiring in August 2002 and May 2001, respectively. Rent expense for all Company facilities was $764,000, $931,000, and $868,000 in 1998, 1997, and 1996, respectively. Future minimum lease payments as of December 31, 1998 are as follows (in thousands): Years ending December 31, 1999 $ 754 2000 689 2001 250 2002 67 ------- $ 1,760 ======= The Company maintains letter-of-credit facilities of $3 million in total with two financial institutions. Approximately $60,000 of letters of credit was issued and outstanding at December 31, 1998. The Company has entered into licensing agreements with third parties to use certain technologies in the Company's products. Under the terms of the license agreements, the Company pays a royalty based upon a percentage of the sales price or units shipped. Royalty expenses incurred are charged to cost of sales in the period of the related sales and are payable in quarterly installments. NOTE 6 - CAPITAL STOCK Employee Stock Purchase Plan Effective May 1998, the Company terminated the Employee Stock Purchase Plan (the "Plan"), which allowed eligible employees to purchase the Company's Common Stock at a discount through payroll deductions. Prior to the termination of the Plan, the Company reserved 250,000 shares of Common Stock for issuance under the Plan, and the Company has issued 223,606 shares of Common Stock for an aggregate purchase price of $1,434,000. Stock Option Plans 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 2,500,000 shares of the Company's Common Stock for issuance under the 1997 Plan. Pursuant to the 1997 Plan, the exercise price per share of each stock option is determined by the Company's Board of Directors, provided that (i) the exercise price for an incentive stock option is not less than the fair market value of a share of Common Stock on the date of the grant and (ii) the exercise price for a nonstatutory stock option is not less than 85% of the fair market value of a share of Common Stock on the date of the grant. Options under the 1997 Plan vest over a period determined by the Board of Directors, which is generally four years. As of December 31, 1998, options to purchase 1,795,093 shares of Common Stock were outstanding; 704,907 shares were available for future grants; and 2,500,000 shares were authorized but unissued. 27 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Upon adoption of the 1997 Plan in April 1997, the Company terminated the 1993 Stock Option Plan (the "1993 Plan") and the 1996 Nonstatutory Stock Option Plan (the "1996 Plan"). No further stock options were granted under the 1993 Plan and the 1996 Plan. Outstanding options and shares issued upon the exercise of options granted continue to be governed by the terms and conditions of the respective plans. As of December 31, 1998, options to purchase a total of 958,510 shares of Common Stock under the 1993 Plan and the 1996 Plan were outstanding. The 1994 Outside Directors Stock Option Plan (the "1994 Plan"), as amended, which provides for the automatic granting of nonqualified stock options to directors of the Company ("Outside Director"), has a total of 150,000 shares reserved for issuance. Pursuant to the 1994 Plan, the Company grants to each new Outside Director an option to purchase 15,000 shares of Common Stock and to each Outside Director an option to purchase 5,000 shares of Common Stock on the date of each annual meeting of stockholders. The exercise price of the stock options will be the fair market value of the Common Stock on the date of grant, and options vest over a period of four years. At December 31, 1998, options to purchase 45,000 shares of Common Stock were outstanding; 105,000 shares were available for future grants; and 150,000 shares of Common Stock were authorized but unissued under the 1994 Plan. The Company has elected to continue to follow APB 25 in accounting for its employee stock options and adopted the disclosure-only requirements of SFAS 123. SFAS 123 requires the disclosure of pro forma net income and earnings per share as if the Company had accounted for its employee stock options under the fair value method in accordance with SFAS 123. The fair value of these options is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: zero dividend yield; expected volatility of 82.35% in 1998, 77.24% in 1997, and 69.36% in 1996; risk-free interest rate of 4.64% in 1998, 5.36% in 1997 and 5.48% in 1996; and all options are exercised at vesting. Had compensation cost for the Company's employee stock-based plans been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS 123, the Company's net loss and net loss per share would have been as follows (in thousands, except per share amount): 1998 1997 1996 - -------------------------------------------------------------------------------- Net loss - as reported $ (7,889) $ (22,442) $ (11,902) Net loss - pro forma (11,368) (28,003) (14,782) Net loss per share: Basic - as reported (0.64) (1.85) (1.01) Basic - pro forma (0.93) (2.30) (1.26) Diluted - as reported (0.64) (1.85) (1.01) Diluted - pro forma (0.93) (2.30) (1.26) Due to the broad decline in the market price of the Company's Common Stock during 1997, a substantial amount of stock options granted had exercise prices above the current market price. On July 25, 1997 and subsequently October 31, 1997, the Company offered stock option plan participants the right to replace any remaining unexercised stock options with an equal number of options at an exercise price equal to the closing market price on such dates. 28 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 1998:
Outstanding Exercisable -------------------------------------------- ------------------------ Weighted Average Weighted Weighted Range of Remaining Contractual Average Average Exercise Prices Shares Life (in years) Exercise Price Shares Exercise Price --------------- -------------------------------------------- ------------------------ $ 0.30 - $ 3.00 453,950 8.89 $ 2.36 74,900 $ 0.35 3.88 - 4.94 2,121,133 8.48 4.68 775,642 4.85 5.00 - 7.50 149,077 8.97 5.95 36,647 5.86 7.63 - 9.13 48,443 8.86 8.05 10,051 8.17 11.63 - 15.00 26,000 7.51 13.69 16,082 13.51 --------- ------- 2,798,603 8.57 4.52 913,322 4.71 ========= =======
Stock options generally expire in 10 years from the date they are granted. The following table summarizes stock option activities for all of the Company's stock option plans:
Options Weighted Average Outstanding Exercise Price - --------------------------------------------------------------------------------------- Balance at December 31, 1995 1,120,126 $ 10.19 Granted 2,905,155 14.72 Exercised (199,698) 1.14 Canceled (995,216) 15.76 ---------- Balance at December 31, 1996 (555,417 shares exercisable at a weighted average price of $8.47 per share) 2,830,367 13.52 Granted 1,592,700 7.31 Exercised (224,160) 1.89 Canceled (1,602,345) 11.83 ---------- Balance at December 31, 1997 (312,413 shares exercisable at a weighted average price of $5.31 per share) 2,596,562 5.41 Granted 1,298,150 4.11 Exercised (8,747) 4.23 Canceled (1,087,362) 6.17 ---------- Balance at December 31, 1998 (913,322 shares exercisable at weighted average price of $4.71 per share) 2,798,603 4.52 ==========
The weighted average estimated grant date fair value, as defined by SFAS 123, for options granted under the stock option plans during 1998, 1997 and 1996 were $1.98, $3.29 and $5.66, respectively. The weighted average estimated grant date fair value, as defined by SFAS 123, for purchase rights granted under the employee stock purchase plan during 1998, 1997 and 1996 were $1.96, $1.43 and $2.89, respectively. 29 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 - INCOME TAXES The following is a geographical breakdown of consolidated loss before income taxes (in thousands): Years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Domestic $ (7,302) $(21,761) $ (1,626) Foreign (587) (4,207) (9,668) -------------------------------------------- $ (7,889) $(25,968) $(11,294) ============================================ Provision for (benefit from) income taxes consists of the following (in thousands): Years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Current: Federal $ -- $(5,815) $ 174 State -- -- 54 Foreign -- -- 436 ----------------------------------------- -- (5,815) 664 ----------------------------------------- Deferred: Federal -- 1,993 (46) State -- 296 (10) ----------------------------------------- -- 2,289 (56) ----------------------------------------- $ -- $(3,526) $ 608 ========================================= The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory income tax rate to pre-tax loss as follows:
Years ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Federal statutory rate (35.0%) (35.0%) (35.0%) State tax, net of federal impact -- (6.0) 0.3 Research and development tax credits -- (0.8) (1.1) Tax-exempt interest income -- (1.0) (4.5) Provision for valuation allowance on deferred tax assets 35.0 22.1 -- Nondeductible acquisition costs -- 8.6 45.6 Other -- (1.5) 0.1 ------------------------------------- -- (13.6%) 5.4% =====================================
Deferred tax assets consist of the following (in thousands): December 31, 1998 1997 - -------------------------------------------------------------------------------- Net operating loss and credits carryforwards $ 3,920 $ 1,575 Reserves and accruals not currently deductible 1,104 1,947 Inventory 1,437 1,789 Other 275 432 -------------------- Gross deferred tax assets 6,736 5,743 Valuation allowance (6,736) (5,743) -------------------- Net deferred tax assets $ -- $ -- ==================== 30 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Management believes that, based on a number of factors, it is not more likely than not that the deferred tax assets will be utilized, such that a full valuation allowance has been recorded. As of December 31, 1998, the Company has Federal net operating loss carryforwards of approximately $8.5 million which will expire beginning in 2013. For state tax purposes, the Company has net operating loss carryforwards of approximately $8.5 million which will expire beginning in 2002. NOTE 8 - ACQUISITIONS Effective April 29, 1997, the Company acquired NetVision Corporation ("NetVision"), a privately held company engaged in the development of very high bandwidth LAN switching and gigabit Ethernet technologies, at a cost of $6.5 million, including payments to NetVision stockholders, the assumption of certain liabilities, and transaction expenses. Effective March 21, 1996, the Company completed its acquisition of NuCom Systems, Inc. ("NuCom"), a Taiwan-based company, by purchasing all the outstanding shares of NuCom in exchange for $11.2 million in cash, 440,748 shares of the Company's Common Stock valued at $5.3 million, plus product integration costs for an aggregate purchase price of $17.1 million. These transactions were accounted for using the purchase method, and the purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair market values at the date of acquisition. In each transaction, the research and development in process represented the estimated current fair market value of specified technologies which had not reached technological feasibility and had no future uses. The results of the operations acquired were included with those of the Company from the date of acquisition. The allocation of the purchase price was as follows (in thousands): Acquisition of NetVision: Research and development, in process $ 6,462 Goodwill 200 Assets 44 Liabilities assumed (257) -------- Total $ 6,449 ======== Acquisition of NuCom: Research and development, in process $ 13,032 Other intangible assets 1,716 Cash and cash equivalents 1,357 Current assets 3,138 Non-current assets 613 Property and equipment 479 Current liabilities assumed (3,235) -------- Total $ 17,100 ======== The total purchase price is as follows: Cash payment $ 11,158 Issuance of common stock 5,342 Other expenses 600 -------- Total $ 17,100 ======== 31 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The pro forma combined results of operations of the Company, NetVision and NuCom for the years ended December 31, 1997 and 1996, as if the acquisitions had occurred at the beginning of the respective years, after giving effect to certain pro forma adjustments, are as follows (in thousands, except per share amount): 1997 1996 - -------------------------------------------------------------------------------- Net sales $ 34,798 $ 53,080 ============================ Net income (loss) $ (15,214) $ 1,884 ============================ Net income (loss) per share: Basic $ (1.29) $ 0.17 ============================ Diluted $ (1.29) $ 0.16 ============================ The foregoing pro forma results of operations excluded the amortization of goodwill and the write-off of acquired research and development in process resulting from the acquisitions. NOTE 9 - RESTRUCTURING In the third quarter of 1997, the Company announced and began to implement a restructuring plan aimed at reducing costs and restoring profitability to the Company's operations. The restructuring plan was necessitated by decreased demand for the Company's products and the Company's adoption of a new strategic direction. These actions resulted in a net charge of approximately $3.7 million to the consolidated statement of operations in 1997. The restructuring actions principally consisted of termination of approximately 70 employees, closure of certain sales and manufacturing facilities, cancellation of the related leases, and write-off of excess manufacturing equipment and goodwill. The Company completed the restructuring in the second quarter of 1998. The following table lists the restructuring accrual activities from July 1, 1997 to December 31, 1998 (in thousands):
Reduction Write-off Write-off of in Work Closure of Of Excess Goodwill Force Facilities Assets Other Total ---------------------------------------------------------------------------------- Reserve provided $ 962 $ 500 $ 200 $ 1,500 $ 500 $ 3,662 Reserve utilized in third quarter (962) -- (100) -- -- (1,062) Reserve utilized in fourth quarter -- (373) (8) (1,122) (500) (2,003) ---------------------------------------------------------------------------------- Balance at December 31, 1997 -- 127 92 378 -- 597 Reserve utilized in first quarter -- (354) (22) -- -- (376) Reserve utilized in second quarter -- (221) -- -- -- (221) ---------------------------------------------------------------------------------- Balance at December 31, 1998 $ -- $ (448) $ 70 $ 378 $ -- $ -- ==================================================================================
NOTE 10 - SALES BY GEOGRAPHY Export sales to customers outside of North America represented 31%, 26%, and 21% of the Company 's net sales for the years ended December 31, 1998, 1997 and 1996, respectively. As a percentage of net sales, export sales to Europe and Asia for 1998, 1997 and 1996 were 10% and 21%; 11% and 15%; and 8% and 13%, respectively. Sales to Taiwan accounted for 17% of the Company's net sales in 1998. No one foreign country accounted for more than 10% of the Company's net sales in 1997 and 1996. 32 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 - CONCENTRATIONS In 1998, the Company purchased more than $7 million of its finished good inventories from a turnkey manufacturer. In the event that this turnkey manufacturer fails to deliver the required volumes or decides to discontinue its production for the Company, management believes that other subcontractors or the Company's manufacturing facility in Taiwan can provide for comparable production capacities. However, an abrupt change in turnkey manufacturer may cause delay in production and possibly loss in sales, which could adversely impact the Company's operating results. The Company's chairman of the Board of Directors is a director of this turnkey manufacturer. The following table summarizes the percentage of net sales accounted for by the Company's significant customers with sales of 10% or more: Years ended December 31, 1998 1997 1996 --------------------------------------------------------- Customer A 35% 39% 26% Customer B 11% -- -- Customer C -- -- 15% Customer D -- -- 12% ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There is no reportable information under this item. 33 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item regarding directors is included under "Election of Directors" in the Company's Proxy Statement for the 1999 Annual Meeting. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is included under "Compensation of Executive Officers" and "Report of the Compensation Committee on Executive Compensation" in the Company's Proxy Statement for the 1999 Annual Meeting. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included under "Share Ownership by Principal Stockholders and Management" and "Election of Directors" in the Company's Proxy Statement for the 1999 Annual Meeting. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is included under "Compensation Committee Interlocks and Insider Participation Decisions" in the Company's Proxy Statement for the 1999 Annual Meeting. 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The information required by subsections (a)1 and (a)2 of this item are included in the response to Item 8 of Part II of this Annual Report on Form 10-K. (a) Exhibits -------- 3.1(1) Amended and Restated Certificate of Incorporation. 3.2(1) By-Laws. 4.1(1) Fourth Amended and Restated Investor Rights Agreement dated July 15, 1993. 10.1(1) Form of Indemnity Agreement for directors and officers. 10.2(1) Amended and Restated 1993 Stock Option Plan and forms of agreement thereunder. 10.4(1) 1994 Outside Directors Stock Option Plan and form of agreement thereunder. 10.9(1) Facilities Lease dated August 8, 1991 with John Arrillaga, Trustee, or his Trustee, or his Successor Trustee UTA dated 7/20/77, as amended, and Richard T. Peery, Trustee, or his Successor Trustee UTA dated 7/20/77, as amended. 10.12(1)(2) OEM Purchase Agreement with Network General Corporation dated March 4, 1991. 10.14(3) Amendment No. 1, dated June 1, 1994, to Facilities Lease with John Arrillaga, Trustee, or his Successor Trustee UTA dated 7/20/77, as amended, and Richard T. Peery, Trustee, or his Successor Trustee UTA dated 7/20/77, as amended. 10.18(4) Purchase Agreement among Network Peripherals Inc., Network Peripherals, Ltd., NuCom Systems, Inc., and the shareholders of NuCom, dated January 31, 1996. 10.22(5) Line of Credit Agreement with Sumitomo Bank dated October 2, 1996. 10.23(5) Agreement with Glenn Penisten dated May 15, 1996. 10.26(7) Purchase Agreement among Network Peripherals Inc., NetVision Corporation, and the shareholders of NetVision, dated April 29, 1997. 10.28(6) Amended 1994 Outside Directors Option Plan. 10.29(8) Development and Purchase Agreement with Sun Microsystems, Inc., dated February 25, 1994. 10.30(8) Corporate Supply Agreement with Sun Microsystems, Inc., dated March 31, 1997. 10.31(9) Modification Agreement, dated August 29, 1997, to amend certain terms of the Line of Credit Agreement with Sumitomo Bank of California. 10.32(9) Second Modification Agreement, dated November 17, 1997, to amend certain terms of the Line of Credit Agreement with Sumitomo Bank of California. 10.33(9) Amended and Restated Salary Continuation Agreement with Pauline Lo Alker dated October 31, 1997. 10.35(9) Salary Continuation Agreement with Glenn Penisten dated October 31, 1997. 10.37(9) Salary Continuation Agreement with James Sullivan dated October 31, 1997. 10.39 Amended 1997 Stock Plan. 10.40 Third Modification Agreement, dated August 18, 1998, to amend certain terms of the Line of Credit Agreement with Sumitomo Bank of California. 10.41 Employment Agreement with William Rosenberger dated June 11, 1998, and subsequent amendment dated October 19, 1998. 10.42 Salary Continuation Agreement with Jerry McDowell dated October 19, 1998. 10.43 Salary Continuation Agreement with Wilson Cheung dated January 13, 1999. 10.44 Salary Continuation Agreement with Robert Zecha dated January 13, 1999. 21 Subsidiaries of the Registrant. 23.1(9) Consent of Independent Accountants dated March 27, 1998. 23.2 Consent of Independent Accountants dated March 22, 1999. 27 Financial Data Schedule. 35 (b) Reports on Form 8-K None (1) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (File No. 33-78350). (2) Confidential treatment has been granted as to part of this Exhibit. (3) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1994 (File No. 0-23970). (4) Incorporated by reference to the Registrant's report on Form 8-K filed on March 31, 1996 (File No. 0-23970). (5) Incorporated by reference to the corresponding exhibit in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-23970). (6) Incorporated by reference to the corresponding exhibit in the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 0-23970). (7) Incorporated by reference to the Registrant's report on Form 8-K filed on May 14, 1997 (File No. 0-23970). (8) The Registrant has filed portions of these agreements separately with the Commission and has requested that those portions be afforded confidential treatment. (9) Filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997. 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NETWORK PERIPHERALS INC. By: \s\ WILSON CHEUNG ----------------------------- Wilson Cheung Vice President of Finance and Chief Financial Officer (Authorized Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title \s\ WILLIAM ROSENBERGER President, Chief Executive Officer -------------------------- and Director (Principal Executive William Rosenberger Officer) \s\ WILSON CHEUNG Vice President of Finance and -------------------------- Chief Financial Officer Wilson Cheung (Principal Financial and Accounting Officer) \s\ STEVE BELL Director -------------------------- Steve Bell \s\ MICHAEL GARDNER Director -------------------------- Michael Gardner \s\ CHARLES HART Director -------------------------- Charles Hart \s\ GLENN PENISTEN Chairman of the Board -------------------------- Glenn Penisten 37 NETWORK PERIPHERALS INC. VALUATION AND QUALIFYING ACCOUNTS (in thousands) SCHEDULE II
