-----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, T7SufdU9ADelCGMQ3N/kuyWO780DuIvTNVaWJJ312cGY0bxS6hR2nXKc37vDKvAK MWtavASRIK3R5HJKKvfsVw== 0001012870-00-000272.txt : 20000203 0001012870-00-000272.hdr.sgml : 20000203 ACCESSION NUMBER: 0001012870-00-000272 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000128 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: 516829 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, 1999 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) 2859 Bayview Drive Fremont, California 94538 (Address, including zip code of principal executive offices) (510) 897-5000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(g) of the Act: Title of class Common Stock Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of January 25, 2000 was $610,560,503 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 January 25, 2000 was 12,753,222. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's proxy statement for its annual meeting of stockholders to be held on April 25, 2000 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.................................................... 23 ITEM 8. Financial Statements and Supplementary Data................................................................... 24 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................................................................... 39 PART III ITEM 10. Directors and Executive Officers of the Registrant............................................................ 40 ITEM 11. Executive Compensation........................................................................................ 40 ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................................ 40 ITEM 13. Certain Relationships and Related Transactions................................................................ 40 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................... 41 Signatures.................................................................................................... 43 Supplemental Schedule......................................................................................... 44
2 PART I ITEM 1. BUSINESS We design and sell highly scalable, cost-effective Gigabit Ethernet switching solutions designed for local area networks, or LANs. All of our switches are based on our highly flexible NuWaveArchitecture, which combines our advanced design and our proprietary Application-Specific Integrated Circuits, or ASICs. This architecture is designed to enable us to deliver standards-based switches that can work seamlessly with a wide variety of existing LAN infrastructures and technologies. We believe our NuWaveArchitecture offers the industry's only wire- speed, non-blocking performance capability on all ports in a stackable configuration and facilitates the creation of multiple configurations of Fast Ethernet and Gigabit Ethernet switches. We are focusing our sales and marketing resources on original equipment manufacturers, or OEMs. Our NuWaveArchitecture allows OEMs to quickly create or expand their product lines for the rapidly growing and changing enterprise market at lower costs and with greater functionality than possible with other currently available switch architectures. As the Internet and complex applications, such as enterprise resource planning, data warehousing and data backup, have become pervasive, the volume of data traffic over LANs has increased dramatically and created bottlenecks on LANs that degrade network performance. Enterprises have historically implemented Layer 2 switches and software-based Layer 3 routers to manage increased traffic and to provide the intelligence necessary to process increasingly complex multi-protocol traffic. However, increasing bandwidth requirements and transmission speeds combined with multiple traffic types such as voice, data and video have strained the performance capabilities of software-based Layer 3 routers. In response to these developments, LAN managers have begun to implement hardware-based Layer 3 switches in their networks to replace both Layer 2 switches and software-based Layer 3 multi-protocol routers. Despite the performance improvements of Layer 3 switches versus Layer 3 routers, many of today's Layer 3 switching solutions still have limitations, such as traffic blocking when additional switches are stacked to increase capacity. We address this issue and others through our proprietary NuWaveArchitecture, which enables us to deliver the following benefits to our customers and end-users: . High performance at low cost. We believe our advanced architecture and modular design enable us to deliver products with exceptional price/performance advantages regardless of scale or configuration. . Scalability. We believe we offer the only wire speed, non-blocking Layer 3 stacked switching solution, thereby enabling enterprises to expand their LANs without creating bottlenecks or impacting network performance. We designed our products to enable the stacking, where additional modular units can connect to existing units via internal high bandwidth channels that do not block traffic or reduce switching resources. . Flexibility. Our proprietary technology enables us to rapidly create new product configurations without redesigning the proprietary ASICs that form the core of our switches. As a result, we believe our OEM customers will be able to bring new products to market more quickly than would be possible using competitive product offerings or internally developed technology. In addition, our architecture enables us to add software-based Layer 4-7 capabilities. . Manageability. Our products' true stacking capabilities simplify network management because the management software views the stacked modules as a single unit. We believe our products reduce the complexity of network management, thereby lowering overall cost of ownership. We were incorporated in California in March 1989 and were reincorporated in Delaware in 1994. We initially focused on networking products based on fiber distributed data interface, or FDDI, technology, and we obtained a significant share of the market for FDDI adapter products in the early 1990s. Because the market for FDDI-based products declined significantly beginning in 1995, we developed a new line of Layer 2 Fast Ethernet switching products that we first shipped in early 1996. By 1998, the market for our FDDI-based products and our Layer 2 Fast Ethernet products (together, our "legacy products") declined substantially, and we committed nearly all our resources to the development of a new line of Layer 3 Gigabit Ethernet switches founded on our NuWaveArchitecture. We commenced limited commercial shipments of the first product in this line, the Keyston24g in December 1999. Due to the decrease in profitability of our Layer 2 Fast Ethernet products, in June 1999 we divested our research and development operations in Taiwan that were focused on legacy products. See Note 8 to Consolidated Financial Statements. As used in this annual report, the terms "we," "us," "our" and "NPI" mean Network Peripherals Inc. and its subsidiaries (unless the context indicates another meaning), and the term "common stock" means our common stock, par value $0.001 per share. 3 PRODUCTS AND TECHNOLOGY Through 1999, our product offerings consisted of Fast Ethernet and FDDI LAN switches and hubs, FDDI to Fast Ethernet bridges, FDDI Network Interface Cards, and network management software. However, as the life cycle of these legacy products reached maturity during 1999, we intend to decrease, and ultimately cease, shipment of these products in 2000 in accordance to the decreasing demand and profitability in this market. The information in the following paragraphs contains forward-looking statements describing new products that are expected to be available for shipment to our customers during 2000. The successful completion and shipment of these products is subject to a number of uncertainties, including verification testing to confirm that the products meet our standards for quality, reliability and interoperability; availability of components; pricing actions by competitors that may render it unprofitable to introduce the products; market acceptance of the products; and the emergence or broad acceptance of new technologies that may render the products obsolete. All of our Gigabit Ethernet switches are based on our flexible NuWaveArchitecture, which combines advanced design and proprietary ASICs to deliver standards-based switches that are intended to work seamlessly with any existing LAN. Our NuWaveArchitecture offers the industry's only wire-speed, non- blocking performance capability on all ports in a stackable configuration and facilitates the creation of multiple configurations of Fast Ethernet and Gigabit Ethernet switches. This architecture offers a 64 Gigabit per second, or Gbps, crosspoint switching fabric that enables stacked configurations of up to 96 Fast Ethernet ports or 16 Gigabit Ethernet ports or a combination of Fast Ethernet and Gigabit Ethernet ports. All ports operate at Layer 2 and Layer 3 and provide Layer 4 functionality. In addition, the NuWaveArchitecture eliminates blocking with multiple input buffers, separate queues for unicast and multicast traffic and other special queuing and buffering techniques. Further, our architectural approach gives us the capability to increase functionality and reduce cost in future generations of NuWaveArchitecture. Standalone LAN Switching Solutions Keystone24g. We began commercial shipments of the Keystone24g in December 1999. It is the first commercially available Gigabit Ethernet switch based on our NuWaveArchitecture. It is a fully managed standalone switch with 24 fixed Fast Ethernet ports and two optional Gigabit up-links. The Keystone24g features advanced, traffic-enhancing capabilities such as wire-speed IP routing and support for QoS traffic classes, IP Multicast and protocol-based virtual LANs. Stacking LAN Switching Solutions Keystone24mg Stack Master. We expect to commence commercial shipments of the Keystone24mg Stack Master in the first quarter of 2000. It is a highly scalable, fully managed Layer 3 switch that supports high capacity Gigabit Ethernet, Fast Ethernet and WAN interfaces. The Keystone24mg incorporates a powerful, non-blocking 64-Gbps switching fabric. The Keystone24mg Stack Master has 24 fixed Fast Ethernet ports and in a stacked environment can provide up to 96 Fast Ethernet ports without blocking. Enterprises can combine the Keystone24mg with up to three Capstone24t and/or Capstone8f Stack Slaves to provide a highly scalable, cost-effective Layer 3 stacked switching solution. The Keystone24mg Stack Master communicates with and manages all Capstone Stack Switch ports over the stacking interface as if they were built directly into the Keystone24mg chassis. The use of dedicated, separate channels for user data and management and control information is designed to ensure wire-speed performance even under sustained periods of high traffic volume while maintaining network integrity. Capstone24t Stack Slave. We expect to commence commercial shipments of our Capstone24t Stack Slave in the first quarter of 2000. The Capstone24t connects to the Keystone24mg over an advanced stacking interface based on our proprietary ASICs. The interface connects the Capstone24t directly to the Keystone24mg's 64-Gbps switching fabric. The Capstone24t sends data over a dedicated 6-Gbps channel and sends management and control information over a separate 2-Gbps link. The Capstone24t has 24 fixed, full-duplex, auto-negotiating Fast Ethernet ports. One Capstone24t and one Keystone24mg create a 48-port stack, while a combination of one Keystone24mg and three Capstone24t switches creates a 96-port stack. The addition of two optional Gigabit up-links on the Keystone24mg can expand the stack functionality and extend price/performance advantages. Capstone8f Stack Slave. We expect to commence commercial shipments of the Capstone8f Stack Slave in the first quarter of 2000. The Capstone8f is similar in features and functions to the Capstone24t except that it is designed to communicate over a fiber connection rather than a copper connection used in the Capstone24t. Each Capstone8f offers eight fixed Fast Ethernet ports. A combination of one Keystone24mg and three Capstone8f switches builds a 48-port stack. 4 Backbone Switch in Solutions Cornerstone6g Switch. We expect to commence commercial shipments of the Cornerstone6g in the first quarter of 2000. The Cornerstone6g provides up to 12 Gigabit ports and 16 Fast Ethernet ports. The Cornerstone6g is a fully managed standalone switch that supports high capacity Gigabit Ethernet and Fast Ethernet port configurations. The base unit has six fixed Gigabit Ethernet ports. Customers can also choose an additional six Gigabit Ethernet ports and a 16 port Fast Ethernet option. Gigabit Ethernet ports on the Cornerstone6g are available in short-haul fiber (SX) and long-haul fiber (LX), and we are developing a configuration that utilizes copper. This combination of port options makes our Cornerstone6g suitable for a range of high performance applications, including data centers, network backbones and power workgroups. Management Software NuSightGEMS is our Gigabit Ethernet management software that we bundle and ship with our NuWaveArchitecture products. The initial version shipped with our Keystone24g in December 1999, and we intend to offer enhanced versions for each of our NuWaveArchitecture products as they are produced. NuSightGEMS provides advanced and easy to use management capabilities that simplify user configuration of our products as well as diagnostic and management tools. This software allows users to define policies to prioritize traffic flowing through the switch according to user name, user group, time of day and location. NuSightGEMS is based on widely accepted industry standards and operates with a variety of management software applications. Further, NuSightGEMS interacts with Novell's Network Directory Services to provide customers with Directory Enabled Network functions that can establish network behavior based on user-defined procedures. NuSightGEMS also takes advantage of the various QoS functions incorporated with our NuWaveArchitecture to give customers greater management control and flexibility over our products and their LANs. MARKETING, SALES AND SUPPORT We focus our sales and marketing efforts on OEMs, value added resellers, or VARs, system integrators and distributors. As of December 31, 1999, our worldwide sales and marketing organization included 32 full-time technically trained marketing, sales and support personnel located in the United States, the Netherlands and Taiwan. We have domestic sales offices located in Fremont and Los Angeles, California, and Boston, Massachusetts. The information in the following paragraph contains forward looking statements describing our sales and marketing strategy. There are a number of uncertainties that could affect the success of the plan including the timely availability of new products by us, reliability, price and performance characteristics of the components, new and existing products, the introduction of similar products by competitors, pricing actions by competitors and our inability to recruit and retain required sales and marketing staff with the needed skills. OEMs. We anticipate that the majority of our sales in future periods will be to OEM customers. OEMs frequently require that suppliers modify their product configuration to meet specific parameters such as port density or management functionality. Our NuWaveArchitecture is designed to allow OEMs to quickly create or expand their product lines for the rapidly growing enterprise market at lower costs and with greater functionality than possible with other switch architectures. We intend to leverage the flexibility of the NuWaveArchitecture to integrate our products into OEMs' product lines. OEMs can exercise significant influence in the development of our target market because they utilize our products to deliver to end users complete, factory-configured solutions that are installed and field-serviced by the OEM's technical support organizations. We intend to partner with leading OEMs to introduce new products and develop new markets. OEMs will provide critical input as we develop the next generation of products. Our sales personnel, in addition to traditional marketing and sales functions, are responsible for initiating and developing relationships with OEM leaders in the computer networking industry. While we do not generally obtain long-term purchase commitments from OEM customers, we enter into contracts with OEM customers to establish the terms and conditions of sales made pursuant to orders from OEMs. Further, the OEM customers typically provide us with a rolling forecast up to three months in advance of shipment. VARs, System Integrators and Distributors. We also expect future revenue from sales to VARs, system integrators and distributors. We have existing relationships with a large number of these distribution channel customers due to our experience with our legacy products. We intend to leverage this base of resellers to seek new opportunities in the deployment of the NuWave product line. Our technically trained staff is responsible for initiating and developing relationships with these customers by providing insight into the evolution of the network environment and facilitating the development and deployment of optimal network solutions, domestically and internationally. In 1999, 56% of our sales was in North America, with the balance of the sales to Asia and Europe, representing 30% and 14%, respectively. Sun Microsystems accounted for 36% of net sales in 1999. The Company has experienced fluctuations in the volume of activity with individual customers and changes in customer base and expects such fluctuations and changes 5 to continue in the future with the NuWave product line. The loss of a major customer, reductions of a major order or delay in a major shipment could adversely affect our business and financial performance. RESEARCH AND DEVELOPMENT In June 1999, we divested our Hsin-chu office, the research and development center for our Layer 2 switching products located in Taiwan, as an integral part of our strategy to direct all engineering effort towards the development of the NuWaveArchitecture. The net assets, assembled workforce and intellectual property associated with our Layer 2 switching products were transferred to the buyer; however, we retained royalty-free licensing rights to continue development and distribution of these products. In 1999, our research and development expenses were $7.8 million. The information in this section contains forward-looking statements describing our product development plans for 2000 and beyond. The successful development and introduction of new products is subject to a number of uncertainties, including our ability to recruit, train and retain adequate numbers of professional engineers, successful design of proprietary ASICs and computer software, design, development and verification testing to confirm that the products meet our standards for quality, reliability and interoperability, availability of components, pricing actions by competitors that may render it unprofitable to introduce the products, unanticipated technical obstacles or delays, and the emergence or wide acceptance of new technologies that could render our products obsolete. Our future success is dependent on our ability to enhance current products and to design and produce new products that are at the forefront of technological advancements. We work closely with our OEM partners, reseller customers and research organizations to identify new solutions to meet the current and future needs of enterprises and Internet service providers. We design our products consistent with industry standards to ensure interoperability, and we intend to support emerging standards in accordance with our product strategy. We designed the NuWaveArchitecture based on common ASICs and management software to serve as the foundation of all new products in the NuWave product line. This enables us to reduce product design and development cycles providing for fast time to market for new products and features. We intend to exploit the NuWaveArchitecture in reducing costs and enhancing existing products and in developing new products. As of December 31, 1999, we employed 31 personnel in research and development, including ASIC design, software development and quality assurance. We also engage third party consultants to expedite development efforts of certain projects when appropriate. CUSTOMER SERVICE AND SUPPORT AND QUALITY ASSURANCE Our customer service and support organization maintains and supports products sold by our sales force to end users, and provides technical support to our VARs and OEMs. Generally, our VARs and OEMs provide installation, maintenance and support services to their customers, and we assist them in providing such support. Questions and problems from end users, VARs and OEMs can be handled via telephone, e-mail and facsimile. Our website is continually updated to enable our customers to download the latest technical information and tips, along with firmware, software and product manuals. This same group also conducts new product Beta testing to ensure that our new products will meet customer requirements when those products reach the marketplace. Our quality assurance organization is tied to our customer service and support organization in order to maintain its focus on satisfaction of customer requirements and expectations. This group conducts network testing, OEM and third party testing, problem reproduction and resolution and validation of manufacturing tools in order to ensure compliance with industry standards, product performance and interoperability with our customer's existing equipment. MANUFACTURING Our manufacturing operations consist of procurement of components and the assembly, testing and quality assurance of finished goods for shipment to customers. We purchase the components of our products, including our proprietary ASICs, circuit boards, integrated circuits and power supplies, from third parties. NEC is the sole manufacturer of our ASICs. We monitor the quality of the purchased components through quality assurance procedures at our manufacturing facility in Taiwan and in our headquarters in Fremont, California. We currently conduct final test and assembly of our products at our manufacturing facility in Taiwan, which is staffed by 52 full-time personnel experienced in advanced manufacturing, test engineering and quality assurance. Our manufacturing operation is ISO 9002 certified. In January 2000, we entered into an agreement with Solectron Corporation, a major contract manufacturer with global capabilities, located in Milpitas, California, to provide additional manufacturing capacity. This arrangement will enable us to manufacture our products near our customers and accommodate significant increases in production volume, if necessary. Under this contract, Solectron will purchase the components for our products and assemble them to our specifications. We believe this will enable us to leverage Solectron's established relationships with suppliers to procure materials at reduced costs and mitigate potential supply constraints. We intend to utilize Solectron's extensive resources and expertise to assist us in manufacturing engineering, repair and product testing and burn-in. We intend to continue to perform all component and supplier qualification, quality assurance and document control at our facilities. We select suppliers on the basis of technology, manufacturing capacity, quality and cost. Whenever possible and practicable, we strive to have at least two manufacturing locations for each component. Nevertheless, our reliance on third party suppliers and manufacturers involves risks, including possible limitations on availability of products due to market abnormalities, lack of control over delivery schedules, fluctuating manufacturing yields, and high production costs. The 6 inability of our suppliers to deliver products of acceptable quality and in a timely manner or our inability to procure adequate supplies of our products could have a material adverse effect on our business, financial condition or operating results. COMPETITION The markets in which we compete are intensely competitive and are characterized by frequent new product introductions, changing customer preferences and evolving technology and industry standards. Our competitors continue to introduce products with improved price/performance characteristics, and we will have to do the same to remain competitive. Increased competition is likely to result in significant price reductions and may result in lower than expected revenues or profit margins, any of which could harm our business, financial condition or operating results. Many of our current and potential competitors have significantly broader product offerings, greater financial, technical, marketing and other resources, and larger installed bases of customers than we do. The Layer 3 switching market is in the early stage of development with competition in this market coming from relatively new market entrants such as Extreme Networks and Foundry Networks, as well as from more established companies such as Nortel Networks, Cisco Systems and 3Com. We believe that this market will consolidate over time and that this consolidation could adversely affect our ability to compete effectively. A number of companies developing technologies similar to ours have been acquired by our larger competitors. These acquisitions are likely to permit our competitors to devote significantly greater resources to the development and marketing of new competitive products and the marketing of existing products to their installed bases. We expect that competition will increase as a result of these and other industry consolidations and alliances. Some of our current and potential OEM customers could develop products internally that would replace our products. The resulting lost sales of our products to any such OEMs, in addition to the increased competition presented by these OEMs, could have a material adverse effect on our business, financial condition and operating results. We believe that the principal competitive factors in the LAN equipment market include the completeness of product offerings, product quality, price and performance, adherence to industry standards, the degree of interoperability with other networking equipment and time to market for new products. We believe that we compete favorably with respect to each of these factors. In particular, we believe that our true stacking Layer 3 switch solutions compete very favorably with respect to price when compared to other Layer 3 switches available today. INTELLECTUAL PROPERTY Our success is dependent upon our proprietary technology. The core of our proprietary technology is the NuWaveArchitecture and our proprietary ASICs. We rely principally upon copyright, trademark and trade secret laws to protect our proprietary technology. We generally enter into confidentiality or license agreements with employees, suppliers, customers and potential customers, limiting or prohibiting their disclosure of our proprietary information. Although we hold one U.S. patent covering technology of our legacy products, we do not own any patents or have pending patent applications associated with our NuWaveArchitecture. We seek to protect our proprietary rights and other intellectual property through a combination of copyright, trademark and trade secret protection, as well as through contractual protections such as proprietary information agreements and nondisclosure agreements. We also believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements and reliable product maintenance are essential to establishing and maintaining a technology leadership position. We generally enter into confidentiality or license agreements with our employees, consultants and corporate partners, and generally control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult, and there can be no assurance that the steps taken by us will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as do the laws of the United States. 