Additions ------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End of Year Expenses Accounts Deductions of Year - ------------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, 1996 Allowance for doubtful accounts $ 200 $-- $ 21 $ (12) $ 209 Allowance for sales returns and other credits 538 -- 6,743 (6,336) 945 ------------------------------------------------------------------ Total allowances for doubtful accounts and sales returns 738 -- 6,764 (6,348) 1,154 Year ended December 31, 1997 Allowance for doubtful accounts 209 -- 138 (49) 298 Allowance for sales returns and other credits 945 -- 3,593 (3,652) 886 ------------------------------------------------------------------ Total allowances for doubtful accounts and sales returns 1,154 -- 3,731 (3,701) 1,184 Year ended December 31, 1998 Allowance for doubtful accounts 298 -- 49 (264) 83 Allowance for sales returns and other credits 886 -- 187 (633) 440 ------------------------------------------------------------------ Total allowances for doubtful accounts and sales returns $ 1,184 $-- $ 236 $ (897) $ 523 ==================================================================
38 EX-10.39 2 1997 STOCK PLAN NETWORK PERIPHERALS INC. 1997 STOCK PLAN (As Amended Through March 24, 1998) 1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN. 1.1 Establishment. The Network Peripherals Inc. 1997 Stock Plan (the "Plan") is hereby established effective as of February 18, 1997 (the "Effective Date"). 1.2 Purpose. The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. 1.3 Term of Plan. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Awards granted under the Plan have lapsed. However, all Incentive Stock Options shall be granted, if at all, within ten (10) years from the earlier of the date the Plan is adopted by the Board or the date the Plan is duly approved by the stockholders of the Company. 2. DEFINITIONS AND CONSTRUCTION. 2.1 Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "Award" means an Option or Restricted Stock. (b) "Board" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "Board" also means such Committee(s). (c) "Code" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (d) "Committee" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (e) "Company" means Network Peripherals Inc., a Delaware corporation, or any successor corporation thereto. (f) "Consultant" means any person, including an advisor, engaged by a Participating Company to render services other than as an Employee or a Director. (g) "Director" means a member of the Board or of the board of directors of any other Participating Company. (h) "Disability" means the permanent and total disability of the Participant within the meaning of Section 22(e)(3) of the Code. (i) "Employee" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for purposes of the Plan. (j) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (k) "Fair Market Value" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein, subject to the following: (i) If, on such date, there is a public market for the Stock, the Fair Market Value of a share of Stock shall be the closing sale price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in the Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion. (ii) If, on such date, there is no public market for the Stock, the Fair Market Value of a share of Stock shall be as determined by the Board without regard to any restriction other than a restriction which, by its terms, will never lapse. (l) "Incentive Stock Option" means an Option intended to be (as set forth in the Option Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code. (m) "Insider" means an officer or a Director of the Company or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act. (n) "Nonstatutory Stock Option" means an Option not intended to be (as set forth in the Option Agreement) or which does not qualify as an Incentive Stock Option. 2 (o) "Option" means a right granted under Section 6 to purchase Stock (subject to adjustment as provided in Section 4.2) pursuant to the terms and conditions of the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option. (p) "Option Agreement" means a written agreement between the Company and an Optionee setting forth the terms, conditions and restrictions of the Option granted to the Optionee and any shares acquired upon the exercise thereof. (q) "Optionee" means a person who has been granted one or more Options. (r) "Parent Corporation" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (s) "Participant" means a person who has been granted one or more Awards. (t) "Participating Company" means the Company or any Parent Corporation or Subsidiary Corporation. (u) "Participating Company Group" means, at any point in time, all corporations collectively which are then Participating Companies. (v) "Restricted Stock" means Stock (subject to adjustment as provided in Section 4.2) granted or sold to a Participant pursuant to Section 7 and the terms and conditions of the Plan. (w) "Restricted Stock Agreement" means a written agreement between the Company and a Participant setting forth the terms, conditions and restrictions applying to the Restricted Stock acquired by the Participant. (x) "Rule 16b-3" means Rule 16b 3 under the Exchange Act, as amended from time to time, or any successor rule or regulation. (y) "Section 162(m)" means Section 162(m) of the Code, as amended by the Revenue Reconciliation Act of 1993 (P.L. 103-66), and any regulations promulgated thereunder. (z) "Securities Act" means the Securities Act of 1933, as amended. (aa) "Service" means a Participant's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. The Participant's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders Service to the Participating Company Group or a change in the Participating Company for which the Participant renders such Service, provided that there is no interruption or termination of the Participant's Service. Furthermore, a Participant's Service with the Participating Company Group shall not be deemed to have 3 terminated if the Participant takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Participant's Service shall be deemed to have terminated unless the Participant's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining vesting under the Participant's Option Agreement or Restricted Stock Agreement. The Participant's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Participant performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall determine whether the Participant's Service has terminated and the effective date of such termination. (bb) "Stock" means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2. (cc) "Subsidiary Corporation" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. (dd) "Ten Percent Stockholder" means a Participant who, at the time an Award is granted to the Participant, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company within the meaning of Section 422(b)(6) of the Code. 2.2 Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 3. ADMINISTRATION. 3.1 Administration by the Board. The Plan shall be administered by the Board. All questions of interpretation of the Plan or of any Award shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan or such Award. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, determination or election. 3.2 Administration with Respect to Insiders. With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b 3. 4 3.3 Powers of the Board. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Board shall have the full and final power and authority, in its sole discretion: (a) to determine the persons to whom, and the time or times at which, Awards shall be granted and the number of shares of Stock to be subject to each Award; (b) to determine whether an Award will be an Incentive Stock Option, a Nonstatutory Stock Option, or Restricted Stock; (c) to determine the Fair Market Value of shares of Stock or other property; (d) to determine the terms, conditions and restrictions applicable to each Award (which need not be identical) and any shares acquired pursuant to the Plan, including, without limitation, (i) the exercise or purchase price, if any, applicable to each Award, (ii) the method of payment for shares purchased under the Plan, (iii) the method for satisfaction of any tax withholding obligation arising in connection with the Award or such shares, including by the withholding or delivery of shares of stock, (iv) the timing, terms and conditions of the exercisability of each Option or the vesting of any shares acquired pursuant to the Plan, (v) the time of the expiration of the Award, (vi) the effect of the Participant's termination of Service with the Participating Company Group on any of the foregoing, and (vii) all other terms, conditions and restrictions applicable to the Award or such shares not inconsistent with the terms of the Plan; (e) to approve one or more forms of Option Agreement and Restricted Stock Agreement; (f) to amend, modify, extend, or renew, or grant a new Award in substitution for, any Award or to waive any restrictions or conditions applicable to any Award or any shares acquired under the Plan; (g) to accelerate, continue, extend or defer the exercisability of any Option or the vesting of any shares acquired under the Plan, including with respect to the period following a Participant's termination of Service with the Participating Company Group; (h) to delegate to any proper officer of the Company the authority to grant one or more Awards, without further approval of the Board, to any person eligible pursuant to Section 5, other than a person who, at the time of such grant, is an Insider; provided, however, that (i) such Awards shall not be granted to any one person within any fiscal year of the Company for more than 50,000 shares in the aggregate, (ii) the exercise or purchase price per share of Stock shall be equal to the Fair Market Value per share of the Stock on the effective date of grant, and (iii) each such Award shall be subject to the terms and conditions of the appropriate standard form of Option Agreement or Restricted Stock Agreement approved by the Board and shall conform to the provisions of the Plan and such other guidelines as shall be established from time to time by the Board; 5 (i) to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt supplements to, or alternative versions of, the Plan, including, without limitation, as the Board deems necessary or desirable to comply with the laws of, or to accommodate the tax policy or custom of, foreign jurisdictions whose citizens may be granted Awards; and (j) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Option Agreement or Restricted Stock Agreement and to make all other determinations and take such other actions with respect to the Plan or any Award as the Board may deem advisable to the extent consistent with the Plan and applicable law. 3.4 Committee Complying with Section 162(m). If a Participating Company is a "publicly held corporation" within the meaning of Section 162(m), the Board may establish a Committee of "outside directors" within the meaning of Section 162(m) (a "Section 162(m) Committee") to approve the grant of any Award which might reasonably be anticipated to result in the payment of employee remuneration that would otherwise exceed the limit on employee remuneration deductible for income tax purposes pursuant to Section 162(m). 4. SHARES SUBJECT TO PLAN. 4.1 Maximum Number of Shares Issuable. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be two million five hundred thousand (2,500,000) and shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof. If an outstanding Award for any reason expires or is terminated or canceled or shares of Stock acquired, subject to repurchase or forfeiture, pursuant to an Award are repurchased by the Company or forfeited, the shares of Stock allocable to the unexercised portion of such Award, or such repurchased or forfeited shares of Stock, shall again be available for issuance under the Plan. 4.2 Adjustments for Changes in Capital Structure. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Awards, in the Section 162(m) Grant Limit set forth in Section 4.3, and in the exercise or purchase price per share of any outstanding but unexercised Awards. If a majority of the shares which are of the same class as the shares that are subject to outstanding Awards are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event, as defined in Section 8.1) shares of another corporation (the "New Shares"), the Board may unilaterally amend the outstanding Awards to provide that such Awards are for New Shares. In the event of any such amendment, the number of shares subject to outstanding Awards and the exercise or purchase price per share of outstanding but unexercised Awards shall be adjusted in a fair and equitable manner as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the exercise 6 or purchase price of any Award be decreased to an amount less than the par value, if any, of the stock subject to the Award. The adjustments determined by the Board pursuant to this Section 4.2 shall be final, binding and conclusive. 4.3 Section 162(m) Grant Limit. Subject to adjustment as provided in Section 4.2, at any such time as a Participating Company is a "publicly held corporation" within the meaning of Section 162(m), no Employee shall be granted one or more Awards within any fiscal year of the Company which in the aggregate are for more than five hundred thousand (500,000) shares; provided, however, that the Company may make an additional one-time grant to any newly-hired Employee of an Award for up to two hundred fifty thousand (250,000) shares (the "Section 162(m) Grant Limit"). An Option which is canceled in the same fiscal year of the Company in which it was granted shall continue to be counted against the Section 162(m) Grant Limit for such period. 5. ELIGIBILITY. Awards may be granted only to Employees, Consultants, and Directors. For purposes of the foregoing sentence, "Employees," "Consultants" and "Directors" shall include prospective Employees, prospective Consultants and prospective Directors to whom Awards, other than a Restricted Stock Bonus (as defined in Section 7 below), may be granted in connection with written offers of a Service relationship with the Participating Company Group. Eligible persons may be granted more than one (1) Award. 6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish. Option Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions: 6.1 Limitations on Options. (a) Option Grant Restrictions. Any person who is not an Employee on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective Employee upon the condition that such person become an Employee shall be deemed granted effective on the date such person commences Service as an Employee with a Participating Company, with an exercise price determined as of such date in accordance with Section 6.2. (b) Fair Market Value Limitation. To the extent that options designated as Incentive Stock Options (granted under all stock option plans of the Participating Company Group, including the Plan) become exercisable by an Optionee for the first time during any calendar year for stock having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section 6.1(b), options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this 7 Section 6.1(b), such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 6.1(b), the Optionee may designate which portion of such Option the Optionee is exercising. In the absence of such designation, the Optionee shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion shall be issued upon the exercise of the Option. 6.2 Exercise Price. The exercise price for each Option shall be established in the sole discretion of the Board; provided, however, that (a) the exercise price per share for an Incentive Stock Option shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, (b) the exercise price per share for a Nonstatutory Stock Option shall be not less than eighty five percent (85%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option, and (c) no Incentive Stock Option granted to a Ten Percent Stockholder shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code. 6.3 Exercise Period. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria, and restrictions as shall be determined by the Board and set forth in the Option Agreement evidencing such Option; provided, however, that (a) no Incentive Stock Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Stockholder shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, and (c) no Option granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences Service with a Participating Company. Except as otherwise provided in this Section or by the Board in the grant of an Option, any Option granted hereunder shall have a term of ten (10) years from the effective date of grant of the Option. 6.4 Payment of Exercise Price. (a) Forms of Consideration Authorized. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the exercise price, (iii) by the assignment of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option 8 (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a "Cashless Exercise"), (iv) by the Optionee's promissory note in a form approved by the Company, (v) by such other consideration as may be approved by the Board from time to time to the extent permitted by applicable law, or (vi) by any combination thereof. The Board may at any time or from time to time, by adoption of or by amendment to the standard forms of Option Agreement described in Section 6.7, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration. (b) Tender of Stock. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. Unless otherwise provided by the Board, an Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (c) Cashless Exercise. The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise. (d) Payment by Promissory Note. No promissory note shall be permitted if the exercise of an Option using a promissory note would be a violation of any law. Any permitted promissory note shall be on such terms as the Board shall determine at the time the Option is granted. The Board shall have the authority to permit or require the Optionee to secure any promissory note used to exercise an Option with the shares of Stock acquired upon the exercise of the Option or with other collateral acceptable to the Company. Unless otherwise provided by the Board, if the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. 6.5 Tax Withholding. The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable upon the exercise of an Option, or to accept from the Optionee the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the federal, state, local and foreign taxes, if any, required by law to be withheld by the Participating Company Group with respect to such Option or the shares acquired upon the exercise thereof. Alternatively or in addition, in its sole discretion, the Company shall have the right to require the Optionee, through payroll withholding, cash payment or otherwise, including by means of a Cashless Exercise, to make adequate provision for any such tax withholding obligations of the Participating Company 9 Group arising in connection with the Option or the shares acquired upon the exercise thereof. The Company shall have no obligation to deliver shares of Stock or to release shares of Stock from an escrow established pursuant to the Option Agreement until the Participating Company Group's tax withholding obligations have been satisfied by the Optionee. 6.6 Effect of Termination of Service. (a) Option Exercisability. Subject to earlier termination of the Option as otherwise provided herein, an Option shall be exercisable after an Optionee's termination of Service as follows: (i) Disability. If the Optionee's Service with the Participating Company Group is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of six (6) months (or such longer period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the date of expiration of the Option's term as set forth in the Option Agreement evidencing such Option (the "Option Expiration Date"). (ii) Death. If the Optionee's Service with the Participating Company Group is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of six (6) months (or such longer period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee's termination of Service. (iii) Other Termination of Service. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within thirty (30) days (or such longer period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) Extension if Exercise Prevented by Law. Notwithstanding the foregoing, if the exercise of an Option within the applicable time periods set forth in Section 6.6(a) is prevented by the provisions of Section 10 below, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. (c) Extension if Optionee Subject to Section 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 6.6(a) of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) 10 of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. 6.7 Standard Forms of Option Agreement. Unless otherwise provided by the Board at the time the Option is granted, an Option designated as an "Incentive Stock Option" or a "Nonstatutory Stock Option" shall comply with and be subject to the terms and conditions set forth in the form of Incentive Stock Option Agreement or Nonstatutory Stock Option Agreement, respectively, adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. The Board shall have the authority from time to time to vary the terms of any of the standard forms of Option Agreement described in this Section either in connection with the grant or amendment of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Option Agreement are not inconsistent with the terms of the Plan. Such authority shall include, but not by way of limitation, the authority to grant Options which are immediately exercisable subject to the Company's right to repurchase any unvested shares of Stock acquired by an Optionee upon the exercise of an Option in the event such Optionee's employment or service with the Participating Company Group is terminated for any reason, with or without cause. 6.8 Nontransferability of Incentive Stock Options. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee or the Optionee's guardian or legal representative. No Option shall be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. Notwithstanding the foregoing, a Nonstatutory Stock Option shall be assignable or transferable to the extent permitted by the Board and set forth in the Option Agreement evidencing such Option. 7. TERMS AND CONDITIONS OF RESTRICTED STOCK. The Board may from time to time grant Restricted Stock Awards which may be in the form of a stock bonus (a "Restricted Stock Bonus") or a stock purchase right (a "Restricted Stock Purchase Right"). Restricted Stock Awards shall be evidenced by Restricted Stock Agreements, specifying the number of shares of Stock covered there, in such form as the Board shall from time to time establish. Restricted Stock Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions: 7.1 Performance-Based Restricted Stock Awards. A Section 162(m) Committee may, but need not, condition the grant of any Restricted Stock Award (a "Performance Award") on the attainment, during a performance period established by such Committee, of one or more performance goals pursuant to procedures intended to qualify such Award as "performance-based compensation" for purposes of Section 162(m). Any such performance goals shall be preestablished in writing by the Section 162(m) Committee within the period required by Section 162(m) and shall be based on one or more of the following business 11 criteria with respect to the Participating Company Group: revenue, operating income, pre-tax profit, net income, gross margin, operating margin, earnings per share, return on stockholder equity, return on capital, return on assets, or the initial shipment of a new product. Such business criteria shall have the same meaning as used in the Company's financial statements, or, if not used in the Company's financial statements, the meaning pursuant to generally accepted accounting principles or as used generally in the Company's industry. Each performance goal shall be objectively determinable and may be an absolute measure or a relative measure determined with reference to an index or other standard selected by the Section 162(m) Committee. Prior to the issuance of Stock pursuant to a Performance Award, the Section 162(m) Committee shall certify in writing the attainment of the relevant performance goals. Neither the Board nor any Committee thereof shall have the discretion to waive the attainment of any performance goal or to increase the number of shares issuable pursuant to a Performance Award in excess of the amount determined in accordance with the objective formula established by the Section 62(m) Committee. However, if provided in a Participant's Restricted Stock Agreement, the Section 62(m) Committee shall have the authority to reduce the number of shares that would otherwise become issuable to the Participant upon the attainment of the relevant performance goals if, in the Section 162(m) Committee's sole judgment, such reduction is appropriate; provided, however, that such reduction shall not increase the number of shares issuable to another Participant. 7.2 Purchase Price. The purchase price under each Restricted Stock Purchase Right shall be established by the Board. No monetary payment (other than applicable tax withholding) shall be required as a condition of receiving a Restricted Stock Bonus, the consideration for which shall be services actually rendered to the Participating Company Group or for its benefit. 7.3 Purchase Period. A Restricted Stock Purchase Right shall be exercisable within a period established by the Board, which shall in no event exceed thirty (30) days from the effective date of the grant of the Restricted Stock Purchase Right; provided, however, that no Restricted Stock Purchase Right granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences Service with a Participating Company. 7.4 Payment of Purchase Price. (a) Forms of Consideration Authorized. Except as otherwise provided below, payment of the purchase price for the number of shares of Stock being purchased pursuant to any Restricted Stock Purchase Right shall be made (i) in cash, by check, or cash equivalent, (ii) by the Participant's promissory note in a form approved by the Company, (iii) by such other consideration as may be approved by the Board from time to time to the extent permitted by applicable law, or (iv) by any combination thereof. The Board may at any time or from time to time, by adoption of or by amendment to the standard form of Restricted Stock Agreement described in Section 7.9, or by other means, grant Restricted Stock Purchase Rights which do not permit all of the foregoing forms of consideration to be used in payment of the purchase price or which otherwise restrict one or more forms of consideration. Restricted Stock 12 Bonuses shall be issued in consideration for services actually rendered to the Participating Company Group or for its benefit. (b) Payment by Promissory Note. No promissory note shall be permitted if the purchase of Restricted Stock using a promissory note would be a violation of any law. Any permitted promissory note shall be on such terms as the Board shall determine at the time the Restricted Stock Purchase Right is granted. The Board shall have the authority to permit or require the Participant to secure any promissory note used to purchase Restricted Stock with such shares or with other collateral acceptable to the Company. Unless otherwise provided by the Board, if the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Participant shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. 7.5 Tax Withholding. The Company shall have the right to require the Participant, through payroll withholding, cash payment or otherwise, to make adequate provision for the federal, state, local and foreign taxes, if any, required by law to be withheld by the Participating Company Group in connection with a Restricted Stock Award or the shares acquired pursuant thereto. The Company shall have no obligation to deliver shares of Stock or to release shares of Stock from an escrow established pursuant to the Restricted Stock Agreement until the Participating Company Group's tax withholding obligations have been satisfied by the Participant. 7.6 Vesting and Restrictions on Transfer. Shares issued pursuant to any Restricted Stock Award may be made subject to vesting conditioned upon the satisfaction of such Service requirements, performance goals (which may, but need not, be established and certified in accordance with the provisions of Section 7.1), or other restrictions (the "Vesting Restrictions") as shall be determined by the Board (or a Section 162(m) Committee, as the case may be) and set forth in the Restricted Stock Agreement evidencing such Award. During such period (the "Restriction Period") as shares acquired pursuant to a Restricted Stock Award remain subject to Vesting Restrictions, such shares may not be sold, exchanged, transferred, pledged, assigned or otherwise disposed of other than pursuant to an Ownership Change Event or as provided in Section 7.10. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions. 7.7 Voting Rights; Dividends. Except as provided in this Section and Section 7.6, during the Restriction Period applicable to shares of Restricted Stock held by a Participant, the Participant shall have all of the rights of a stockholder of the Company holding shares of Stock, including the right to vote the shares of Restricted Stock and to receive all dividends and other distributions paid with respect to such shares; provided, however, that if any 13 such dividends or distributions are paid in shares of Stock, such shares shall be subject to the same Vesting Restrictions as the shares of Restricted Stock with respect to which they were paid. 7.8 Effect of Termination of Service. If a Participant's Service with the Participating Company Group terminates for any reason, whether voluntary or involuntary (including the Participant's death or disability), (a) the Company shall have the option to repurchase at the original purchase price paid by the Participant shares of Restricted Stock acquired by the Participant pursuant to a Restricted Stock Purchase Right and (b) the Participant shall forfeit to the Company shares of Restricted Stock acquired by the Participant pursuant to a Restricted Stock Bonus which, in either case, remain subject to Vesting Restrictions as of the date of the Participant's termination of Service. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company. 7.9 Standard Forms of Restricted Stock Agreement. The Board shall have the authority from time to time to approve one or more standard forms of Restricted Stock Agreement and to vary the terms of any such standard forms either in connection with the grant or amendment of an individual Restricted Stock Award or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Restricted Stock Agreement are not inconsistent with the terms of the Plan. 7.10 Nontransferability of Restricted Stock Award Rights. Rights to acquire shares of Stock pursuant to a Restricted Stock Award may not be assigned or transferred in any manner except by will or the laws of descent and distribution, and, during the lifetime of the Participant, shall be exercisable only by the Participant. 8. TRANSFER OF CONTROL. 8.1 Definitions. (a) An "Ownership Change Event" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. 14 (b) A "Transfer of Control" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "Transaction") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "Transferee Corporation(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2 Effect of Transfer of Control on Awards. In the event of a Transfer of Control, the Board, in its sole discretion, may provide that any unexercisable or unvested portion of the outstanding Awards shall be immediately exercisable and vested in full as of a date determined by the Board and/or may arrange with the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "Acquiring Corporation"), for the Acquiring Corporation to either assume the Company's rights and obligations under outstanding Awards or substitute for outstanding Awards substantially equivalent awards for the Acquiring Corporation's stock. For purposes of this Section 8.2, an Award shall be deemed assumed if, following the Transfer of Control, the Award confers the right to acquire in accordance with its terms and conditions, for each share of Stock subject to the Award immediately prior to the Transfer of Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Transfer of Control was entitled. Any Awards which are neither assumed or substituted for by the Acquiring Corporation in connection with the Transfer of Control nor exercised as of the date of the Transfer of Control shall terminate and cease to be outstanding effective as of the date of the Transfer of Control. Notwithstanding the foregoing, shares acquired upon exercise of an Award prior to the Transfer of Control and any consideration received pursuant to the Transfer of Control with respect to such shares shall continue to be subject to all applicable provisions of the Award Agreement evidencing such Award except as otherwise provided in such Award Agreement or by the Board. 9. PROVISION OF INFORMATION. Each Participant shall be given access to information concerning the Company equivalent to that information generally made available to the Company's common stockholders. 10. COMPLIANCE WITH SECURITIES LAW. The grant of Awards and the issuance of shares of Stock pursuant to Awards shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. No shares may be issued pursuant an Award if such issuance would constitute a violation of any applicable federal, 15 state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Award may be exercised or shares issued pursuant to an Award unless (a) a registration statement under the Securities Act shall at the time of such exercise or issuance be in effect with respect to the shares issuable pursuant to the Award or (b) in the opinion of legal counsel to the Company, the shares issuable pursuant to the Award may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the issuance of shares pursuant to any Award, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 11. INDEMNIFICATION. In addition to such other rights of indemnification as they may have as members of the Board or officers or employees of the Participating Company Group, members of the Board and any officers or employees of the Participating Company Group to whom authority to act for the Board or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same. 12. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the Plan at any time. However, subject to changes in applicable law, regulations or rules that would permit otherwise, without the approval of the Company's stockholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the Company's stockholders under any applicable law, regulation or rule. In any event, no termination or amendment of the Plan may adversely affect any then outstanding Award or any unexercised portion thereof, without the consent of the Participant, unless such termination or amendment is required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option or is necessary to comply with any applicable law, regulation or rule. 16 IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing sets forth the Network Peripherals Inc. 1997 Stock Plan, as amended by the Board through March 24, 1998. ________________________________ Secretary 17 PLAN HISTORY February 18, 1997 Board adopts Plan, with an initial reserve of 1,500,000 shares. April 24, 1997 Stockholders approve Plan, with an initial reserve of 1,500,000 shares. March 24, 1998 Board approves 1,000,000 share reserve increase (from 1,500,000 to 2,500,000). May 26, 1998 Stockholders approve 1,000,000 share reserve increase (approved by Board on March 24, 1998). 