7 EXECUTIVE OFFICERS The executive officers of NPI and their ages are as follows: Name Age Position - -------------------------------------------------------------------------------- William Rosenberger 50 President, Chief Executive Officer, and Director Robert Zecha 42 Vice President, Research and Development James Sullivan 47 Vice President, Sales Wilson Cheung 36 Vice President, Finance and Chief Financial Officer Joseph Botta 59 Vice President, Operations Jerry McDowell 54 Vice President, Marketing William Rosenberger has served as the President, Chief Executive Officer and a director of NPI since July 1998. From January 1996 to June 1998, Mr. Rosenberger was President and Chief Executive Officer 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. Robert Zecha has served as Vice President of Research and Development of NPI 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 was a director of 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. James Sullivan has served as Vice President of Sales since joining NPI in October 1997. From July 1985 to July 1997, he held several sales management positions with Novell, Inc., including Vice President of Worldwide OEM Sales and Senior Director of North American Channel Sales. Wilson Cheung has served as Vice President of Finance and Chief Financial Officer of NPI since October 1998. Preceding the appointment to this office, Mr. Cheung held various management positions since joining NPI in July 1995. From July 1994 to June 1995, Mr. Cheung was a financial analyst at Sybase Inc., a software company. From 1991 through June 1994, Mr. Cheung held various senior financial analyst positions at Raychem Corp., a materials component company. From 1988 to 1991, Mr. Cheung was a senior auditor at Coopers & Lybrand. Joseph Botta has served as Vice President of Operations of NPI since June 1999. Previously, Mr. Botta was the Principal Owner of Silver Creek Investments. From March 1997 through November 1997, he was the Vice President of Operations at ACT Networks, Inc., a wide-area network access products manufacturer. From 1988 to 1997, he held various management positions at Whittaker Corporation, a networking company, most recently serving as Executive Vice President. Jerry McDowell has been Vice President of Marketing of NPI since November 1998. From June 1996 to November 1998 he was President and Executive Director of Research of The Robert Frances Group, a syndicated market research firm which he co-founded. From March 1994 to November 1996, Mr. McDowell was Senior Director of Marketing and Business Development at Objective Systems Integrators, a software company. Mr. McDowell has also served in executive and management positions at Dataquest, the Meta Group, Wang Laboratories, Paradyne and others. * As of December 31, 1999 8 EMPLOYEES As of December 31, 1999, we employed 145 people, including 31 in research and development, 32 in sales, marketing and technical, 61 in manufacturing operations and 21 in finance and administration. Of those employees, 71 were in international locations. None of our employees is represented by a labor union. We consider our relations with our employees to be good. Competition for employees in our industry and geographical areas is intense, and there can be no assurance that we will be successful in attracting and retaining such personnel. ITEM 2. PROPERTIES Our principal executive offices are located in Fremont, California, and consist of 22,500 square feet under a lease that will expire in October 2004. Additionally, we have research and development facilities in Long Island, New York and manufacturing facilities in Taiwan. The property on which our Taiwan facility is located is currently in receivership. If, as a result of this receivership, we are unable to maintain our lease of this property, we may need to relocate our facility. There is no guarantee that we will be able to find a suitable replacement facility on equal terms or of sufficient quality. We have international sales offices in the Netherlands and Taiwan, as well as satellite offices in Los Angeles, California and Boston, Massachusetts. We expect that these existing facilities will be generally adequate to meet our immediate and foreseeable needs. ITEM 3. LEGAL PROCEEDINGS From time to time, we may be involved in litigation relating to claims arising out of our operations. As of the date of this Annual Report, we are not a party to any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1999. 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Our Common Stock is traded in the over-the-counter market on the Nasdaq National Market. As of January 25, 2000, there were approximately 120 stockholders of record. The following table sets forth, for the fiscal periods indicated, the high and low closing prices for the Common Stock, all as reported by Nasdaq. 1997 High Low - ------------------------------------------------------------------ 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 1999 - ------------------------------------------------------------------ First Quarter $ 7.25 $ 3.69 Second Quarter 19.38 5.75 Third Quarter 19.94 16.00 Fourth Quarter 47.75 18.88 We have never paid or declared any cash dividends. It is our present policy to retain earnings to finance the growth and development of the business and, therefore, we do not anticipate paying cash dividends on our Common Stock in the foreseeable future. 10 ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) Consolidated Statements of Operations Data: Net sales $ 10,231 $28,585 $ 34,798 $ 53,080 $47,144 Cost of sales 9,410 17,250 25,341 28,590 24,690 ---------------------------------------------------- Gross profit 821 11,335 9,457 24,490 22,454 ---------------------------------------------------- Operating expenses: Research and development 7,803 11,485 9,757 8,570 4,811 Marketing and selling 6,437 6,010 13,242 11,849 7,319 General and administrative 3,503 3,234 3,982 3,378 2,226 Gain on sale of assets (1,055) - - - - Acquired research and development in process - - 6,462 13,732 - Restructuring expense - - 3,662 - - ---------------------------------------------------- Total operating expenses 16,688 20,729 37,105 37,529 14,356 ---------------------------------------------------- Income (loss) from operations (15,867) (9,394) (27,648) (13,039) 8,098 Interest income 908 1,505 1,680 1,745 2,236 ---------------------------------------------------- Income (loss) before income taxes (14,959) (7,889) (25,968) (11,294) 10,334 Provision for (benefit from) income taxes - - (3,526) 608 3,617 ---------------------------------------------------- Net income (loss) $(14,959) $(7,889) $(22,442) $(11,902) $ 6,717 ==================================================== Net income (loss) per share: Basic $ (1.19) $ (0.64) $ (1.85) $ (1.01) $ 0.60 ==================================================== Diluted $ (1.19) $ (0.64) $ (1.85) $ (1.01) $ 0.57 ==================================================== Weighted average common shares: Basic 12,584 12,281 12,154 11,760 11,147 ==================================================== Diluted 12,584 12,281 12,154 11,760 11,736 ====================================================
December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- (in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments $ 9,715 $23,351 $ 30,465 $ 45,873 $52,141 Working capital 12,565 26,070 34,439 54,997 63,269 Total assets 20,852 35,549 45,889 71,434 70,111 Stockholders' equity 17,909 30,972 38,679 59,857 65,709
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: . the timely development and market acceptance of our new products; . the market demand by customers for our existing products, including demand by OEM customers for custom products; . competitive actions, including pricing actions and the introduction of new competitive products, that may affect the volume of sales of our products; . uninterrupted supply of key components, including semiconductor devices and other materials, some of which may be sourced from a single supplier; . uninterrupted service by contract manufacturers; . our ability to recruit, train and retain key personnel, including engineers and other technical professionals; . the development of new technologies rendering our existing technologies and products obsolete; . the economies of countries where our products are distributed; and . general market conditions. In evaluating these forward-looking statements, consideration should also be given to the Business Risks discussed in a subsequent section of this annual report. OVERVIEW We were incorporated in California in March 1989 and were reincorporated in Delaware in 1994. Our initial business focus was on networking products based on fiber distributed data interface, or FDDI, technology, and we obtained a significant share of the market for FDDI adapter products in the early 1990s. Because the market for FDDI-based products declined significantly beginning in 1995, we developed a new line of Layer 2 Fast Ethernet switching products that we first shipped in early 1996. By 1998, the market for our FDDI-based products and our Layer 2 Fast Ethernet products (together, our "legacy products") declined substantially, and we committed nearly all of our resources to the development of a new line of Layer 3 Gigabit Ethernet switches founded on our NuWaveArchitecture. A substantial portion of our operating expenses in 1998 and 1999 was related to the design and development of our custom ASICs, the development of network management software and the testing of prototype designs. We commenced limited commercial shipments of the first product in this line, the Keystone24g, in December 1999. We anticipate that substantially all of our revenues in future periods will be derived from sales of products based on the NuWaveArchitecture and that sales of our legacy products will decline to immaterial levels by the end of 2000. We derived substantially all of our revenue in 1999 from sales of our legacy products with sales to Sun Microsystems accounting for 36% of our revenue. The balance of the sales in 1999 was to other OEMs and to the reseller channel. We derived 56% of our revenues from sales to customers in North America, 30% of our revenues from sales to customers in Asia and 14% of our revenues from sales to customers in Europe. For our NuWave product line in 2000, we intend to focus our sales and marketing efforts on developing and expanding our OEM customer base, and to a lesser extent, to continue servicing existing reseller customers while seeking new opportunities in the reseller channel. We have sales offices in the United States, Taiwan and the Netherlands. All sales are denominated in U.S. dollars. We generally recognize product revenue upon shipment, provided that no significant obligations remain and collectibility is probable. Revenue from customer support agreements is deferred and recognized ratably over the term of the agreement. Cost of revenue is comprised principally of payments to our materials suppliers, contract manufacturers, final assembly costs, manufacturing and quality functions, inventory management costs and certain product costs. We expect our gross profit to be affected by many factors, including: . declines in the average selling price of our products; . fluctuations in demand for our products; . the volume of products sold; . the mix of products and services sold; . the mix of sales channels through which our products are sold; and . new product introductions both by us and our competitors. 12 Generally, we realize higher margins on sales to the reseller channel than on sales to OEMs. Any change in the mix between the channels or the loss of a major customer could adversely affect our gross margin, operating results and financial condition. We experienced significant erosion in the average selling prices of our legacy products, and we anticipate that the average selling prices of our products based on the NuWaveArchitecture will decrease from their levels at introduction and fluctuate in the future. Therefore, to maintain or increase our gross margins, we must develop and introduce new products and enhancements on a timely basis. We must also continually reduce our costs of production. As our average selling prices decline, we must increase our unit sales volume to maintain or increase our revenue. We intend to allocate materials procurement, product assembly and test engineering in reliability and burn-in between our own manufacturing facility and Solectron, our contract manufacturer, to obtain optimal production efficiencies. We will continue to perform component and supplier qualification, quality assurance and document control at our facilities. We believe that this strategy will enable us to achieve lower costs if volumes increase. In transitioning from our legacy business to our NuWave business, we have incurred significant losses in the past three years primarily reflecting declining revenues of legacy products in conjunction with substantial investments in research and development to bring NuWave products to market. Although we expect revenues to increase upon volume shipment of the entire NuWave family of products in the early part of 2000, we cannot assure you that such revenues will exceed production costs and operating expenses in the same periods. RESULTS OF OPERATIONS Net Sales Our net sales were $10.2, $28.6 and $34.8 million in 1999, 1998 and 1997, respectively. The decrease reflected declining demand of FDDI and Fast Ethernet legacy products, as the technology of these products reached maturity. In 1999, sales of Fast Ethernet products represented 51% of net sales with the balance attributed to FDDI products. Net sales to OEM customers declined to $5.2 million in 1999 from $19.4 and $22.0 million in 1998 and 1997, respectively. Net sales to the reseller channel followed the same trend, declining to $5.0 million in 1999 from $9.2 and $12.8 million in 1998 and 1997, respectively. Net sales to customers in North America were $5.7, $19.7 and $25.8 million in 1999, 1998 and 1997, respectively. The balance of net sales of $4.5, $8.9 and $9.0 million in 1999, 1998 and 1997, respectively, were to Asia and Europe. Gross Profit/Margin Our gross margin in 1999 was 8%, compared to gross margins of 40% and 27% in 1998 and 1997, respectively. The erosion of gross margin in 1999 primarily reflected the competitive pricing pressures on the Fast Ethernet products as this market reached the commodity stage. Further, the decline in production volume of all legacy products resulted in under-utilization of our manufacturing facilities and excess overhead charges. The improvement in gross margin from 1997 to 1998 was due to restructuring actions taken in 1997, which included the write-off of slow-moving and obsolete inventories and a one-time charge associated with the transfer of manufacturing facilities. Research and Development Our research and development expenses were $7.8, $11.5 and $9.8 million, in 1999, 1998 and 1997, respectively. Research and development expenses in 1997 were net of contract funding of $217,000. No contract funding was received in 1999 and 1998. The focus of our research and development efforts since 1997, pursuant to the acquisition of NetVision Corporation, was principally on the development of the NuWaveArchitecture. We began diverting our resources away from our legacy products in the third quarter of 1997 as part of the restructuring described below. The diversion of resources continued through June 1999, when the we completely ceased further investment in legacy products, except for sustaining engineering and warranty support, by divesting the engineering group responsible for such development efforts (see "Gain on Sale of Assets" below). Accordingly, the decrease in research and development expenses in 1999 from 1998 primarily reflected reduction in compensation, overhead costs and project costs associated with the termination of legacy product development, including the divestiture of our research and development office in Taiwan. The increase in expenses from 1997 to 1998 was primarily attributed to the deployment of resources in the development of the NuWaveArchitecture. These resources included outside consultants and contract engineering services used to develop the proprietary ASICs and network management software. The increase in expenses in 1998 was also attributed to a one-time charge of approximately $500,000 incurred in connection with the elimination of non-critical personnel in research and development, in an effort to further streamline operations. 13 Marketing and Selling Marketing and selling expenses were $6.4, $6.0 and $13.2 million in 1999, 1998 and 1997, respectively. In 1997, we realigned our marketing and sales strategy to focus on broadening our OEM customer base, rather than penetrating the distribution channel, which was the focus of previous sales and marketing efforts. An OEM-based strategy required substantially less sales and marketing resources, in particular a smaller sales force and less advertising and promotion expenditures directed at brand name recognition. However, the deployment of our renewed strategy required the addition of personnel with expertise in the development of OEM relationships. Accordingly, in 1999 and in the latter part of 1998, we added staff to the sales and marketing group, including technicians and senior management, and redirected advertising campaigns to draw OEM interest, which was reflected in the increased spending in 1999 compared to 1998. The decrease in spending from 1997 to 1998 was primarily attributed to the restructuring described below, which included reducing staff and closure of regional sales offices, and the termination of marketing programs directed at the distribution channel. General and Administrative General and administrative expenses were $3.5, $3.2 and $4.0 million in 1999, 1998 and 1997, respectively. In 1999, we incurred higher professional fees, which was the primary factor to increased expenses in 1999 compared to 1998. These professional fees included the engagement of an investor relations firm and increased fees paid to information system consultants to prepare us for year 2000 issues (see "Year 2000 Compliance" below). The decrease in expenses from 1997 to 1998 was primarily the result of diminished fees to third parties, including renegotiated insurance costs and consulting fees, and the realization of reduced staff associated with the restructuring described below. Acquired Research and Development In Process In April 1997, we acquired NetVision Corporation, a company specializing in LAN switching and Gigabit Ethernet technologies. We expensed $6.5 million of acquired research and development in process as a result of the acquisition. See Note 9 of Notes to Consolidated Financial Statements. Restructuring In the third quarter of 1997, we incurred a charge of $3.7 million for the restructuring of our 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 Systems Inc. in 1996. We completed the restructuring in the second quarter of 1998. See Note 10 of Notes to Consolidated Financial Statements. Gain on Sale of Assets In connection with the sale of our research and development facilities in Hsin- chu, Taiwan, which was completed in June 1999, we recorded a gain of $1,055,000, net of payments of broker fees and severance of $216,000. The divestiture of this office was completed in an effort to reduce our investment in the legacy products and to focus our resources on the commercialization of NuWave products. Interest Income Interest income was $908,000 in 1999, compared to $1.5 and $1.7 million in 1998 and 1997. The decrease was primarily a reflection of the declining aggregate balance of cash, cash equivalents and short-term investments during the three years ended 1999. Despite a lower fund balance in 1998 compared to 1997, the return on investments did not decline in direct relation to the balance. This resulted from a higher rate of return which reflected a shift from short-term investments in tax-exempt securities to taxable corporate securities in mid- 1997. Income Taxes We did not record a tax benefit associated with the net loss incurred in 1999 and 1998, as we deemed that it was more likely than not that the deferred tax assets will not be realized based on evidence available and, accordingly, a full valuation allowance was provided. During 1998, we received an income tax refund of $4 million as a result of the carryback claim of the 1997 net operating loss to offset net income recognized in 1995 and 1994. The related tax benefit was fully recognized in 1997. Our effective tax rate for 1997 was a benefit of 13.6%, which reflected a net loss and a full valuation allowance provided against 14 deferred tax assets. The effective tax benefit rate for 1997 was reduced due to the charge for acquired research and development in process, which was non- deductible for income tax purposes. Recent Accounting Pronouncement In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. We will adopt SFAS No. 133 during its year ending December 31, 2001. To date, we have not engaged in derivative or hedging activities. We are unable to predict the impact of adopting SFAS No. 133 if we were to engage in derivative and hedging activity in the future. Euro Conversion We have a wholly-owned subsidiary in the Netherlands, which is one of the 11 European countries participating in the adoption of a common currency, the Euro, on January 1, 1999. Following the introduction of the Euro, the legacy currency in each participating country remains as legal tender until January 1, 2002. During the transition period, either the Euro or the legacy currency may be used to pay for goods and services. Beginning January 1, 2002, participating countries will issue new Euro-denominated bills and coins, and the legacy currency will no longer be the legal tender for any transactions after July 1, 2002. Our subsidiary in the Netherlands is a sales office for the entire European region. Sales made to all European countries are denominated in US dollars. Expenses incurred by this subsidiary are currently paid in guilders, the legacy currency. In 1999 and 1998, sales to all European customers accounted for 14% and 10%, respectively, of our total sales, and 6% of our total operating expenses in both 1999 and 1998 were attributed to this subsidiary. Due to the immateriality of expenses of the Netherlands subsidiary relative to our operations as a whole, we believe the Euro conversion will not have any significant impact to our results of operations during and after the transition period. Year 2000 Compliance Although the date is now past January 1, 2000, we have not experienced an immediate adverse impact from the transition to the Year 2000. However, we cannot provide assurance that we or our suppliers and customers have not been affected in a manner that is not yet apparent. In addition, some computer programs that were date sensitive to the Year 2000 may not have been programmed to process the Year 2000 as a leap year, and any negative consequential effects remain unknown. As a result, we will continue to monitor our Year 2000 compliance and the Year 2000 compliance of our suppliers and customers. 15 LIQUIDITY AND CAPITAL RESOURCES Our working capital was $12.6 million and $26.1 million at December 31, 1999 and December 31, 1998, respectively, and the current ratio (ratio of current assets to current liabilities) was 5.3 to 1 and 6.7 to 1, respectively. The aggregate balance of cash, cash equivalents and short-term investments decreased to $9.7 million at December 31, 1999 from $23.4 million at December 31, 1998. The decrease was primarily due to cash used to finance operations and capital expenditures. In 1999, net cash used in operating activities was $13.6 million, which was principally attributed to the net loss for the year of $15.0 million, partially offset by a net decrease in accounts receivable of $3 million. In 1998, net cash used in operating activities was $4.2 million, which was attributed to the net loss for the year of $7.9 million, partially offset by the collection of an income tax refund of $4.0 million. Our capital expenditures totaled $2.6 million in both 1999 and 1998. In 1999, we relocated our corporate headquarters to a larger facility in Fremont, California. Capital expenditures for the move, including leasehold improvements, totaled approximately $700,000. The balance of the expenditures in 1999 was principally for the purchase of design equipment and software licenses for the development of the NuWaveArchitecture, as well as test equipment for our quality assurance laboratory. In 1998, the expenditures included the purchase of a SMT line, or equipment for advanced manufacturing, totaling $600,000. The remainder of the expenditures was for equipment and licenses used in the design of ASICs. Our principal sources of liquidity are our cash, cash equivalents and short-term investments. We also have a $5 million revolving bank line of credit, which expires on May 31, 2000. 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 our receivables, inventory, and other tangible assets. There were no borrowings under the line of credit in 1999 and 1998. Under the line of credit, we are required to maintain at least $8 million in cash, cash equivalents and short term investments. As of December 31, 1999, we were in compliance with this requirement. In the first half of 2000, with the authorization by our Board of Directors, we intend to increase our working capital by issuing common shares in a follow-on public offering. The net proceeds from this follow-on public offering are expected to be used for general corporate purposes, which may include the purchase of equipment and the expansion of operations. We also may use a portion of the net proceeds to acquire or invest in businesses, technologies, products or services that are complementary to our business. From time to time we have discussed potential strategic acquisitions and investments with third parties. We are not currently in discussions regarding any acquisitions or investments and have no agreements or commitments to complete any such transaction. We believe that our current balance of cash, cash equivalents, and short-term investments, together with proceeds from the follow-on public offering, will be sufficient to satisfy our working capital and capital expenditure requirements for the next 12 months. BUSINESS RISKS If any of the following risks actually occurs, our business, financial condition or operating results could be materially adversely affected. The risks set forth below are not the only risks facing us. Additional risks and uncertainties not presently known to us, or that we currently see as immaterial, may also harm our business. We have a history of losses, expect future losses and cannot assure you that we will achieve profitability. We have experienced net losses in each of the last four fiscal years, and we cannot be certain that we will realize sufficient revenue to achieve profitability. We expect that we will continue to incur significant sales and marketing and product development costs associated with the recent introduction of the Gigabit Ethernet products based on our NuWaveArchitecture. Consequently, we will need to generate significantly higher revenue to achieve and sustain profitability. If sales of our NuWaveArchitecture products do not meet our expectations, we will continue to experience losses indefinitely. In addition, we have discontinued production of the Layer 2 Fast Ethernet and FDDI products that accounted for our historical revenues. We intend to complete end-of-life sales of these products in the first half of 2000. We cannot assure you that we will be able to sell all inventory relating to these products. If we are required to write-off any unsold inventory, our operating results could be adversely affected. Substantially all of our future revenue depends on the commercial success of products based on our NuWaveArchitecture, and if these products do not achieve market acceptance, our business will be seriously harmed. Substantially all of our future revenue depends on the commercial success of products based on our NuWaveArchitecture. We recently introduced the first product based on our NuWaveArchitecture, and we intend to introduce several new products based on this technology in the near future. 