18 EX-10.40 3 THIRD MODIFICATION AGREEMENT Exhibit 10.40 Third Modification Agreement, Dated August 18, 1998, With Sumitomo Bank of California THIRD MODIFICATION AGREERMENT This Third Modification Agreement ("Third Modification") is made as of August 18, 1998, by and among NETWORK PERIPHERALS INC. a Delaware corporation ("Borrower"), having its chief executive office at 1371 McCarthy Boulevard, Milpitas, California 95035, SUMITOMO BANK OF CALIFORNIA, a California banking corporation ("Sumitomo"), having its head office at 320 California Street, San Francisco, California, and each other lender which may hereafter execute and deliver an instrument of assignment with respect to the Agreement (defined below) (individually, the "Bank," and collectively, the "Banks") and Sumitomo, as Agent. RECITALS A. Pursuant to a Credit Agreement, dated October 2, 1996, executed by Borrower and Sumitomo ("Agreement") , Sumitomo extended a revolving line of credit to Borrower of up to $10,000,000.00 ("Line of Credit") with a $5,000,000.00 letter of credit subline. Borrower's obligation to repay advances on the Line of Credit was evidenced by a Promissory Note, dated the same date as the Agreement, executed by Borrower, in the principal amount of $10,000,000.00 ("Note"). To secure the indebtedness of Borrower under the Credit Agreement and Note, Borrower executed a Security Agreement, dated as of October 2, 1996 ("Security Agreement"). B. Pursuant to a Modification Agreement ("Modification") dated August 29, 1997, by and among Borrower and Sumitomo, on behalf of itself and as Agent for the Banks, the Agreement was modified on the terms contained therein. C. Pursuant to a Second Modification Agreement ("Second Modification") dated November 17, 1997, by and among Borrower and Sumitomo, on behalf of itself and as Agent for the Banks, the Agreement was further modified on the terms contained therein. D. As used herein, the term "Loan Documents" means all documents described in these Recitals and those documents executed pursuant thereto or in conjunction therewith. E. Borrower seeks a further modification of the Agreement and Loan Documents and Sumitomo is agreeable on the terms set forth below. TERMS NOW, THEREFORE, Borrower and Sumitomo agree as follows: 1. Capitalized Terms. Unless otherwise defined herein, capitalized terms shall have the meanings set forth in the Agreement. 2. Adoption of Recitals. Borrower hereby represents and warrants that each of the Recitals set forth above are true, accurate and complete. 3. Acknowledgement of Debt. Borrower acknowledges that there are no claims, demands, offsets or defenses at law or in equity that would defeat or diminish Sumitomo's right to collect the indebtedness evidenced by the Note and Agreement and to proceed to enforce the rights and remedies available to Sumitomo as provided in the Loan Documents or by law. 4. Modification of Loan Documents. The Loan Documents are hereby supplemented, amended and modified as follows, which terms shall supersede and prevail over any existing and conflicting provisions thereof: (a) The terms "Commitment Amount", "Letter of Credit Maturity Date", "Letter of Credit Sublimit" and "Maturity Date" in Section 1.1 of the Agreement are hereby deleted and replaced with the following: Commitment Amount. $5,000,000 in the aggregate, or any lesser amount, including zero, resulting from a termination or reduction of such amount in accordance with Section 2.5 or Section 7.2. Letter of Credit Maturity Date. Means November 30, 1998. Letter of Credit Sublimit. $2,500,000 in the aggregate, or any lesser amount, including zero, resulting from a termination or reduction of such amount in accordance with Section 2.5 or Section 7.2. Maturity Date. Means July 31, 1999. (b) Section 3.2(f) of the Agreement, as modified by the Second Modification, is deleted and replaced with the following: (f) Borrower shall deposit with Sumitomo cash collateral, acceptable to Sumitomo in its sole discretion, 2 equal to or greater than the amount of the Loan or Letter of Credit requested by Borrower. Such cash collateral shall remain on deposit with Sumitomo until such time as the Loan or Letter of Credit is repaid in full by Borrower. (c) Section 5.7 (b) of the Agreement is deleted and replaced with the following: (b) Profitability. Borrower shall be profitable on an annual basis and shall not have a net loss on a consolidated basis in any fiscal quarter as measured quarterly for that fiscal quarter; provided, however, that for the fiscal quarter ending September 30, 1998, Borrower may have a net loss on a consolidated basis of not more than $1,500,000.00; and that for the fiscal quarter ending December 31, 1998, Borrower may have a net loss on a consolidated basis of not more than $1,000,000.00. (d) Section 5.7(d) of the Agreement is deleted and replaced with the following: (d) Consolidated Tangible Net Worth. Borrower shall maintain Consolidated Tangible Net Worth of at least $30,000,000.00. (e) The following new Section 5.7(f) is added to the Agreement: (f) Cash Position. Borrower shall maintain a consolidated cash position on its balance sheet of at least $20,000,000.00. (f) The Loan Documents which recite they are security instruments shall secure, in addition to any other obligations secured thereby, the payment and performance by Borrower of all obligations under the Agreement, the Note and the other Loan Documents, as amended by this Third Modification, and any amendments, modifications, extensions or renewals of the same which are hereafter agreed to in writing by the parties. 5. Conditions Precedent. Sumitomo's obligation to extend credit to Borrower pursuant to this Third Modification is subject to the condition precedent that Borrower strictly complies with the requirement that Borrower deliver to Sumitomo, in form and substance satisfactory to Sumitomo, the following documents and other things by Borrower or as specified below: 3 (a) This Agreement. (b) Such other evidence as Sumitomo may require, to establish the consummation of the transactions contemplated hereby, the taking of all proceedings in connection therewith and compliance with the conditions set forth in this Third Modification. 6. Representations and Warranties. Except as previously disclosed to Sumitomo, Borrower hereby represents and warrants that no default, Event of Default, breach or failure of condition has occurred or exists, or would exist with notice or lapse of time, or both, under any of the Loan Documents. Borrower agrees that all representations and warranties of Borrower in the Agreement and the other Loan Documents are true and correct as of the date of this Third Modification, and shall survive the execution of this Third Modification. 7. Governing of Law. This Third Modification shall be construed, governed and enforced in accordance with the laws of the State of California. 8. Interpretation. No provision of this Third Modification is to be interpreted for or against either Borrower or Sumitomo because that party, or that party's representative, drafted such provision. 9. Full Force and Effect. Except as set forth herein, all other terms and conditions of the Loan Documents shall remain in full force and effect, including provisions on prepayment, late charges, default interest and attorneys' fees. 10. Reaffirmation. Borrower hereby acknowledges, reaffirms and confirms its obligations under the Loan Documents, as amended and modified by this Third Modification. 11. Entire Agreement. This Third Modification (and all documents herein mentioned) and the Loan Documents constitute the entire, complete and exclusive understanding between the parties regarding the Line of Credit and the Collateral and may not be modified, amended, or terminated except by a written agreement signed by the party against whom enforcement is sought. No modification, change or supplement of the Loan Documents, this Third Modification or related agreements shall be binding on Sumitomo unless in writing signed by a Corporate Officer and Manager of Sumitomo. No waiver or any event of default shall be construed to be a waiver, acquiescence, or consent to any preceding or subsequent event of default. 12. Documentation. In addition to the instruments and documents mentioned or referred to herein, Borrower will, at its own cost and expense, supply Sumitomo with such other instruments, documents, information and data as are 4 reasonably necessary for the purposes hereof, all of which shall be in form and content as reasonably required by Sumitomo. 13. Counterparts This Third Modification may be executed in multiple counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Third Modification as of the day and year first above written. SUMITOMO: SUMITOMO BANK OF CALIFORNIA, a California banking corporation By: \s\ Arne F. Olson ----------------------------- ARNE F. OLSON, Vice President AGENT: SUMITOMO BANK OF CALIFORNA, a California banking corporation By: \s\ Arne F. Olson ----------------------------- ARNE F. OLSON, Vice President BORROWER: NETWORK PERIPHERALS INC., a Delaware corporation By: \s\ Robert Hersh ----------------------------- ROBERT HERSH, Vice President and Chief Financial Officer 5 EX-10.41 4 EMPLOYMENT AGREEMENT Exhibit 10.41 Employment Agreement with William Rosenberger and subsequent amendment EMPLOYMENT AGREEMENT This Employment Agreement is made and entered into by and between Network Peripherals Inc., a Delaware Corporation (the "Company"), and William F. Rosenberger ("Rosenberger") as of June 11, 1998 (the "Effective Date"). 1. Position and Duties. Rosenberger shall be employed by the Company as its President and Chief Executive Officer, reporting to the Company's Board of Directors (the "Board"). As its President and Chief Executive Officer, Rosenberger agrees to devote his full business time, energy and skill to his duties at the Company. These duties shall include all those duties customarily performed by the President and Chief Executive Officer, as well as any other reasonable duties that may be assigned from time to time by the Board. In addition, Rosenberger has been elected to the Board for a term expiring at the annual meeting of the stockholders of the Company to be held in 1999. 2. Term of Employment. Rosenberger's employment with the Company will be for no specified term, and may be terminated by Rosenberger or the Company at any time, with or without cause. Upon the termination of Rosenberger's employment with the Company for any reason, neither Rosenberger nor the Company shall have any further obligation or liability under this Employment Agreement to the other, except as set forth in paragraphs 5, 6, 9, 10 and 11 below. 3. Compensation. Rosenberger shall be compensated by the Company for his services as follows: (a) Base Salary. Rosenberger shall be paid a monthly base salary of $20,833.33 per month ($250,000 on an annualized basis), subject to applicable withholding, in accordance with the Company's normal payroll procedures. (b) Benefits. Rosenberger shall have the right, on the same basis as other members of senior management of the Company, to participate in and to receive benefits under any of the Company's employee benefit plans, as such plans may be modified from time to time. In addition, Rosenberger shall be entitled to the benefits afforded to other members of senior management under the Company's vacation, holiday and business expense reimbursement policies. (c) Performance Bonuses. Rosenberger shall be eligible to earn either one, but not both, of the following performance bonuses: 1 (i) Provided that Rosenberger's employment with the Company has not terminated prior to the date of the consummation of a Change in Control (as defined in paragraph 7 below), Rosenberger shall earn a bonus of $200,000 in the event of a Change in Control consummated on or before June 30, 1999 in which the aggregate fair market value, as determined by the Board, of the consideration paid or to be paid by the Acquiring Corporation (as defined in paragraph 7 below) in connection with the Change in Control exceeds one hundred fifty million dollars ($150,000,000). Such bonus, if any, less applicable withholding, shall be paid as soon as practicable following the consummation of the Change in Control. (ii) Provided that Rosenberger has not earned the bonus described in subparagraph (i) above, Rosenberger shall earn a bonus of $100,000 provided that (A) the Company has achieved at least two consecutive fiscal quarters ending on or before June 30, 1999 for each of which the Company has earned positive net income and (B) on June 30, 1999 Rosenberger remains employed by the Company as its Chief Executive Officer. Such bonus, if any, less applicable withholding, shall be paid as soon as practicable after June 30, 1999, or if later, as soon as practicable after the determination of the net income for the second such fiscal quarter. For purposes of this subparagraph, "net income" shall mean the Company's net income for any fiscal quarter as determined for purposes of computing the Company's publicly reported earnings per share and as set forth in the Company's consolidated income statement prepared in accordance with generally accepted accounting principles and as reviewed or audited by the Company's independent auditors. (d) Signing Bonus. As soon as practicable following the execution of this Employment Agreement, the Company shall pay to Rosenberger a one-time signing bonus in the amount of $50,000 (the "Signing Bonus"), less applicable withholding. If Rosenberger voluntarily terminates his employment with the Company within six months of the Effective Date, Rosenberger shall be required to repay the Signing Bonus to the Company upon the date of the such termination. 4. Stock Option. Rosenberger shall be granted the option to purchase up to 500,000 shares of the Common Stock of the Company (the "Option"). Subject to Rosenberger's continued employment with the Company, the shares subject to the Option (the "Optioned Shares") shall become vested and exercisable at the rate of 50,000 Optioned Shares on December 31, 1998 and an additional 8,333 Optioned Shares for each full month of Rosenberger's employment with the Company thereafter. Provided that Rosenberger's employment with the Company has not terminated prior to the date of the consummation of a Change in Control (as defined in paragraph 7 below), the vesting and exercisability of the Optioned Shares shall be accelerated effective as of the date ten (10) days prior to the date of the Change in Control as to: (a) 50% of the Optioned Shares that would otherwise remain unvested as of the date of the Change in Control, provided that the Change in Control is consummated on or before March 11, 1999; or 2 (b) 75% of the Optioned Shares that would otherwise remain unvested as of the date of the Change in Control, provided that the Change in Control is consummated after March 11, 1999 and on or before June 11, 1999; or (c) 100% of the Optioned Shares that would otherwise remain unvested as of the date of the Change in Control, provided that the Change in Control is consummated after June 11, 1999. Except as otherwise provided herein, the Option shall be subject to the terms of the Company's 1997 Stock Plan and the appropriate standard form Company stock option agreement, which Rosenberger shall be required to sign as a condition of the issuance of the Option. 5. Benefits Upon Voluntary Termination, Permanent Disability or Death. In the event that Rosenberger voluntarily terminates his employment relationship with the Company at any time and such termination is not deemed a Constructive Termination Following a Change in Control (as defined in paragraph 7 below), or in the event that Rosenberger's employment terminates as a result of his death or Permanent Disability (as defined in paragraph 7 below) other that within one (1) year after a Change in Control, Rosenberger shall be entitled to no compensation or benefits from the Company other than those earned under paragraphs 3 and 4 above through the date of his termination of employment. In the event that Rosenberger voluntarily resigns from his employment with the Company, he shall simultaneously resign from his membership on the Board. 6. Benefits Upon Other Termination. Rosenberger agrees that his employment may be terminated by the Company at any time, with or without cause. In the event of the termination of Rosenberger's employment by the Company for the reasons set forth below, he shall be entitled to the following: (a) Termination for Cause. If Rosenberger's employment is terminated by the Company for Cause (as defined in paragraph 7 below), Rosenberger shall be entitled to no compensation or benefits from the Company other than those earned under paragraphs 3 and 4 above through the date of his termination of employment. In the event that Rosenberger's employment is terminated by the Company for Cause, Rosenberger shall immediately resign from his membership on the Board. (b) Termination Without Cause; Resignation Upon Constructive Termination Following a Change in Control; Death or Permanent Disability Following a Change in Control. (i) If Rosenberger's employment is terminated by the Company for any reason other than for Cause (as defined in paragraph 7 below), or if Rosenberger resigns from all capacities in which he is then rendering service to the Company (including service as a member of the Board) within a reasonable period of time following an event constituting Constructive Termination Following a Change in Control (as defined in paragraph 7 below), or if Rosenberger's employment terminates within one (1) year after the occurrence of any Change in Control (as defined in paragraph 7 below) as a result of his death or Permanent Disability 3 following such Change in Control, Rosenberger shall be entitled to the following separation benefits: (A) Compensation and benefits earned under paragraphs 3 and 4 through the date of Rosenberger's termination; (B) Rosenberger's employment as an officer of the Company shall terminate immediately; however, the Company shall continue Rosenberger's employment as a non-officer employee of the Company for a period of one(1) year following the date of his termination (the "Severance Period"). During the Severance Period, Rosenberger shall be entitled to the greater of (1) his then current base salary or (2) or his base salary as provided in paragraph 3 of this Employment Agreement, less applicable withholding, payable in accordance with the Company's normal payroll practices; (C) Within ten (10) days of submission of proper expense reports by Rosenberger, the Company shall reimburse the Rosenberger for all expenses he has reasonably and necessarily incurred by in connection with the business of the Company prior to his termination of employment; (D) Continued provision of the Company's standard employee medical insurance coverages through the end of the Severance Period; thereafter, Rosenberger shall be entitled to elect continued medical insurance coverage in accordance with the applicable provisions of federal law (COBRA); provided, however, that in the event Rosenberger becomes covered under another employer's group health plan during the period provided for herein, the Company shall cease provision of continued group health insurance for Rosenberger; and (E) Notwithstanding any provisions to the contrary contained in any stock option agreement between the Company and Rosenberger, if termination of Rosenberger's employment with the Company as contemplated by this paragraph 6(b) occurs within one (1) year following a Change in Control, then (1) All stock options granted by the Company to Rosenberger prior to the Change in Control, which are not accelerated pursuant to the provisions of paragraph 4, shall become immediately exercisable and vested in full as of the time of such termination; and (2) All such stock options shall remain exercisable for a period of at least one (1) year following Rosenberger's termination of employment, subject to any longer periods for exercise of such options set forth in the particular option agreements. This paragraph 6(b)(i)(E) shall apply to all stock option agreements entered into between the Company and Rosenberger, whether heretofore or hereafter entered into. (ii) Rosenberger's entitlement to any benefits under paragraph 6(b) is conditioned upon Rosenberger's execution and delivery to the Company of (A) a general release 4 of claims in a form satisfactory to the Company and (B) Rosenberger's resignation from all of his positions with the Company (with the exception of any continued employment for the purposes set forth in paragraph 6(b)), including from the Board, in a form satisfactory to the Company. (iii) In the event that Rosenberger accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity which offers products or services that are competitive with any products or services offered by the Company or with any products or services that Rosenberger is aware the Company intends to offer, Rosenberger shall be deemed to have resigned from his employment with the Company effective immediately upon such acceptance of employment or provision of services. Upon such resignation, Rosenberger shall not be entitled to any further payments or benefits as provided under paragraph 6(b). (iv) In the event that Rosenberger accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity while Rosenberger continues to receive any separation benefits pursuant to this paragraph 6(b), Rosenberger shall immediately notify the Company of such acceptance and provide to the Company information with respect to such person or entity as the Company may reasonably request in order to determine if that person's or entity's products or services are competitive with the Company's. 7. Definitions. As used in this Employment Agreement, the following terms shall have the meanings set forth below: (a) "Acquiring Corporation" means, in connection with a Change in Control, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be. (b) "Cause" means Rosenberger's: (i) theft, material act of dishonesty, fraud, falsification of any employment or Company records or the commission of any criminal act which impairs his ability to perform his duties under this Employment Agreement; (ii) improper disclosure of the Company's confidential, business or proprietary information; (iii) material breach of the Company's policies, work rules or lawful directions from the Board of Directors; or (iv) persistent failure to perform the lawful duties and responsibilities assigned by the Company to him which is not cured within a reasonable time following his receipt of written notice of such failure from the Company. 