16 If these products fail to meet the needs of our target customers, or if they do not compare favorably in price and performance to competing solutions, our revenue will not grow. We cannot assure you that these products will achieve market acceptance. We have made only limited sales of these products, and it is possible that they may not satisfy our customers' requirements. Failure of products based on our NuWaveArchitecture to satisfy our customers' requirements could delay or prevent their adoption. If our target customers do not widely adopt, purchase and successfully deploy our new products, our revenue will not grow significantly, or possibly at all, and our business, financial condition and results of operations will be seriously harmed. A number of factors could cause our quarterly and annual financial results to be worse than expected, which could result in a decline in our stock price. To support anticipated sales of our NuWaveArchitecture products, we plan to increase our operating expenses to expand our sales and marketing activities, broaden our customer support capabilities, develop new distribution channels and fund increased levels of research and development. We base our operating expenses on anticipated revenue trends, and a high percentage of our expenses are fixed in the short term. Consequently, any delay or failure in generating revenue could cause our quarterly and annual operating results to be below the expectations of public market analysts or investors, which could cause the price of our common stock to decline. We may fail or experience a delay in generating revenue for a number of reasons. Our customer agreements typically provide that the customer may delay scheduled delivery dates and cancel orders within specified time frames without significant penalty. Accordingly, we may incur significant expenses without meeting corresponding anticipated revenue levels for a given period. In addition, the timing of product releases, purchase orders and product availability could result in significant product shipments scheduled for the end of a quarter. Failure to ship these products by the end of a quarter may adversely affect our operating results. Our periodic revenue and operating results have varied significantly in the past and may vary significantly in the future due to a number of factors, including: . market acceptance of and demand for our NuWaveArchitecture products; . decreased average selling prices of our products . unexpected product returns or the cancellation or rescheduling of significant orders; . our ability to develop, introduce, ship and support new products and product enhancements and manage product transitions; . announcements and new product introductions by our competitors; . our ability to achieve cost reductions; . our ability to obtain sufficient supplies of components for our products for which we rely on sole or limited source suppliers; . increased prices of the components we purchase; . our ability to attain and maintain production volumes and quality levels for our products; . the mix of products sold and the mix of distribution channels through which they are sold; and . costs relating to possible acquisitions and integration of technologies or businesses. Due to the foregoing factors, we believe that period-to-period comparisons of our operating results should not be relied upon as an indicator of our future performance. 17 Intense competition in the market for LAN equipment could prevent us from increasing revenue or achieving or sustaining profitability. The market for local area network, or LAN, equipment is intensely competitive. Our principal competitors include Alcatel, Bay Networks, Cabletron Systems, Cisco Systems, Ericsson, Extreme Networks, Foundry Networks, Lucent Technologies, Nortel Networks, Siemens, and 3Com. Many of our current and potential competitors have substantially greater financial, technical, sales, marketing and other resources, as well as greater name recognition and larger installed customer bases, than we do. These competitors have developed or could in the future develop new technologies that compete with our products or even render our products obsolete. We believe that this market will consolidate over time and that this consolidation could adversely affect our ability to compete effectively. A number of companies developing technologies similar to ours have been acquired by our larger competitors. These acquisitions are likely to permit our competitors to devote significantly greater resources to the development and marketing of new competitive products and the marketing of existing products to their installed bases. We expect that competition will increase as a result of these and other industry consolidations and alliances. To remain competitive, we believe we must, among other things, invest significant resources in developing new products with superior performance at competitive prices, enhance our NuWaveArchitecture products and maintain customer satisfaction. If we fail to do so, our products may not compete favorably, and our revenue and future profitability could suffer. The average selling prices of our products may decrease rapidly, which may reduce gross margins or revenue if we are unable to reduce our cost of goods sold. The enterprise LAN equipment industry has experienced rapid erosion of average selling prices due to a number of factors, including competitive pricing pressures and rapid technological change. We may experience substantial period- to-period fluctuations in future operating results due to the erosion of our average selling prices. We anticipate that the average selling prices of our products will decrease in the future in response to competitive pricing pressures, increased sales discounts, new product introductions by us or our competitors or other factors. Therefore, to maintain our gross margins, we must develop and introduce on a timely basis new products and product enhancements and continually reduce our product costs. As the average selling prices for our products are expected to decline, we will need to reduce our product costs, particularly the cost of our ASICs. To reduce the cost of ASICs we intend to integrate chips and reduce die sizes. However, we cannot be certain when or if such price reductions will occur. Our failure to achieve cost reductions would cause our revenue and gross margins to decline, which would harm affect our operating results. We must develop and expand our OEM relationships and other indirect distribution channels to increase revenue and improve our operating results. Our distribution strategy focuses primarily on developing and expanding indirect distribution channels through original equipment manufacturers, or OEMs and, to a lesser extent, resellers, as well as expanding our field sales organization. If we fail to develop and cultivate relationships with significant OEMs, or if these OEMs are not successful in their product development and sales efforts, sales of our products may fail to increase and may even decrease. Our ability to generate increased revenue depends significantly upon the ability and willingness of our OEM customers to develop and promote products that incorporate our technology on a timely basis. If our OEM customers do not successfully market the solutions that incorporate our products, then sales of our products to our OEM customers will be adversely affected. The ability and willingness of OEM customers to develop and promote our products is based upon a number of factors beyond our control. In addition, some of our current and potential OEM customers could develop products internally that would replace our products. The resulting lost sales of our products to any such OEMs, in addition to the increased competition presented by these OEMs, could harm our business, financial condition and operating results. Although we have secured a limited number of OEM customers for our NuWaveArchitecture products, nearly all of these customers are still at the early stages of initial commercial shipments. If our OEM customers are unable to or otherwise do not ship systems that are based on our products, or if their shipped systems are not commercially successful, our business, operating results or financial condition could suffer. In order to support for our indirect distribution channels, we plan to expand our field sales and support staff. We cannot assure you that this internal expansion will be successfully completed, that the cost of this expansion will not exceed the revenue generated or that our expanded sales and support staff will be able to compete successfully against the significantly more extensive and well-funded sales and marketing operations of many of our current or potential competitors. Our inability to effectively establish our distribution channel s or manage the expansion of our sales and support staff could limit our ability to grow and increase revenue. Our market is subject to rapid technological change, and we must continually introduce new products that achieve broad market acceptance to compete effectively. The LAN equipment market is characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. If we do not address these changes by regularly introducing new products, our product line will become obsolete. Developments in routers and routing software could also 18 significantly reduce demand for our products. Alternative technologies could achieve widespread market acceptance and displace the the Ethernet technology on which our product lines and architecture are based. We cannot assure you that our technological approach will achieve broad market acceptance or that other technologies or devices will not supplant our approach. When we announce new products or product enhancements that have the potential to replace or shorten the life cycle of our existing products, customers may defer purchasing our existing products. These actions could harm our operating results by unexpectedly decreasing sales, increasing our inventory levels of older products and exposing us to greater risk of product obsolescence. The market for enterprise LAN switching products is evolving, and we believe our ability to compete successfully in this market is dependent upon the continued compatibility and interoperability of our products with products offered by other vendors. In particular, the networking industry has been characterized by the successive introduction of new technologies and standards that have dramatically reduced the price and increased the performance of enterprise LAN equipment. To remain competitive, we need to introduce products in a timely manner that incorporate or are compatible with these new technologies as they emerge. We may experience delays in product development in the future, and any delay in product introduction could adversely affect our ability to compete and cause our operating results to be below our expectations or the expectations of public market analysts or investors. Because we expect to depend on a small number of OEM and distribution channel customers for a significant portion of our revenue in any period, the loss of any of these customers or any cancellation or delay of a large purchase by any of these customers could significantly reduce our revenue. Our sales strategy is to focus on selling our NuWaveArchitecture products to OEM customers, and we anticipate that, although our largest customers may vary from period-to-period, a small number of key OEM customers will account for a significant portion of our revenues in each fiscal period. We cannot assure you that we will be able to obtain OEM customers, and even if we are successful, this strategy will pose a number of significant risks. The loss of any key OEM customers, or a significant reduction in sales to those customers, could significantly reduce our revenue below anticipated levels. Because our expense levels are based on our expectations as to future revenue and to a large extent are fixed in the short term, a substantial reduction or delay in sales of our products to, or the loss of any significant OEM, reseller or other customer, or unexpected returns from resellers could harm our business, operating results and financial condition. While we expect that our financial performance in any given period will depend on orders from a small number of OEMs, resellers and other significant customers, we do not have contracts with customers binding them to minimum purchase quantities, except as set forth in a particular purchase orders. For example: . our customers can stop purchasing, and our OEMs and resellers can stop marketing our products, at any time; . our reseller agreements generally are not exclusive and are for one year terms, with no obligation of the resellers to renew the agreements; and . our OEM and reseller agreements provide for discounts based on expected or actual volumes of products purchased or resold by the reseller in a given period. In the future we expect to establish a program which, under specified conditions, enables some distributors to return products to us. The amount of potential product returns will be estimated and provided for in the period of the sale; however, we cannot assure you that our estimates will be adequate to cover actual returns. The sales cycle for our products is long, and we may incur substantial non- recoverable expenses or devote significant resources to sales that do not occur when anticipated. Our sales cycle, particularly to OEMs, typically involves a lengthy qualification process during which we generally invest significant resources to address customer specifications. Because of the length of the sales cycle, we may experience delays between increasing expenses for research and development and sales and marketing efforts and the generation of higher revenue, if any, from such expenditures. If sales forecasted from a specific customer for a particular quarter are not realized in that quarter, we may be unable to compensate for the shortfall, which could harm our 19 operating results. The purchase of our products or of solutions that incorporate our products typically involves significant internal procedures associated with the evaluation, testing, implementation and acceptance of new technologies. This evaluation process frequently results in a lengthy sales process, typically ranging from three months to longer than a year, and subjects each sale to a number