5 (c) "Change in Control" means an Ownership Change Event (as defined below) or a series of related Ownership Change Events (collectively, the "Transaction") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "Transferee Corporation(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. For purposes of this Agreement, "Ownership Change Event" means the occurrence of any of the following with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (d) "Constructive Termination Following a Change in Control" means one or more of the following events that occurs within one (1) year after the occurrence of any Change in Control: (i) without Rosenberger's express written consent, the assignment to Rosenberger of any duties, or any limitation of Rosenberger's responsibilities, substantially inconsistent with his positions, duties, responsibilities and status with the Company immediately prior to the date of the Change in Control; (ii) without Rosenberger's express written consent, the removal of Rosenberger from his position with the Company as held by him immediately prior to the Change in Control, except in connection with the termination of Rosenberger's employment with the Company for Cause; (iii) without Rosenberger's express written consent, the relocation of the principal place of Rosenberger's employment to a location that is more than fifty (50) miles from his principal place of employment immediately prior to the date of the Change in Control, or the imposition of travel requirements on Rosenberger substantially inconsistent with such travel requirements existing immediately prior to the date of the Change in Control; (iv) any failure by the Company to pay, or any reduction by the Company of (A) Rosenberger's base salary in effect immediately prior to the date of the Change 6 in Control (unless reductions comparable in amount and duration are concurrently made for all other employees of the Company with responsibilities, organizational level and title comparable to Rosenberger), or (B) Rosenberger's bonus compensation in effect immediately prior to the date of the Change in Control (subject to applicable performance requirements with respect to the actual amount of bonus compensation earned by Rosenberger and all other participants in the bonus program); (v) any failure by the Company to (A) continue to provide Rosenberger with the opportunity to participate, on terms no less favorable than those in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Company then held by Rosenberger, any benefit or compensation plans and programs, including, but not limited to, the Company's life, disability, health, dental, medical, savings, profit sharing, stock purchase and retirement plans in which Rosenberger was participating immediately prior to the date of the Change in Control, or their equivalent (provided, that any changes or terminations of such existing benefit or compensation plans or programs shall not be a Constructive Termination within the meaning of this paragraph if the changed plan or program or a replacement plan or program provides equivalent or more favorable benefits or compensation to Rosenberger), or (2) provide Rosenberger with all other fringe benefits (or their equivalent) from time to time in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Company then held by Rosenberger; or (vi) any failure or refusal of a successor company to assume the Company's obligations under this Employment Agreement as required by paragraph 15; provided, however, that Rosenberger's resignation as a result of any of the foregoing events shall be a voluntary resignation, and not a resignation following Constructive Termination Following a Change in Control, unless Rosenberger gives written notice of any such event(s) to the Board and allows the Company at least ten (10) days thereafter to correct such condition(s). (e) "Permanent Disability" means that: (i) Rosenberger has been incapacitated by bodily injury or disease so as to be prevented thereby from engaging in the performance of his duties following reasonable accommodations on behalf of the Company; (ii) such total incapacity shall have continued for a period of six (6) consecutive months; and (iii) such incapacity will, in the opinion of a qualified physician, be permanent and continuous during the remainder of Rosenberger's life. 8. Parachute Payments. In the event that any payment or benefit received or to be received by Rosenberger pursuant to this Employment Agreement or otherwise (collectively, the 7 "Payments") would result in a "parachute payment" as described in section 280G of the Internal Revenue Code of 1986, as amended, notwithstanding the other provisions of this Employment Agreement, the amount of such Payments will not exceed the amount which produces the greatest after-tax benefit to Rosenberger. For purposes of the foregoing, the greatest after-tax benefit will be determined within thirty (30) days of the occurrence of such payment to Rosenberger, in his sole and absolute discretion. If no such determination is made by Rosenberger within thirty (30) days of the occurrence of such payment, the Company will promptly make such determination in a fair and equitable manner. 9. Confidential and Proprietary Information. Rosenberger agrees to abide by the terms and conditions of the Company's standard form of employee confidentiality and assignment of inventions agreement as executed by Rosenberger and attached hereto as Exhibit A. 10. Agreement Not To Compete Unfairly. Employee agrees that in the event of his termination at any time and for any reason, he shall not compete with the Company in any unfair manner, including, without limitation, using any confidential or proprietary information of the Company to compete with the Company in any way. 11. Non-Solicitation. Employee agrees that for a period of one year after the date of the termination of his employment for any reason, he shall not, either directly or indirectly, solicit the services, or attempt to solicit the services, of any employee of the Company to any other person or entity. 12. Dispute Resolution. In the event of any dispute or claim relating to or arising out of this Employment Agreement (including, but not limited to, any claims of breach of contract, wrongful termination or age, sex, race or other discrimination), Rosenberger and the Company agree that all such disputes shall be fully and finally resolved by binding arbitration conducted by the American Arbitration Association in Santa Clara County, California in accordance with its National Employment Dispute Resolution rules, as those rules are currently in effect (and not as they may be modified in the future). Employee acknowledges that by accepting this arbitration provision he is waiving any right to a jury trial in the event of such dispute. Provided, however, that this arbitration provision shall not apply to any disputes or claims relating to or arising out of the misuse or misappropriation of trade secrets or proprietary information. 13. Attorneys' Fees. The prevailing party shall be entitled to recover from the losing party its attorneys' fees and costs incurred in any action brought to enforce any right arising out of this Employment Agreement. 14. Interpretation. Rosenberger and the Company agree that this Employment Agreement shall be interpreted in accordance with and governed by the laws of the State of California. 15. Successors and Assigns. 8 (a) Successors of the Company. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, expressly, absolutely and unconditionally to assume and agree to perform this Employment Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession transaction shall be a breach of this Employment Agreement and shall entitle the Employee to terminate his employment with the Company within three (3) months thereafter and to receive the benefits provided under Section 6(b) of this Employment Agreement in the event of Constructive Termination Following a Change in Control. As used in this Employment Agreement, "Company" shall mean the Company as defined above and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this paragraph 15 or which otherwise becomes bound by all the terms and provisions of this Employment Agreement by operation of law. (b) Heirs of Employee. In view of the personal nature of the services to be performed under this Employment Agreement by Rosenberger, he shall not have the right to assign or transfer any of his rights, obligations or benefits under this Employment Agreement, except as otherwise noted herein. This Employment Agreement shall inure to the benefit of and be enforceable by Rosenberger's personal and legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If Rosenberger should die after the conditions to payment of benefits set forth herein have been met and any amounts are still payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Employment Agreement to Rosenberger's beneficiary, successor, devisee, legatee or other designee or, if there be no such designee, to Rosenberger's estate. Until a contrary designation is made to the Company, Rosenberger hereby designates as his beneficiary under this Employment Agreement the person whose name appears below his signature on this Employment Agreement. 16. Entire Agreement. This Employment Agreement constitutes the entire employment agreement between Rosenberger and the Company regarding the terms and conditions of his employment, with the exception of (a) the agreement described in paragraph 9 and (b) any stock option agreements between Rosenberger and the Company. This Employment Agreement (including the documents described in clauses (a) and (b) above) supersedes all prior negotiations, representations or agreements between Rosenberger and the Company, whether written or oral, concerning Rosenberger's employment by the Company. 17. Notices. For purposes of this Employment Agreement, notices and all other communications provided for in the Employment Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, as follows: if to the Company: Network Peripherals Inc. 1371 McCarthy Boulevard Milpitas, CA 95035 Attn: Corporate Secretary 9 and if to Rosenberger, at the address specified at the end of this Employment Agreement. Notice may also be given at such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 18. Validity: If any one or more of the provisions (or any part thereof) of this Employment Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. 19. Modification: This Employment Agreement may only be modified or amended by a supplemental written agreement signed by Rosenberger and the Company. IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the date and year written below. NETWORK PERIPHERALS INC. Date: June 11, 1998 By: \s\ Robert Hersh -------------- ----------------- Its: Vice President, Finance ------------------------ Date: June 11, 1998 \s\ William Rosenberger -------------- ------------------------ William F. Rosenberger Address for Notice to Rosenberger: ---------------------------------- ---------------------------------- Name of Designated Beneficiary: Address of Designated Beneficiary: - -------------------------------- ---------------------------------- ---------------------------------- 10 AMENDED EMPLOYMENT AGREEMENT This Amended Employment Agreement (the "Agreement") is made and entered into as of October 19, 1998 (the "Effective Date"), by and between Network Peripherals Inc., a Delaware corporation (the "Company"), and William F. Rosenberger ("Rosenberger"). The Agreement supersedes, in its entirety, Section 4 of the Employment Agreement between the Company and Rosenberger dated June 11, 1998. 4. Stock Option. Rosenberger shall be granted the option to purchase up to 500,000 shares of Common stock of the Company (the "Option"). Subject to Rosenberger's continued employment with the Company, the shares subject to the Option (the "Optioned Shares") shall become vested and exercisable at the rate of 50,000 Optioned Shares on December 21, 1998 and an additional 8,333 Optioned Shares for each full month of Rosenberger's employment with the Company thereafter. Provided that Rosenberger's employment with the company has not terminated prior to the date of the consummation of a Change in Control (as defined in paragraph 7 below), the vesting and exercisability of the Optioned Shares shall be accelerated effective as of the date ten (10) days prior to the date of the Change in control as to 100% of the Optioned Shares that would otherwise remain unvested as of the date of the Change in Control. Except as otherwise provided herein, the Option shall be subject to the terms of the Company's 1997 Stock Plan and the appropriate standard form Company stock option agreement, which Rosenberger shall be required to sign as a condition of the issuance of the Option. NETWORK PERIPHERALS INC. Date: October 19, 1998 By: \s\ Robert Hersh ---------------------- ----------------------------- Its: Vice President, Finance ---------------------------- Date: October 19, 1998 \s\ William Rosenberger ---------------------- -------------------------------- William F. Rosenberger 11 EX-10.42 5 SALARY CONTINUATION AGREEMENT Exhibit 10.42 Salary Continuation Agreement with Jerry McDowell SALARY CONTINUATION AGREEMENT This Salary Continuation Agreement (the "Agreement") is made and entered into as of October 19, 1998 (the "Effective Date"), by and between Network Peripherals Inc., a Delaware corporation (the "Company"), and Jerry McDowell ("Employee"). Recitals The Company recognizes that the possibility of a Change in Control or other event may occur which may change the nature and structure of the Company and that uncertainty regarding the consequences of such events may adversely affect the Company's ability to retain its key employees. The Company also recognizes that the Employee possesses an intimate and essential knowledge of the Company upon which the Company may need to draw for objective advice and continued services in connection with any acquisition of the Company or other Change in Control that is potentially advantageous to the Company's stockholders. The Company believes that the existence of this Agreement will serve as an incentive to Employee to remain in the employ of the Company and will enhance its ability to call on and rely upon the Employee in connection with a Change in Control. The Company and the Employee desire to enter into this Agreement in order to provide additional compensation and benefits to the Employee in recognition of past services and to encourage Employee to continue to devote his full attention and dedication to the Company and to continue his employment with the Company. 1. Definitions. As used in this Agreement, unless the context requires a different meaning, the following terms shall have the meanings set forth herein: (a) "Cause" means: (i) theft, a material act of dishonesty, fraud, the falsification of any employment or Company records or the commission of any criminal act which impairs Employee's ability to perform his duties under this Agreement; (ii) improper disclosure of the Company's confidential, business or proprietary information by the Employee; (iii) any action by Employee which the Company's Board of Directors (the "Board") reasonably believes has had or will have a material detrimental effect on the Company's reputation or business; or 1 (iv) persistent failure of the Employee to perform the lawful duties and responsibilities assigned by the Company which is not cured within a reasonable time following the Employee's receipt of written notice of such failure from the Company. (b) "Change in Control " means an Ownership Change Event (as defined below) or a series of related Ownership Change Events (collectively, the "Transaction") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "Transferee Corporation(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. For purposes of this Agreement, "Ownership Change Event" means the occurrence of any of the following with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (c) "Constructive Termination" means one or more of the following events that occurs within one (1) year after the occurrence of any Change in Control: (i) without the Employee's express written consent, the assignment to the Employee of any duties, or any limitation of the Employee's responsibilities, substantially inconsistent with the Employee's positions, duties, responsibilities and status with the Company immediately prior to the date of the Change in Control; (ii) without the Employee's express written consent, the removal of the Employee from the Employee's position with the Company as held by the Employee immediately prior to the Change in Control (including a termination of employment as a result of the death or Permanent Disability of the Employee), except in connection with the termination of the employment of the Employee by the Company for Cause; (iii) without the Employee's express written consent, the relocation of the principal place of the Employee's employment to a location that is more than fifty (50) miles from the Employee's principal place of employment immediately prior to the date of the Change in Control, or the imposition of travel requirements on the Employee substantially inconsistent with such travel requirements existing immediately prior to the date of the Change in Control; 2 (iv) any failure by the Company to pay, or any reduction by the Company of (1) the Employee's base salary in effect immediately prior to the date of the Change in Control (unless reductions comparable in amount and duration are concurrently made for all other employees of the Company with responsibilities, organizational level and title comparable to the Employee), or (2) the Employee's bonus compensation in effect immediately prior to the date of the Change in Control (subject to applicable performance requirements with respect to the actual amount of bonus compensation earned by the Employee and all other participants in the bonus program); (v) any failure by the Company to (1) continue to provide the Employee with the opportunity to participate, on terms no less favorable than those in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Company then held by the Employee, any benefit or compensation plans and programs, including, but not limited to, the Company's life, disability, health, dental, medical, savings, profit sharing, stock purchase and retirement plans in which the Employee was participating immediately prior to the date of the Change in Control, or their equivalent (provided, that any changes or terminations of such existing benefit or compensation plans or programs shall not be a Constructive Termination if the changed plan or program or a replacement plan or program provides equivalent or more favorable benefits or compensation to the Employee), or (2) provide the Employee with all other fringe benefits (or their equivalent) from time to time in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Company then held by the Employee; or (vi) any failure or refusal of a successor company to assume the Company's obligations under this Agreement as required by Section 13; provided, however, that the Employee's resignation as a result of any of the foregoing events shall be a voluntary resignation, and not a resignation following Constructive Termination, unless the Employee gives written notice of any such event(s) to the Board and allows the Company at least ten (10) days thereafter to correct such condition(s). (d) "Effective Date" means the day and year first set forth above. (e) "Permanent Disability" means that: (i) the Employee has been incapacitated by bodily injury or disease so as to be prevented thereby from engaging in the performance of the Employee's duties following reasonable accommodations on behalf of the Company; (ii) such total incapacity shall have continued for a period of six (6) consecutive months; and (iii) such incapacity will, in the opinion of a qualified physician, be permanent and continuous during the remainder of the Employee's life. 3 (f) "Termination Upon Change in Control" means any one of the following: (i) any termination of the employment of the Employee by the Company without Cause within one (1) year after the occurrence of any Change in Control; (ii) any termination of the employment of the Employee by the Company without Cause during the period commencing thirty (30) days prior to the date of the Company's first public announcement that the Company has entered into a definitive agreement to effect a Change in Control (even though still subject to approval by the Company's stockholders and other conditions and contingencies) and ending on the date of the Change in Control; or (iii) any resignation by the Employee from all capacities in which the Employee is then rendering service to the Company within a reasonable period of time following the event constituting Constructive Termination (with the termination of employment following death or Permanent Disability being deemed a resignation); provided, however, that "Termination Upon Change in Control" shall not include any termination of the employment of the Employee (1) by the Company for Cause; or (2) as a result of the voluntary termination of employment by the Employee that is not deemed a Constructive Termination under Subsection 1(c) above. 2. Position and Duties. Until a Change in Control, Employee shall continue to be an at-will employee of the Company employed in his current position at his then current salary rate, subject to revision from time to time by the Board of Directors or a committee thereof. Employee shall also be entitled to continue to participate in and to receive benefits on the same basis as other executive or senior staff members under any of the Company's employee benefit plans as in effect from time to time. In addition, Employee shall be entitled to the benefits afforded to other employees similarly situated under the Company's vacation, holiday and business expense reimbursement policies, as amended from time to time. Employee agrees to devote his full business time, energy and skill to his duties at the Company. These duties shall include, but not be limited to, any duties consistent with his position which may be assigned to Employee from time to time. 3. Benefits Upon Voluntary Termination, Permanent Disability or Death. In the event that Employee voluntarily terminates his employment relationship with the Company at any time and such termination is not deemed a Constructive Termination as described in Subsection 1(c) above, or in the event that Employee's employment terminates as a result of his death or Permanent Disability prior to a Change in Control, Employee shall be entitled to no compensation or benefits from the Company other than those earned under Section 2 above through the date of his termination of employment. 4. Termination Upon Change in Control. (a) In the event of the Employee's Termination Upon Change in Control, Employee shall be entitled to the following separation benefits: 4 (i) those benefits earned under Section 2 (other than any unpaid incentive bonus) through the date of Employee's termination; (ii) Employee's employment as an officer of the Company shall terminate immediately; however, the Company shall continue Employee's employment as a non-officer employee of the Company for a period of six (6) months following the date of the Employee's termination (the "Severance Period"). During such period, Employee shall be entitled to the greater of (1) Employee's then current salary at the time of the Change in Control, or (2) Employee's salary and bonus over the preceding six (6) months, in either case less applicable withholding, payable in accordance with the Company's normal payroll practices; (iii) within ten (10) days of submission of proper expense reports by the Employee, the Company shall reimburse the Employee for all expenses reasonably and necessarily incurred by the Employee in connection with the business of the Company prior to his termination of employment; (iv) continued provision of the Company's standard employee medical insurance coverages through the end of the Severance Period; thereafter, Employee shall be entitled to elect continued medical insurance coverage in accordance with the applicable provisions of federal law (COBRA); provided, however, that in the event Employee becomes covered under another employer's group health plan during the period provided for herein, the Company shall cease provision of continued group health insurance for Employee; and (v) notwithstanding any provisions to the contrary contained in any stock option agreement between the Company and the Employee, upon a Termination Upon Change in Control, (1) all stock options granted by the Company to the Employee prior to the Change in Control, which are not accelerated pursuant to the provisions of Section 5, shall become immediately exercisable and vested in full as of the time of such Termination Upon Change in Control; and (2) all such stock options shall remain exercisable for a period of at least one (1) year, subject to any longer periods for exercise of such options set forth in the particular option agreements. This Subsection 4(a)(v) shall apply to all such stock option agreements, whether heretofore or hereafter entered into between the Company and the Employee. (b) The Employee's entitlement to any benefits under Section 4 is conditioned upon the Employee's execution and delivery to the Company of (i) a general release of claims in a form satisfactory to the Company and (ii) a resignation from all of Employee's positions with the Company (with the exception of any continued employment for the purposes set forth in Section 4(a)) in a form satisfactory to the Company. (c) In the event that Employee accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity 5 which offers products or services that are competitive with any products or services offered by the Company or with any products or services that Employee is aware the Company intends to offer, Employee shall be deemed to have resigned from his employment with the Company effective immediately upon such acceptance of employment or provision of services. Upon such resignation, Employee shall not be entitled to any further payments or benefits as provided under this Section 4. (d) In the event that Employee accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity while Employee continues to receive any separation benefits pursuant to this Section 4, Employee shall immediately notify the Company of such acceptance and provide to the Company information with respect to such person or entity as the Company may reasonably request in order to determine if that person's or entity's products or services are competitive with the Company's. 5. Acceleration of Exercisability and Vesting of Stock Options Upon Change in Control. In the event of a Change in Control, all stock options granted to the Employee prior to the Change in Control (whether heretofore or hereafter granted) shall become immediately exercisable and vested in full effective as of the date thirty (30) days before the consummation of the transaction constituting such Change in Control. 6. Parachute Payments. In the event that any payment or benefit received or to be received by Employee pursuant to this Agreement or otherwise (collectively, the "Payments") would result in a "parachute payment" as described in section 280G of the Internal Revenue Code of 1986, as amended, notwithstanding the other provisions of this Agreement, the amount of such Payments will not exceed the amount which produces the greatest after-tax benefit to Employee. For purposes of the foregoing, the greatest after-tax benefit will be determined within thirty (30) days of the occurrence of such payment to Employee, in Employee's sole and absolute discretion. If no such determination is made by Employee within thirty (30) days of the occurrence of such payment, the Company will promptly make such determination in a fair and equitable manner. 7. Exclusive Remedy. Under any claim for breach of this Agreement or wrongful termination, the payments and benefits provided for in Section 4 shall constitute the Employee's sole and exclusive remedy for any alleged injury or other damages arising out of the cessation of the employment relationship between the Employee and the Company in the event of Employee's termination. Except as expressly set forth herein, the Employee shall be entitled to no other compensation, benefits, or other payments from the Company as a result of any termination of employment with respect to which the payments and/or benefits described in Section 4 have been provided to the Employee. 8. Proprietary and Confidential Information. The Employee agrees to continue to abide by the terms and conditions of the Company's confidentiality and/or proprietary rights agreement between the Employee and the Company. 9. Conflict of Interest. Employee agrees that for a period of one (1) year after termination of his employment with the Company, he will not, directly or indirectly, solicit the 6 services of or in any other manner persuade employees or customers of the Company to discontinue that person's or entity's relationship with or to the Company as an employee or customer, as the case may be. 10. Arbitration. Any claim, dispute or controversy arising out of this Agreement, the interpretation, validity or enforceability of this Agreement or the alleged breach thereof shall be submitted by the parties to binding arbitration by the American Arbitration Association in Santa Clara County, California; provided, however, that this arbitration provision shall not preclude the Company from seeking injunctive relief from any court having jurisdiction with respect to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company's trade secrets or confidential and proprietary information. All costs and expenses of arbitration or litigation, including but not limited to attorneys fees and other costs reasonably incurred by the prevailing party, as determined by such arbitration or litigation, shall be paid by the other party. Judgment may be entered on the award of the arbitration in any court having jurisdiction. 11. Interpretation. Employee and the Company agree that this Agreement shall be interpreted in accordance with and governed by the laws of the State of California. 12. Conflict in Benefits. This Agreement shall supersede all prior arrangements, whether written or oral, and understandings regarding the subject matter of this Agreement; provided, however, that this Agreement is not intended to and shall not affect, limit or terminate (i) any plans, programs, or arrangements of the Company that are either in writing or regularly made available to a significant number of employees of the Company, (ii) any agreement or arrangement with the Employee that has been reduced to writing and which does not relate to the subject matter hereof, or (iii) any agreements or arrangements hereafter entered into by the parties in writing, except as otherwise expressly provided herein. 13. Successors and Assigns. (a) Successors of the Company. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession transaction shall be a breach of this Agreement and shall entitle the Employee to terminate his employment with the Company within three (3) months thereafter and to receive the benefits provided under Section 4 of this Agreement in the event of Termination Upon Change in Control. As used in this Agreement, "Company" shall mean the Company as defined above and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 13 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) Heirs of Employee. This Agreement shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Employee should die after the conditions to payment of benefits set forth herein have been met and any amounts are still 7 payable to his hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's beneficiary, successor, devisee, legatee or other designee or, if there be no such designee, to the Employee's estate. Until a contrary designation is made to the Company, the Employee hereby designates as his beneficiary under this Agreement the person whose name appears below his signature on this Agreement. 14. Notices. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: if to the Company: Network Peripherals Inc. 1371 McCarthy Boulevard Milpitas, CA 95035 Attn: President and if to the Employee at the address specified at the end of this Agreement. Notice may also be given at such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 15. No Representations. Employee acknowledges that he is not relying and has not relied on any promise, representation or statement made by or on behalf of the Company which is not set forth in this Agreement. 16. Validity. If any one or more of the provisions (or any part thereof) of this Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. 8 17. Modification. This Agreement may only be modified or amended by a supplemental written agreement signed by Employee and the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year written below. Network Peripherals Inc. Date: October 19, 1998 By: ______________________________ Signature Title: Vice President, Finance Date: October 19, 1998 __________________________________ Employee's Signature Address for Notice to Employee: Name of Designated Beneficiary: Address of Designated Beneficiary: 9 EX-10.43 6 AMENDED AND RESTATED SALARY CONTINUATION AGREEMENT Exhibit 10.43 Salary Continuation Agreement with Wilson Cheung AMENDED AND RESTATED SALARY CONTINUATION AGREEMENT This Amended and Restated Salary Continuation Agreement (the "Agreement") is made and entered into as of January 13, 1999 (the "Effective Date"), by and between Network Peripherals Inc., a Delaware corporation (the "Company"), and Wilson Cheung ("Employee"). Recitals The Company recognizes that the possibility of a Change in Control or other event may occur which may change the nature and structure of the Company and that uncertainty regarding the consequences of such events may adversely affect the Company's ability to retain its key employees. The Company also recognizes that the Employee possesses an intimate and essential knowledge of the Company upon which the Company may need to draw for objective advice and continued services in connection with any acquisition of the Company or other Change in Control that is potentially advantageous to the Company's stockholders. The Company believes that the existence of this Agreement will serve as an incentive to Employee to remain in the employ of the Company and will enhance its ability to call on and rely upon the Employee in connection with a Change in Control. The Company and the Employee desire to enter into this Agreement in order to provide additional compensation and benefits to the Employee in recognition of past services and to encourage Employee to continue to devote his full attention and dedication to the Company and to continue his employment with the Company. 