of significant risks, including budgetary constraints and internal acceptance reviews. The length of our sales cycle also may vary substantially from customer to customer. We purchase several key components for our products from single or limited sources and could lose sales if these sources fail to meet our needs. We currently purchase several key components used in the manufacture of our products from single or limited sources and depend upon supply from these sources to meet our needs. We may encounter shortages and delays in obtaining components in the future that materially adversely affect our ability to meet customer orders. In particular, NEC Corporation is the sole manufacturer of the ASICs that form the core of our NuWave Architecture products. We do not have a long-term supply contract with NEC that obligates them to continue to supply components to us, and it is possible that they could allocate their resources to their other customers in the future, which could materially disrupt our ability to manufacture our products and meet customer demands. Qualifying an alternative manufacturer of our ASICs would be time consuming, costly and disruptive. In addition, we acquire certain microprocessors and other integrated circuits as well as a custom designed power supply from sole source suppliers. While we believe we could qualify alternative suppliers for these products, any delays caused by supply disruptions could result in increased component prices that could adversely affect our gross margins. We also use certain components including memory components and printed circuit boards, that we acquire from limited sources that create risks similar to those created by our sole source supply arrangements. We use a rolling 12-month forecast based on anticipated product orders to determine our material requirements. Lead times for materials and components we order vary significantly and depend on factors such as the specific supplier, contract terms and market demand for a component at a given time. If orders do not match forecasts, we may have excess or inadequate inventory of certain materials and components, which could materially adversely affect our operating results and financial condition. From time to time we have experienced shortages and allocations of certain components, resulting in delays in filling orders. In the future we may again experience these shortages, particularly with respect to the supply of semiconductors. We may need to expand or relocate our manufacturing operations and may depend on contract manufacturers for a significant portion of our manufacturing requirements. We currently manufacture all of our products at our facility in Taiwan. If the demand for our products grows, we will need to increase our material purchases, internal manufacturing capacity and internal test and quality functions. Any disruptions in product flow could limit our revenue, adversely affect our competitive position and reputation and result in additional costs or cancellation of orders under agreements with our customers. The property on which our Taiwan facility is located is currently in receivership. If, as a result of this receivership, we are unable to maintain our lease of this property, we may need to relocate our facility. There is no guarantee that we will be able to find a suitable replacement facility on equal terms or of sufficient quality. We have augmented our manufacturing capacity by entering into an agreement with Solectron Corporation, a contract manufacturer, to manufacture a portion of our product requirements. As a result of entering into this agreement we may experience, among others, the following problems, any of which could materially adversely affect our business and operating results: . delays in product shipments; 20 . reduced control over quality and quantity of products; and . interruption in the supply of products caused by, among other factors, the loss of a contract manufacturer. If we lose key personnel or are unable to hire additional qualified personnel as necessary, we may not be able to successfully manage our business or achieve our objectives. Our success depends to a significant degree upon the continued contributions of our key management, engineering, sales and marketing, finance and manufacturing personnel, many of whom would be difficult to replace. In particular, we believe that our future success is highly dependent on William Rosenberger, our President and Chief Executive Officer, and Robert Zecha, our Vice President, Research and Development. We do not have key person insurance covering any of our personnel. We believe our future success will also depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing, finance and manufacturing personnel. Competition for these personnel is intense and we have had difficulty hiring employees, particularly software engineers, in the timeframe we desire. There can be no assurance that we will be successful in attracting and retaining the personnel we require. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel in the future, or delays in hiring required personnel, particularly engineers and sales personnel, could make it difficult for us to manage our business and meet key objectives. In addition, companies in the networking industry whose employees accept positions with competitors frequently claim that competitors have engaged in unfair hiring practices. We could incur substantial costs in defending ourselves against any such claims, regardless of the merits of such claims. If our products do not comply with evolving industry standards and complex government regulations, they may not achieve market acceptance, which may prevent us from increasing our revenue or achieving profitability. The market for LAN equipment is characterized by the need to support industry standards as they emerge, evolve and achieve acceptance. We will not be competitive unless we continually introduce new products and product enhancements that meet these emerging standards. We may not be able to effectively address the compatibility and interoperability issues that arise as a result of technological changes and evolving industry standards. In addition, in the United States, our products must comply with various regulations and standards defined by the Federal Communications Commission, or FCC, and Underwriters Laboratories. Internationally, products that we develop may be required to comply with standards established by telecommunications authorities in various countries as well as with recommendations of the International Telecommunication Union. If we do not comply with existing or evolving industry standards or if we fail to obtain timely domestic or foreign regulatory approvals or certificates, we may experience delays in product shipments or be unable to sell our products where these standards or regulations apply, which could prevent us from increasing our revenue or achieving profitability. We need to expand our sales and support organizations to increase market acceptance of our products. Our products and services require a sophisticated sales effort targeted at several levels within a prospective customer's organization. We have recently expanded our sales force and plan to hire additional sales personnel. Unless we expand our sales force we will not be able to increase revenue. However, competition for qualified sales personnel is intense, and we might not be able to hire an adequate number of sales personnel. We currently have a small customer service and support organization and will need to increase our staff to support new customers and the expanding needs of existing customers. The design and installation of networking products can be complex. Accordingly, we need highly-trained customer service and support personnel. Hiring customer service and support personnel is very competitive in our industry due to the limited number of people available with the necessary technical skills and understanding of our products. Our ability to increase our revenue depends on successfully expanding our international sales. Our ability to grow will depend in part on our ability to increase sales of our NuWaveArchitecture products to international customers, particularly in Asia. We anticipate that sales to international customers will constitute a significant portion of our future sales. There are a number of risks arising from our international business, including: 21 . longer accounts receivable collection cycles; . difficulties in managing operations across disparate geographic areas; . difficulties associated with enforcing agreements under foreign legal systems; . import or export licensing requirements; . potential adverse tax consequences; and . unexpected changes in regulatory requirements. Our international sales are denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets. As part of our business strategy, we expect to review acquisition prospects that would complement our current product offerings, augment our market coverage, enhance our technical capabilities or otherwise offer growth opportunities. While we have no current agreements or negotiations underway with respect to any material acquisitions, we may acquire businesses, products or technologies in the future. In the event of any future acquisitions, we could: . issue equity securities which would dilute stockholders' percentage ownership; . incur substantial debt; or . assume contingent liabilities. Such actions by us could harm our operating results and cause the price of our common stock to decline. We cannot assure you that we will be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future, and our failure to do so could harm our business, operating results and financial condition. To fund our future operations, we may need additional capital which may not be available when needed. We believe that our existing working capital together with proceeds from the follow-on public offering and cash available from future operations will enable us to meet our working capital requirements for at least the next 12 months. However, if cash from future operations is insufficient, or if cash is used for acquisitions or other currently unanticipated uses, we may need additional capital. The development and marketing of new products and the expansion of distribution channels and associated support personnel are expected to require a significant commitment of resources. In addition, if the market for enterprise Layer 3 LAN switches were to develop more slowly than we anticipate, or if we fail to establish 22 significant market share and achieve a meaningful level of revenue, we may continue to incur significant operating losses and utilize significant amounts of capital. As a result, we could be required to raise substantial additional capital. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to existing stockholders. If we raise additional funds through the issuance of debt securities, the securities would have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on our operations. We cannot assure you that additional capital, if required, will be available on acceptable terms, or at all. If we are unable to obtain additional capital, we may be required to reduce the scope of our planned product development and marketing efforts, which would harm our business, financial condition and operating results. If our products contain undetected software or hardware errors, we could incur significant unexpected expenses and lost sales. Complex LAN equipment frequently contains undetected software or hardware errors when first introduced or as new versions are released. We have experienced these errors in the past, and we expect that these errors will be found from time to time in new or enhanced products after commencement of commercial shipments. These problems may materially adversely affect our business by causing us to incur significant warranty and repair costs, diverting the attention of our engineering personnel from our product development efforts and causing significant customer relations problems. Problems arising from the use of our products together with other vendors' products could disrupt our business and harm our financial condition. Our products must successfully interoperate with products from other vendors. As a result, when problems occur in a network, it may be difficult to identify the source of the problem. The occurrence of hardware and software errors, whether caused by our products or another vendor's products, could result in the delay or loss of market acceptance of our products, and any necessary revisions may require us to incur significant expenses. The occurrence of any such problems would likely have a material adverse effect on our business, operating results and financial condition. We may be subject to intellectual property infringement claims that are costly to defend and may adversely affect our business and ability to compete. Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In particular, many leading network companies have extensive patent portfolios with respect to networking technology, while we do not own any patents nor do we have any patent applications pending that relate to our NuWaveArchitecture products. We may not have taken actions that adequately protect our intellectual property rights. From time to time, third parties, including leading companies, have asserted against others and may assert against us exclusive patent, copyright, trademark and other intellectual property rights to technologies and related standards that are important to us. Third parties may assert claims or initiate litigation against us or our manufacturers, suppliers or customers alleging infringement of their proprietary rights with respect to our existing or future products. Any of these claims, with or without merit, could be time-consuming, result in costly litigation and diversion of technical and management personnel, or require us to develop non-infringing technology or enter into royalty or license agreements. These royalty or license agreements, if required, may not be available on acceptable terms, if at all. If there is a successful claim of infringement or if we fail to develop non- infringing technology or license the proprietary rights on a timely basis, our business could be harmed. If we fail to protect our intellectual property, or if others use our proprietary technology without authorization, our competitive position may suffer. Our success and ability to compete are substantially dependent upon our internally developed technology and know-how. We rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our cash equivalents and short-term investments ("investments") are exposed to financial market risk due to fluctuations in interest rates and foreign exchange rates, which may affect the interest income and the fair values of our investments. We manage the exposure to financial market risk by performing ongoing evaluation of our investment portfolio and investing in short-term investment grade corporate securities, which mature within the next 12 months. In addition, we do not use investments for trading or other speculative purposes. The effect of fluctuations in foreign exchange rates is immaterial as the majority of the investments held by foreign subsidiaries are denominated in US dollars. For the year ended December 31, 1999, the average rate of return on the investments was approximately 5.1%. A hypothetical 10% fluctuation in interest rates would change interest income by approximately $50,000. Due to their short maturities, the carrying values of investments approximate their fair values, and the impact of fluctuations in interest rates on the fair values of investments is deemed immaterial. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Financial Statements: Page Report of Independent Accountants.................................... 25 Consolidated Balance Sheets at December 31, 1999 and 1998............ 26 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997.................................. 27 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997.................................. 28 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997.................................. 29 Notes to Consolidated Financial Statements........................... 30 Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1999, 1998 and 1997.................................. 44
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. 24 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Network Peripherals Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Network Peripherals Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP San Jose, California January 17, 2000 25 NETWORK PERIPHERALS INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
December 31, 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 4,730 $ 5,537 Short-term investments 4,985 17,814 Accounts receivable, net of allowance for doubtful accounts and returns; 1999, $364, and 1998, $523 428 3,430 Receivable from sale of assets 720 - Inventories 3,830 3,124 Prepaid expenses and other current assets 815 742 -------------------------------------- Total current assets 15,508 30,647 Property and equipment, net 4,984 4,560 Other assets 360 342 -------------------------------------- $ 20,852 $ 35,549 ====================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,534 $ 2,450 Accrued liabilities 1,409 2,127 -------------------------------------- Total current liabilities 2,943 4,577 -------------------------------------- Commitments (Note 5) Stockholders' equity: Preferred Stock, $0.001 par value, 2,000,000 shares authorized; no shares issued or outstanding - - Common Stock, $0.001 par value, 20,000,000 shares authorized; 12,749,000, and 12,292,000 shares issued and outstanding 13 12 Additional paid-in capital 65,955 64,060 Accumulated deficit (48,059) (33,100) ------------------------------------- Total stockholders' equity 17,909 30,972 ------------------------------------- $ 20,852 $ 35,549 =====================================
The accompanying notes are an integral part of these consolidated financial statements. 26 NETWORK PERIPHERALS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Years Ended December 31, 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Net sales $ 10,231 $ 28,585 $ 34,798 Cost of sales 9,410 17,250 25,341 ---------------------------------------------------------------- Gross profit 821 11,335 9,457 ---------------------------------------------------------------- Operating expenses: Research and development 7,803 11,485 9,757 Marketing and selling 6,437 6,010 13,242 General and administrative 3,503 3,234 3,982 Gain on sale of assets (1,055) - - Acquired research and development in process - - 6,462 Restructuring expense - - 3,662 ---------------------------------------------------------------- Total operating expenses 16,688 20,729 37,105 ---------------------------------------------------------------- Loss from operations (15,867) (9,394) (27,648) Interest income 908 1,505 1,680 ---------------------------------------------------------------- Loss before income taxes (14,959) (7,889) (25,968) Income tax benefit - - 3,526 ---------------------------------------------------------------- Net loss $ (14,959) $ (7,889) $ (22,442) ================================================================ Net loss per share: Basic and diluted $ (1.19) $ (0.64) $ (1.85) ================================================================ Weighted average common shares: Basic and diluted 12,584 12,281 12,154 ================================================================
The accompanying notes are an integral part of these consolidated financial statements. 27 NETWORK PERIPHERALS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
Common Stock Additional Accumulated Shares Amount Paid-in Capital Deficit Total - ------------------------------------------------------------------------------------------------------------------- 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 Issuance of Common Stock upon exercise of stock options 457 1 1,895 - 1,896 Net loss - - - (14,959) (14,959) ---------------------------------------------------------------------- Balance at December 31, 1999 12,749 $ 13 $ 65,955 $ (48,059) $ 17,909 ======================================================================
The accompanying notes are an integral part of these consolidated financial statements. 28 NETWORK PERIPHERALS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31, 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net loss $ (14,959) $ (7,889) $ (22,442) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,826 2,000 3,319 Gain of sale of assets (1,055) - - Acquired research and development in process - - 6,462 Deferred income taxes - - 2,289 Changes in assets and liabilities: Accounts receivable 3,002 1,740 3,189 Inventories (706) (1,707) 6,811 Income tax refund receivable - 3,983 (3,580) Prepaid expenses and other assets (131) (146) 1,026 Accounts payable (916) 779 (1,321) Accrued liabilities (718) (2,956) (2,644) ----------------------------------------------------- Net cash used in operating activities (13,657) (4,196) (6,891) ----------------------------------------------------- Cash flows from investing activities: Proceeds from sale or maturity of short-term investments 12,829 - 7,979 Purchases of property and equipment (2,559) (2,644) (2,270) Proceeds from sale of assets, net of expenses 684 - - Purchases of short-term investments - (3,443) - Cash paid for acquisition, net of cash acquired - - (6,449) Holdback amount from acquisition - (456) (659) ----------------------------------------------------- Net cash provided by (used in) investing activities 10,954 (6,543) (1,399) ----------------------------------------------------- Cash flows from financing activities: Proceeds from issuance of Common Stock 1,896 182 861 ----------------------------------------------------- Net cash provided by financing activities 1,896 182 861 ----------------------------------------------------- Net decrease in cash and cash equivalents (807) (10,557) (7,429) Cash and cash equivalents, beginning of year 5,537 16,094 23,523 ----------------------------------------------------- Cash and cash equivalents, end of year $ 4,730 $ 5,537 $ 16,094 ===================================================== Supplemental disclosure of cash flow information Non-cash transactions: Receivable from sale of assets $ 720 $ - $ - Income tax benefit associated with nonqualified stock options - - 403
The accompanying notes are an integral part of these consolidated financial statements. 29 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - THE COMPANY Network Peripherals Inc., a Delaware corporation (the "Company"), designs and manufactures Layer 2, Layer 3, and Layer 4 functionality Ethernet and Gigabit Ethernet switching products, which it markets primarily to original equipment manufacturers, distributors, value-added resellers and system integrators. The Company's switching products are designed for use in workgroups, wiring closets and network backbones. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in accordance with 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, 1999 and 1998, 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 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, product returns, and retroactive price adjustments are recorded at the time products are shipped. Allowances for uncollectible accounts receivable are provided at the time such receivable is deemed uncollectible. Funding under certain development contracts is recognized based upon the achievement of specified contract milestones. Such funding, which is recognized as a reduction of the related development costs, totaled approximately $217,000 in 1997. No such funding was recognized in 1999 and 1998. Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, cash equivalents, short-term investments and trade receivables. The Company maintains its cash, cash equivalents and short-term investments with high credit quality financial institutions and limits its investments to those that are short-term and low risk. Concentration of credit risk with respect to trade receivables is generally limited due to the Company's on-going evaluation of its customers' credit worthiness and the established long-term relationship with certain customers. 30 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Inventories Inventories are stated at the lower of cost, using the first-in, first-out method, or market. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful life of the asset, typically three years. Depreciation of the Company's enterprise resource planning systems, its information systems infrastructure, and certain manufacturing equipment is based on an estimated useful life of five years. 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, 1999 and 1998, goodwill, net of accumulated amortization, was $93,000 and $133,000, respectively, and was included in other assets. Software Development Costs The Company's software products are integrated into its hardware products and are typically available for general release to customers within 30 days after technological feasibility has been achieved. Accordingly, the production costs incurred after the establishment of technological feasibility and before general release to customers are immaterial. The Company has not capitalized any software development costs to date. Income Taxes The Company accounts for income taxes under the asset and liability method, which recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their financial statement reported amounts. The Company records a valuation allowance against deferred tax assets when it is more likely than not that such assets will not be realized. Foreign Currency Translation The functional currency of the Company's subsidiaries in Taiwan and the Netherlands is the U.S. dollar. Accordingly, gains or losses arising from the translation of foreign currency financial statements and transactions are included in determining consolidated results of operations. Employee Benefit Plans The Company has stock option plans and offers a 401(k) plan covering all of its U.S. employees. The 401(k) plan provides for matching contributions determined at the Company's discretion. In 1999, the Company matched 50% of each employee's contribution up to $1,000, and the 1999 matching contributions totaled approximately $59,000. No such matching contributions were made in 1998 and 1997. 31 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock-based Compensation The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", as permitted under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under APB Opinion No. 25, if the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Net Loss Per Share Basic earnings per share are computed as net earnings divided by the weighted- average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock-based compensation including stock options, restricted stock awards, warrants, and other convertible securities using the treasury stock method. During 1999, 1998 and 1997, the Company incurred net losses, such that the inclusion of potential common shares would result in an antidilutive per share amount. Accordingly, no adjustment is made to the basic net loss per share to arrive at the diluted net loss per share. Comprehensive Income There were no reconciling items between net loss and comprehensive loss for the periods presented. Recent Accounting Pronouncement In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133 during its year ending December 31, 2001. To date, the Company has not engaged in derivative or hedging activities. The Company is unable to predict the impact of adopting SFAS No. 133 if it were to engage in derivative and hedging activity in the future. Reclassifications Certain reclassifications have been made to the prior years' amounts in order to conform to the current year's presentation. 32 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - BALANCE SHEET COMPONENTS (in thousands)