1. Definitions. As used in this Agreement, unless the context requires a different meaning, the following terms shall have the meanings set forth herein: (a) "Cause" means: (i) theft, a material act of dishonesty, fraud, the falsification of any employment or Company records or the commission of any criminal act which impairs Employee's ability to perform his duties under this Agreement; (ii) improper disclosure of the Company's confidential, business or proprietary information by the Employee; (iii) any action by Employee which the Company's Board of Directors (the "Board") reasonably believes has had or will have a material detrimental effect on the Company's reputation or business; or 1 (iv) persistent failure of the Employee to perform the lawful duties and responsibilities assigned by the Company which is not cured within a reasonable time following the Employee's receipt of written notice of such failure from the Company. (b) "Change in Control " means an Ownership Change Event (as defined below) or a series of related Ownership Change Events (collectively, the "Transaction") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "Transferee Corporation(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. For purposes of this Agreement, "Ownership Change Event" means the occurrence of any of the following with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (c) "Constructive Termination" means one or more of the following events that occurs within one (1) year after the occurrence of any Change in Control: (i) without the Employee's express written consent, the assignment to the Employee of any duties, or any limitation of the Employee's responsibilities, substantially inconsistent with the Employee's positions, duties, responsibilities and status with the Company immediately prior to the date of the Change in Control; (ii) without the Employee's express written consent, the removal of the Employee from the Employee's position with the Company as held by the Employee immediately prior to the Change in Control (including a termination of employment as a result of the death or Permanent Disability of the Employee), except in connection with the termination of the employment of the Employee by the Company for Cause; (iii) without the Employee's express written consent, the relocation of the principal place of the Employee's employment to a location that is more than fifty (50) miles from the Employee's principal place of employment immediately prior to the date of the Change in Control, or the imposition of travel requirements on the Employee substantially inconsistent with such travel requirements existing immediately prior to the date of the Change in Control; 2 (iv) any failure by the Company to pay, or any reduction by the Company of (1) the Employee's base salary in effect immediately prior to the date of the Change in Control (unless reductions comparable in amount and duration are concurrently made for all other employees of the Company with responsibilities, organizational level and title comparable to the Employee), or (2) the Employee's bonus compensation in effect immediately prior to the date of the Change in Control (subject to applicable performance requirements with respect to the actual amount of bonus compensation earned by the Employee and all other participants in the bonus program); (v) any failure by the Company to (1) continue to provide the Employee with the opportunity to participate, on terms no less favorable than those in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Company then held by the Employee, any benefit or compensation plans and programs, including, but not limited to, the Company's life, disability, health, dental, medical, savings, profit sharing, stock purchase and retirement plans in which the Employee was participating immediately prior to the date of the Change in Control, or their equivalent (provided, that any changes or terminations of such existing benefit or compensation plans or programs shall not be a Constructive Termination if the changed plan or program or a replacement plan or program provides equivalent or more favorable benefits or compensation to the Employee), or (2) provide the Employee with all other fringe benefits (or their equivalent) from time to time in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Company then held by the Employee; or (vi) any failure or refusal of a successor company to assume the Company's obligations under this Agreement as required by Section 13; provided, however, that the Employee's resignation as a result of any of the foregoing events shall be a voluntary resignation, and not a resignation following Constructive Termination, unless the Employee gives written notice of any such event(s) to the Board and allows the Company at least ten (10) days thereafter to correct such condition(s). (d) "Effective Date" means the day and year first set forth above. (e) "Permanent Disability" means that: (i) the Employee has been incapacitated by bodily injury or disease so as to be prevented thereby from engaging in the performance of the Employee's duties following reasonable accommodations on behalf of the Company; (ii) such total incapacity shall have continued for a period of six (6) consecutive months; and (iii) such incapacity will, in the opinion of a qualified physician, be permanent and continuous during the remainder of the Employee's life. 3 (f) "Termination Upon Change in Control" means any one of the following: (i) any termination of the employment of the Employee by the Company without Cause within one (1) year after the occurrence of any Change in Control; (ii) any termination of the employment of the Employee by the Company without Cause during the period commencing thirty (30) days prior to the date of the Company's first public announcement that the Company has entered into a definitive agreement to effect a Change in Control (even though still subject to approval by the Company's stockholders and other conditions and contingencies) and ending on the date of the Change in Control; or (iii) any resignation by the Employee from all capacities in which the Employee is then rendering service to the Company within a reasonable period of time following the event constituting Constructive Termination (with the termination of employment following death or Permanent Disability being deemed a resignation); provided, however, that "Termination Upon Change in Control" shall not include any termination of the employment of the Employee (1) by the Company for Cause; or (2) as a result of the voluntary termination of employment by the Employee that is not deemed a Constructive Termination under Subsection 1(c) above. 2. Position and Duties. Until a Change in Control, Employee shall continue to be an at-will employee of the Company employed in his current position at his then current salary rate, subject to revision from time to time by the Board of Directors or a committee thereof. Employee shall also be entitled to continue to participate in and to receive benefits on the same basis as other executive or senior staff members under any of the Company's employee benefit plans as in effect from time to time. In addition, Employee shall be entitled to the benefits afforded to other employees similarly situated under the Company's vacation, holiday and business expense reimbursement policies, as amended from time to time. Employee agrees to devote his full business time, energy and skill to his duties at the Company. These duties shall include, but not be limited to, any duties consistent with his position which may be assigned to Employee from time to time. 3. Benefits Upon Voluntary Termination, Permanent Disability or Death. In the event that Employee voluntarily terminates his employment relationship with the Company at any time and such termination is not deemed a Constructive Termination as described in Subsection 1(c) above, or in the event that Employee's employment terminates as a result of his death or Permanent Disability prior to a Change in Control, Employee shall be entitled to no compensation or benefits from the Company other than those earned under Section 2 above through the date of his termination of employment. 4. Termination Upon Change in Control. (a) In the event of the Employee's Termination Upon Change in Control, Employee shall be entitled to the following separation benefits: 4 (i) those benefits earned under Section 2 (other than any unpaid incentive bonus) through the date of Employee's termination; (ii) Employee's employment as an officer of the Company shall terminate immediately; however, the Company shall continue Employee's employment as a non-officer employee of the Company for a period of one (1) year following the date of the Employee's termination (the "Severance Period"). During such period, Employee shall be entitled to the greater of (1) Employee's then current salary at the time of the Change in Control, or (2) Employee's salary and bonus over the preceding twelve (12) months, in either case less applicable withholding, payable in accordance with the Company's normal payroll practices; (iii) within ten (10) days of submission of proper expense reports by the Employee, the Company shall reimburse the Employee for all expenses reasonably and necessarily incurred by the Employee in connection with the business of the Company prior to his termination of employment; (iv) continued provision of the Company's standard employee medical insurance coverages through the end of the Severance Period; thereafter, Employee shall be entitled to elect continued medical insurance coverage in accordance with the applicable provisions of federal law (COBRA); provided, however, that in the event Employee becomes covered under another employer's group health plan during the period provided for herein, the Company shall cease provision of continued group health insurance for Employee; and (v) notwithstanding any provisions to the contrary contained in any stock option agreement between the Company and the Employee, upon a Termination Upon Change in Control, (1) all stock options granted by the Company to the Employee prior to the Change in Control, which are not accelerated pursuant to the provisions of Section 5, shall become immediately exercisable and vested in full as of the time of such Termination Upon Change in Control; and (2) all such stock options shall remain exercisable for a period of at least one (1) year, subject to any longer periods for exercise of such options set forth in the particular option agreements. This Subsection 4(a)(v) shall apply to all such stock option agreements, whether heretofore or hereafter entered into between the Company and the Employee. (b) The Employee's entitlement to any benefits under Section 4 is conditioned upon the Employee's execution and delivery to the Company of (i) a general release of claims in a form satisfactory to the Company and (ii) a resignation from all of Employee's positions with the Company (with the exception of any continued employment for the purposes set forth in Section 4(a)) in a form satisfactory to the Company. (c) In the event that Employee accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity 5 which offers products or services that are competitive with any products or services offered by the Company or with any products or services that Employee is aware the Company intends to offer, Employee shall be deemed to have resigned from his employment with the Company effective immediately upon such acceptance of employment or provision of services. Upon such resignation, Employee shall not be entitled to any further payments or benefits as provided under this Section 4. (d) In the event that Employee accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity while Employee continues to receive any separation benefits pursuant to this Section 4, Employee shall immediately notify the Company of such acceptance and provide to the Company information with respect to such person or entity as the Company may reasonably request in order to determine if that person's or entity's products or services are competitive with the Company's. 5. Acceleration of Exercisability and Vesting of Stock Options Upon Change in Control. In the event of a Change in Control, all stock options granted to the Employee prior to the Change in Control (whether heretofore or hereafter granted) shall become immediately exercisable and vested in full effective as of the date thirty (30) days before the consummation of the transaction constituting such Change in Control. 6. Parachute Payments. In the event that any payment or benefit received or to be received by Employee pursuant to this Agreement or otherwise (collectively, the "Payments") would result in a "parachute payment" as described in section 280G of the Internal Revenue Code of 1986, as amended, notwithstanding the other provisions of this Agreement, the amount of such Payments will not exceed the amount which produces the greatest after-tax benefit to Employee. For purposes of the foregoing, the greatest after-tax benefit will be determined within thirty (30) days of the occurrence of such payment to Employee, in Employee's sole and absolute discretion. If no such determination is made by Employee within thirty (30) days of the occurrence of such payment, the Company will promptly make such determination in a fair and equitable manner. 7. Exclusive Remedy. Under any claim for breach of this Agreement or wrongful termination, the payments and benefits provided for in Section 4 shall constitute the Employee's sole and exclusive remedy for any alleged injury or other damages arising out of the cessation of the employment relationship between the Employee and the Company in the event of Employee's termination. Except as expressly set forth herein, the Employee shall be entitled to no other compensation, benefits, or other payments from the Company as a result of any termination of employment with respect to which the payments and/or benefits described in Section 4 have been provided to the Employee. 8. Proprietary and Confidential Information. The Employee agrees to continue to abide by the terms and conditions of the Company's confidentiality and/or proprietary rights agreement between the Employee and the Company. 9. Conflict of Interest. Employee agrees that for a period of one (1) year after termination of his employment with the Company, he will not, directly or indirectly, solicit the 6 services of or in any other manner persuade employees or customers of the Company to discontinue that person's or entity's relationship with or to the Company as an employee or customer, as the case may be. 10. Arbitration. Any claim, dispute or controversy arising out of this Agreement, the interpretation, validity or enforceability of this Agreement or the alleged breach thereof shall be submitted by the parties to binding arbitration by the American Arbitration Association in Santa Clara County, California; provided, however, that this arbitration provision shall not preclude the Company from seeking injunctive relief from any court having jurisdiction with respect to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company's trade secrets or confidential and proprietary information. All costs and expenses of arbitration or litigation, including but not limited to attorneys fees and other costs reasonably incurred by the prevailing party, as determined by such arbitration or litigation, shall be paid by the other party. Judgment may be entered on the award of the arbitration in any court having jurisdiction. 11. Interpretation. Employee and the Company agree that this Agreement shall be interpreted in accordance with and governed by the laws of the State of California. 12. Conflict in Benefits. This Agreement shall supersede all prior arrangements, whether written or oral, and understandings regarding the subject matter of this Agreement; provided, however, that this Agreement is not intended to and shall not affect, limit or terminate (i) any plans, programs, or arrangements of the Company that are either in writing or regularly made available to a significant number of employees of the Company, (ii) any agreement or arrangement with the Employee that has been reduced to writing and which does not relate to the subject matter hereof, or (iii) any agreements or arrangements hereafter entered into by the parties in writing, except as otherwise expressly provided herein. 13. Successors and Assigns. (a) Successors of the Company. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession transaction shall be a breach of this Agreement and shall entitle the Employee to terminate his employment with the Company within three (3) months thereafter and to receive the benefits provided under Section 4 of this Agreement in the event of Termination Upon Change in Control. As used in this Agreement, "Company" shall mean the Company as defined above and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 13 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) Heirs of Employee. This Agreement shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Employee should die after the conditions to payment of benefits set forth herein have been met and any amounts are still 7 payable to his hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's beneficiary, successor, devisee, legatee or other designee or, if there be no such designee, to the Employee's estate. Until a contrary designation is made to the Company, the Employee hereby designates as his beneficiary under this Agreement the person whose name appears below his signature on this Agreement. 14. Notices. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: if to the Company: Network Peripherals Inc. 1371 McCarthy Boulevard Milpitas, CA 95035 Attn: President and if to the Employee at the address specified at the end of this Agreement. Notice may also be given at such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 15. No Representations. Employee acknowledges that he is not relying and has not relied on any promise, representation or statement made by or on behalf of the Company which is not set forth in this Agreement. 16. Validity. If any one or more of the provisions (or any part thereof) of this Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. 8 17. Modification. This Agreement may only be modified or amended by a supplemental written agreement signed by Employee and the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year written below. Network Peripherals Inc. Date: January 13, 1999 By: ______________________________ Signature Title: President and CEO Date: January 13, 1999 __________________________________ Employee's Signature Address for Notice to Employee: Name of Designated Beneficiary: Address of Designated Beneficiary: 9 EX-10.44 7 AMENDED AND RESTATED SALARY CONTINUATION AGREEMENT Exhibit 10.44 Salary Continuation Agreement with Robert Zecha AMENDED AND RESTATED SALARY CONTINUATION AGREEMENT This Amended and Restated Salary Continuation Agreement (the "Agreement") is made and entered into as of January 13, 1999 (the "Effective Date"), by and between Network Peripherals Inc., a Delaware corporation (the "Company"), and Rob Zecha ("Employee"). Recitals The Company recognizes that the possibility of a Change in Control or other event may occur which may change the nature and structure of the Company and that uncertainty regarding the consequences of such events may adversely affect the Company's ability to retain its key employees. The Company also recognizes that the Employee possesses an intimate and essential knowledge of the Company upon which the Company may need to draw for objective advice and continued services in connection with any acquisition of the Company or other Change in Control that is potentially advantageous to the Company's stockholders. The Company believes that the existence of this Agreement will serve as an incentive to Employee to remain in the employ of the Company and will enhance its ability to call on and rely upon the Employee in connection with a Change in Control. The Company and the Employee desire to enter into this Agreement in order to provide additional compensation and benefits to the Employee in recognition of past services and to encourage Employee to continue to devote his full attention and dedication to the Company and to continue his employment with the Company. 1. Definitions. As used in this Agreement, unless the context requires a different meaning, the following terms shall have the meanings set forth herein: (a) "Cause" means: (i) theft, a material act of dishonesty, fraud, the falsification of any employment or Company records or the commission of any criminal act which impairs Employee's ability to perform his duties under this Agreement; (ii) improper disclosure of the Company's confidential, business or proprietary information by the Employee; (iii) any action by Employee which the Company's Board of Directors (the "Board") reasonably believes has had or will have a material detrimental effect on the Company's reputation or business; or 1 (iv) persistent failure of the Employee to perform the lawful duties and responsibilities assigned by the Company which is not cured within a reasonable time following the Employee's receipt of written notice of such failure from the Company. (b) "Change in Control " means an Ownership Change Event (as defined below) or a series of related Ownership Change Events (collectively, the "Transaction") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "Transferee Corporation(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. For purposes of this Agreement, "Ownership Change Event" means the occurrence of any of the following with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (c) "Constructive Termination" means one or more of the following events that occurs within one (1) year after the occurrence of any Change in Control: (i) without the Employee's express written consent, the assignment to the Employee of any duties, or any limitation of the Employee's responsibilities, substantially inconsistent with the Employee's positions, duties, responsibilities and status with the Company immediately prior to the date of the Change in Control; (ii) without the Employee's express written consent, the removal of the Employee from the Employee's position with the Company as held by the Employee immediately prior to the Change in Control (including a termination of employment as a result of the death or Permanent Disability of the Employee), except in connection with the termination of the employment of the Employee by the Company for Cause; (iii) without the Employee's express written consent, the relocation of the principal place of the Employee's employment to a location that is more than fifty (50) miles from the Employee's principal place of employment immediately prior to the date of the Change in Control, or the imposition of travel requirements on the Employee substantially inconsistent with such travel requirements existing immediately prior to the date of the Change in Control; 2 (iv) any failure by the Company to pay, or any reduction by the Company of (1) the Employee's base salary in effect immediately prior to the date of the Change in Control (unless reductions comparable in amount and duration are concurrently made for all other employees of the Company with responsibilities, organizational level and title comparable to the Employee), or (2) the Employee's bonus compensation in effect immediately prior to the date of the Change in Control (subject to applicable performance requirements with respect to the actual amount of bonus compensation earned by the Employee and all other participants in the bonus program); (v) any failure by the Company to (1) continue to provide the Employee with the opportunity to participate, on terms no less favorable than those in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Company then held by the Employee, any benefit or compensation plans and programs, including, but not limited to, the Company's life, disability, health, dental, medical, savings, profit sharing, stock purchase and retirement plans in which the Employee was participating immediately prior to the date of the Change in Control, or their equivalent (provided, that any changes or terminations of such existing benefit or compensation plans or programs shall not be a Constructive Termination if the changed plan or program or a replacement plan or program provides equivalent or more favorable benefits or compensation to the Employee), or (2) provide the Employee with all other fringe benefits (or their equivalent) from time to time in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Company then held by the Employee; or (vi) any failure or refusal of a successor company to assume the Company's obligations under this Agreement as required by Section 13; provided, however, that the Employee's resignation as a result of any of the foregoing events shall be a voluntary resignation, and not a resignation following Constructive Termination, unless the Employee gives written notice of any such event(s) to the Board and allows the Company at least ten (10) days thereafter to correct such condition(s). (d) "Effective Date" means the day and year first set forth above. (e) "Permanent Disability" means that: (i) the Employee has been incapacitated by bodily injury or disease so as to be prevented thereby from engaging in the performance of the Employee's duties following reasonable accommodations on behalf of the Company; (ii) such total incapacity shall have continued for a period of six (6) consecutive months; and (iii) such incapacity will, in the opinion of a qualified physician, be permanent and continuous during the remainder of the Employee's life. 3 (f) "Termination Upon Change in Control" means any one of the following: (i) any termination of the employment of the Employee by the Company without Cause within one (1) year after the occurrence of any Change in Control; (ii) any termination of the employment of the Employee by the Company without Cause during the period commencing thirty (30) days prior to the date of the Company's first public announcement that the Company has entered into a definitive agreement to effect a Change in Control (even though still subject to approval by the Company's stockholders and other conditions and contingencies) and ending on the date of the Change in Control; or (iii) any resignation by the Employee from all capacities in which the Employee is then rendering service to the Company within a reasonable period of time following the event constituting Constructive Termination (with the termination of employment following death or Permanent Disability being deemed a resignation); provided, however, that "Termination Upon Change in Control" shall not include any termination of the employment of the Employee (1) by the Company for Cause; or (2) as a result of the voluntary termination of employment by the Employee that is not deemed a Constructive Termination under Subsection 1(c) above. 2. Position and Duties. Until a Change in Control, Employee shall continue to be an at-will employee of the Company employed in his current position at his then current salary rate, subject to revision from time to time by the Board of Directors or a committee thereof. Employee shall also be entitled to continue to participate in and to receive benefits on the same basis as other executive or senior staff members under any of the Company's employee benefit plans as in effect from time to time. In addition, Employee shall be entitled to the benefits afforded to other employees similarly situated under the Company's vacation, holiday and business expense reimbursement policies, as amended from time to time. Employee agrees to devote his full business time, energy and skill to his duties at the Company. These duties shall include, but not be limited to, any duties consistent with his position which may be assigned to Employee from time to time. 3. Benefits Upon Voluntary Termination, Permanent Disability or Death. In the event that Employee voluntarily terminates his employment relationship with the Company at any time and such termination is not deemed a Constructive Termination as described in Subsection 1(c) above, or in the event that Employee's employment terminates as a result of his death or Permanent Disability prior to a Change in Control, Employee shall be entitled to no compensation or benefits from the Company other than those earned under Section 2 above through the date of his termination of employment. 4. Termination Upon Change in Control. (a) In the event of the Employee's Termination Upon Change in Control, Employee shall be entitled to the following separation benefits: 4 (i) those benefits earned under Section 2 (other than any unpaid incentive bonus) through the date of Employee's termination; (ii) Employee's employment as an officer of the Company shall terminate immediately; however, the Company shall continue Employee's employment as a non-officer employee of the Company for a period of one (1) year following the date of the Employee's termination (the "Severance Period"). During such period, Employee shall be entitled to the greater of (1) Employee's then current salary at the time of the Change in Control, or (2) Employee's salary and bonus over the preceding twelve (12) months, in either case less applicable withholding, payable in accordance with the Company's normal payroll practices; (iii) within ten (10) days of submission of proper expense reports by the Employee, the Company shall reimburse the Employee for all expenses reasonably and necessarily incurred by the Employee in connection with the business of the Company prior to his termination of employment; (iv) continued provision of the Company's standard employee medical insurance coverages through the end of the Severance Period; thereafter, Employee shall be entitled to elect continued medical insurance coverage in accordance with the applicable provisions of federal law (COBRA); provided, however, that in the event Employee becomes covered under another employer's group health plan during the period provided for herein, the Company shall cease provision of continued group health insurance for Employee; and (v) notwithstanding any provisions to the contrary contained in any stock option agreement between the Company and the Employee, upon a Termination Upon Change in Control, (1) all stock options granted by the Company to the Employee prior to the Change in Control, which are not accelerated pursuant to the provisions of Section 5, shall become immediately exercisable and vested in full as of the time of such Termination Upon Change in Control; and (2) all such stock options shall remain exercisable for a period of at least one (1) year, subject to any longer periods for exercise of such options set forth in the particular option agreements. This Subsection 4(a)(v) shall apply to all such stock option agreements, whether heretofore or hereafter entered into between the Company and the Employee. (b) The Employee's entitlement to any benefits under Section 4 is conditioned upon the Employee's execution and delivery to the Company of (i) a general release of claims in a form satisfactory to the Company and (ii) a resignation from all of Employee's positions with the Company (with the exception of any continued employment for the purposes set forth in Section 4(a)) in a form satisfactory to the Company. (c) In the event that Employee accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity 5 which offers products or services that are competitive with any products or services offered by the Company or with any products or services that Employee is aware the Company intends to offer, Employee shall be deemed to have resigned from his employment with the Company effective immediately upon such acceptance of employment or provision of services. Upon such resignation, Employee shall not be entitled to any further payments or benefits as provided under this Section 4. (d) In the event that Employee accepts employment with, or provides any services to (whether as a partner, consultant, joint venturer or otherwise), any person or entity while Employee continues to receive any separation benefits pursuant to this Section 4, Employee shall immediately notify the Company of such acceptance and provide to the Company information with respect to such person or entity as the Company may reasonably request in order to determine if that person's or entity's products or services are competitive with the Company's. 5. Acceleration of Exercisability and Vesting of Stock Options Upon Change in Control. In the event of a Change in Control, all stock options granted to the Employee prior to the Change in Control (whether heretofore or hereafter granted) shall become immediately exercisable and vested in full effective as of the date thirty (30) days before the consummation of the transaction constituting such Change in Control. 6. Parachute Payments. In the event that any payment or benefit received or to be received by Employee pursuant to this Agreement or otherwise (collectively, the "Payments") would result in a "parachute payment" as described in section 280G of the Internal Revenue Code of 1986, as amended, notwithstanding the other provisions of this Agreement, the amount of such Payments will not exceed the amount which produces the greatest after-tax benefit to Employee. For purposes of the foregoing, the greatest after-tax benefit will be determined within thirty (30) days of the occurrence of such payment to Employee, in Employee's sole and absolute discretion. If no such determination is made by Employee within thirty (30) days of the occurrence of such payment, the Company will promptly make such determination in a fair and equitable manner. 7. Exclusive Remedy. Under any claim for breach of this Agreement or wrongful termination, the payments and benefits provided for in Section 4 shall constitute the Employee's sole and exclusive remedy for any alleged injury or other damages arising out of the cessation of the employment relationship between the Employee and the Company in the event of Employee's termination. Except as expressly set forth herein, the Employee shall be entitled to no other compensation, benefits, or other payments from the Company as a result of any termination of employment with respect to which the payments and/or benefits described in Section 4 have been provided to the Employee. 8. Proprietary and Confidential Information. The Employee agrees to continue to abide by the terms and conditions of the Company's confidentiality and/or proprietary rights agreement between the Employee and the Company. 9. Conflict of Interest. Employee agrees that for a period of one (1) year after termination of his employment with the Company, he will not, directly or indirectly, solicit the 6 services of or in any other manner persuade employees or customers of the Company to discontinue that person's or entity's relationship with or to the Company as an employee or customer, as the case may be. 10. Arbitration. Any claim, dispute or controversy arising out of this Agreement, the interpretation, validity or enforceability of this Agreement or the alleged breach thereof shall be submitted by the parties to binding arbitration by the American Arbitration Association in Santa Clara County, California; provided, however, that this arbitration provision shall not preclude the Company from seeking injunctive relief from any court having jurisdiction with respect to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company's trade secrets or confidential and proprietary information. All costs and expenses of arbitration or litigation, including but not limited to attorneys fees and other costs reasonably incurred by the prevailing party, as determined by such arbitration or litigation, shall be paid by the other party. Judgment may be entered on the award of the arbitration in any court having jurisdiction. 11. Interpretation. Employee and the Company agree that this Agreement shall be interpreted in accordance with and governed by the laws of the State of California. 12. Conflict in Benefits. This Agreement shall supersede all prior arrangements, whether written or oral, and understandings regarding the subject matter of this Agreement; provided, however, that this Agreement is not intended to and shall not affect, limit or terminate (i) any plans, programs, or arrangements of the Company that are either in writing or regularly made available to a significant number of employees of the Company, (ii) any agreement or arrangement with the Employee that has been reduced to writing and which does not relate to the subject matter hereof, or (iii) any agreements or arrangements hereafter entered into by the parties in writing, except as otherwise expressly provided herein. 13. Successors and Assigns. (a) Successors of the Company. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession transaction shall be a breach of this Agreement and shall entitle the Employee to terminate his employment with the Company within three (3) months thereafter and to receive the benefits provided under Section 4 of this Agreement in the event of Termination Upon Change in Control. As used in this Agreement, "Company" shall mean the Company as defined above and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 13 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) Heirs of Employee. This Agreement shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Employee should die after the conditions to payment of benefits set forth herein have been met and any amounts are still 7 payable to his hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's beneficiary, successor, devisee, legatee or other designee or, if there be no such designee, to the Employee's estate. Until a contrary designation is made to the Company, the Employee hereby designates as his beneficiary under this Agreement the person whose name appears below his signature on this Agreement. 14. Notices. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: if to the Company: Network Peripherals Inc. 1371 McCarthy Boulevard Milpitas, CA 95035 Attn: President and if to the Employee at the address specified at the end of this Agreement. Notice may also be given at such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 15. No Representations. Employee acknowledges that he is not relying and has not relied on any promise, representation or statement made by or on behalf of the Company which is not set forth in this Agreement. 16. Validity. If any one or more of the provisions (or any part thereof) of this Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. 8 17. Modification. This Agreement may only be modified or amended by a supplemental written agreement signed by Employee and the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year written below. Network Peripherals Inc. Date: January 13, 1999 By: ______________________________ Signature Title: President and CEO Date: January 13, 1999 __________________________________ Employee's Signature Address for Notice to Employee: Name of Designated Beneficiary: Address of Designated Beneficiary: 9 EX-21 8 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Subsidiaries of the Registrant Subsidiaries of Network Peripherals Inc. and their respective states or countries of incorporation are listed as follows: 1. Network Peripherals International Ltd., incorporated in Delaware 2. NetVision Corporation, incorporated in New York 3. Network Peripherals Asia Inc., incorporated in Taiwan 4. Network Peripherals Europe B.V., incorporated in the Netherlands. EX-23.2 9 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-60359) of Network Peripherals Inc. of our report dated January 25, 1999 appearing on page 18 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998. PricewaterhouseCoopers LLP San Jose, California March 22, 1999 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 5,537 17,814 3,953 (523) 3,124 30,647 9,493 (4,933) 35,549 4,577 0 0 0 12 30,960 35,549 28,585 28,585 17,250 17,250 20,729 0 0 (7,889) 0 (7,889) 0 0 0 (7,889) (0.64) (0.64)
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