December 31, 1999 1998 ------------------------------------------------------------------------------------------------ Cash, cash equivalents, and short-term investments: Cash and cash equivalents Cash and money market accounts $ 2,442 $ 2,508 Corporate debt securities 2,288 3,029 ----------------------------- 4,730 5,537 Short-term investments Corporate debt securities 4,985 17,814 ----------------------------- $ 9,715 $23,351 ============================= Inventories: Raw materials $ 2,285 $ 882 Work-in-process 401 572 Finished goods 1,144 1,670 ----------------------------- $ 3,830 $ 3,124 ============================= Property and equipment: Computers and equipment $ 8,106 $ 8,267 Furniture and fixtures 750 920 Leasehold improvements 528 306 ----------------------------- 9,384 9,493 Accumulated depreciation (4,400) (4,933) ----------------------------- $ 4,984 $ 4,560 ============================= Accrued liabilities: Salaries and benefits $ 592 $ 973 Warranty 375 450 Co-op advertising and market development funds 250 386 Other 192 318 ----------------------------- $ 1,409 $ 2,127 =============================
NOTE 4 - LINE OF CREDIT The Company currently has a $5 million revolving bank line of credit, which expires on May 31, 2000. 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 1999 and 1998. As of December 31, 1999, 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 in Fremont, California, under an operating lease that expires in October 2004. The Company also has research and development facilities in Long Island, New York and manufacturing facilities in Taipei, Taiwan under operating leases expiring in August 2002 and May 2001, respectively. Rent expense for all of the Company's facilities was $760,000, $764,000, and $931,000 in 1999, 1998, and 1997, respectively. 33 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Future minimum lease payments under operating leases as of December 31, 1999 are as follows (in thousands): Years ended December 31, 2000 $ 821 2001 614 2002 422 2003 335 2004 286 -------- $ 2,478 ======== NOTE 6 - CAPITAL STOCK Employee Stock Purchase Plan Effective May 1998, the Company terminated the Employee Stock Purchase Plan, which allowed eligible employees to purchase the Company's Common Stock at a discount through payroll deductions. Prior to the termination of the Employee Stock Purchase Plan, the Company reserved 250,000 shares of Common Stock for issuance thereunder, and the Company has issued 223,606 shares of Common Stock for an aggregate purchase price of $1,434,000. Stock Option Plans In December 1999, the Company adopted the 1999 Stock Plan (the "1999 Plan"), which provides for the granting of nonstatutory stock options and restricted stock awards to eligible employees and consultants. Pursuant to the 1999 Plan, the Company has reserved 500,000 shares of the Company's Common Stock for issuance, and the terms and conditions of nonstatutory stock options and restricted stock awards are determined by the Company's Board of Directors, provided that the exercise price for a nonstatutory stock option is not less than 85% of the fair market value of the Company's Common Stock on the date of the grant. As of December 31, 1999, no nonstatutory stock options or restricted stock have been granted under the 1999 plan, and all 500,000 shares of Common Stock reserved for issuance are available for future grant. 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 terms and conditions of stock options are determined by the Company's Board of Directors, provided that (i) the exercise price for incentive stock options is not less than the fair market value of the Company's Common Stock on the date of grant and (ii) the exercise price for nonstatutory stock options is not less than 85% of the fair market value of the Company's Common Stock on the date of grant. Options under the 1997 Plan vest over a period determined by the Board of Directors, which is generally four years. As of December 31, 1999, options to purchase 2,267,499 shares of Common Stock were outstanding, 144,059 shares were available for future grant, and 2,411,558 shares were authorized but unissued under the 1997 Plan. Upon adoption of the 1997 Plan in April 1997, the Company terminated the 1993 Stock Option Plan (the "1993 Plan") and the 1996 Nonstatutory Stock Option Plan (the "1996 Plan"). No further stock options were granted under the 1993 Plan or the 1996 Plan. Outstanding options and shares issued upon the exercise of options granted continue to be governed by the terms and conditions of the respective plans. As of December 31, 1999, options to purchase a total of 482,859 shares of Common Stock were outstanding under the 1993 Plan and the 1996 Plan. 34 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The 1994 Outside Directors Stock Option Plan, as amended (the "1994 Plan"), which provides for the automatic granting of nonqualified stock options to directors of the Company ("Outside Director"), has a total of 150,000 shares reserved for issuance. Pursuant to the 1994 Plan, the Company grants to each new Outside Director an option to purchase 15,000 shares of Common Stock at the time of their appointment and to each Outside Director an additional option to purchase 5,000 shares of Common Stock on the date of each annual meeting of stockholders. The exercise price of the stock options will be the fair market value of the Common Stock on the date of grant, and options vest over a period of four years. At December 31, 1999, options to purchase 50,000 shares of Common Stock were outstanding, 90,000 shares were available for future grant, and 140,000 shares of Common Stock were authorized but unissued under the 1994 Plan. Stock options generally expire 10 years from the date they are granted. The following table summarizes stock option activity for all of the Company's stock option plans (in thousands, except per share amounts):
Options Weighted Average Outstanding Exercise Price ------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 2,830 $13.52 Granted 1,593 7.31 Exercised (224) 1.89 Canceled (1,602) 11.83 ------------ Balance at December 31, 1997 (312 shares exercisable at a weighted average price of $5.31 per share) 2,597 5.41 Granted 1,298 4.11 Exercised (9) 4.23 Canceled (1,087) 6.17 ------------ Balance at December 31, 1998 (913 shares exercisable at a weighted average price of $4.71 per share) 2,799 4.52 Granted 688 15.62 Exercised (457) 4.14 Canceled (230) 6.70 ------------ Balance at December 31, 1999 (1,177 shares exercisable at a weighted average price of $4.72 per share) 2,800 $ 7.13 ============
The Company has elected to continue to follow APB Opinion No. 25 to account for its employee stock options and adopted the disclosure-only requirements of SFAS No. 123. SFAS No. 123 requires the disclosure of pro forma net income and earnings per share as if the Company had accounted for its employee stock options under the fair value method in accordance with SFAS No. 123. The fair value of these options is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected volatilities of 93% in 1999, 82% in 1998, and 77% in 1997; risk-free interest rates of 6.2% in 1999, 4.6% in 1998, and 5.4% in 1997; expected lives of 3.5 years in 1999 and 2.5 years in 1998 and 1997; and no dividend yield for all periods. Had compensation cost for the Company's employee stock-based plans been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Company's net loss and net loss per share would have been as follows (in thousands, except per share amounts):
Years ended December 31, 1999 1998 1997 -------------------------------------------------------------------------------- Net loss - as reported $ (14,959) $ (7,889) $(22,442) Net loss - pro forma (18,523) (11,368) (28,003) Net loss per share: Basic and diluted- as reported (1.19) (0.64) (1.85) Basic and diluted- pro forma (1.47) (0.93) (2.30)
35 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The weighted average estimated grant date fair values, as defined by SFAS No. 123, for options granted under the stock option plans during 1999, 1998 and 1997 were $10.25, $1.98, and $3.29, respectively Due to the broad decline in the market price of the Company's Common Stock during 1997, a substantial amount of stock options granted had exercise prices above the current market price. On July 25, 1997 and subsequently October 31, 1997, the Company offered stock option plan participants the right to replace any remaining unexercised stock options with an equal number of options at an exercise price equal to the closing market price on such dates. The following table summarizes information about stock options outstanding at December 31, 1999 (in thousands, except per share amounts):
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 - $ 3.00 358 8.7 $ 2.64 143 $ 2.59 3.88 - 4.94 1,777 7.7 4.59 963 4.68 5.00 - 9.13 131 7.8 6.73 44 6.82 11.63 - 15.00 245 9.1 14.36 27 13.80 16.13 - 20.00 168 9.5 17.09 - - 21.50 - 25.00 67 9.8 24.43 - - 33.63 - 37.38 54 9.9 35.40 - - ------ ------ 2,800 8.2 7.13 1,177 4.72 ====== ======
NOTE 7 - INCOME TAXES The following is a geographical breakdown of consolidated loss before income taxes (in thousands):
Years ended December 31, 1999 1998 1997 --------------------------------------------------------------------------------------------------------- Domestic $(13,898) $(7,302) $(21,761) Foreign (1,061) (587) (4,207) ---------------------------------------------- $(14,959) $(7,889) $(25,968) ==============================================
Income tax benefit consists of the following (in thousands):
Years ended December 31, 1999 1998 1997 --------------------------------------------------------------------------------------------------- Current: Federal $ - $ - $ 5,815 State - - - Foreign - - - ------------------------------------------ - - 5,815 ------------------------------------------ Deferred: Federal - - (1,993) State - - (296) ------------------------------------------ - - (2,289) ------------------------------------------ $ - $ - $ 3,526 ==========================================
36 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1999 1998 1997 -------------------------------------------------------------------------------------------------------------- Federal statutory rate (35.0%) (35.0%) (35.0%) State tax, net of federal impact - - (6.0) Provision for valuation allowance on deferred tax assets 35.0 35.0 22.1 Nondeductible acquisition costs - - 8.6 Other - - (3.3) ------------------------------------------ - - (13.6%) ==========================================
Deferred tax assets consist of the following (in thousands):
December 31, 1999 1998 ----------------------------------------------------------------------------------------------- Net operating loss and credit carryforwards $ 11,635 $ 3,920 Reserves and accruals not currently deductible 987 1,104 Inventory 585 1,437 Other 618 275 -------------------------- Gross deferred tax assets 13,825 6,736 Valuation allowance (13,825) (6,736) -------------------------- Net deferred tax assets $ - $ - ==========================
Management believes that, based on a number of factors, it is more likely than not that the deferred tax assets will not be realized, such that a full valuation allowance has been recorded. As of December 31, 1999, the Company has federal net operating loss carryforwards of approximately $25 million, which will expire beginning in 2013. For state tax purposes, the Company has net operating loss carryforwards of approximately $11.5 million, which will expire beginning in 2002. NOTE 8 - SALE OF ASSETS In June 1999, the Company sold its research and development facilities located in Hsin Chu, Taiwan, for a total of $1,620,000, of which $900,000 was received in 1999, and the remaining balance of $720,000 is to be received in July 2000. In connection therewith, the Company recorded a gain of $1,055,000, net of payments of broker fees and severance of $216,000. NOTE 9 - ACQUISITION 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. This transaction was accounted for using the purchase method, and the purchase price was allocated to the assets acquired liabilities assumed and research and development in process based on the estimated fair market values at the date of acquisition. The research and development in process represented the estimated current fair value of specified technologies which had not reached technological feasibility and had no alternative uses. The results of the operations acquired were included with those of the Company from the date of acquisition. 37 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The allocation of the purchase price was as follows (in thousands): Research and development, in process $ 6,462 Goodwill 200 Assets 44 Liabilities assumed (257) -------- Total $ 6,449 ======== The pro forma combined results of operations of the Company and NetVision for the year ended December 31, 1997, as if the acquisition had occurred at the beginning of the year, after giving effect to certain pro forma adjustments, are as follows (in thousands, except per share amount): Net sales $ 34,798 ======== Net loss $(15,254) ======== Net loss per share - basic and diluted $ (1.26) ======== The foregoing pro forma results of operations excluded the write-off of acquired research and development in process resulting from the acquisition. NOTE 10 - 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 sales, marketing, finance and manufacturing 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, and the Company utilized all remaining restructuring reserves during 1998. NOTE 11 - GEOGRAPHIC INFORMATION The Company operates in one business segment, which is the design, development, production, marketing and support of high performance networking solutions. Geographic information relating to the Company's net sales and long-lived assets is reported in the tables below. Net sales based on customers' locations are as follows (in thousands): Years ended December 31, 1999 1998 1997 ------------------------------------------------------------- North America $ 5,732 $ 19,695 $ 25,778 Europe 1,452 2,990 3,782 Asia 3,047 5,900 5,238 --------------------------------------- $ 10,231 $ 28,585 $ 34,798 ======================================= Sales to Taiwan-based customers accounted for 17% of the Company's net sales in 1999 and 1998. No one foreign country accounted for more than 10% of the Company's net sales in 1997. 38 NETWORK PERIPHERALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Long-lived assets, which primarily consisted of fixed assets, are reported below based on the location of an asset (in thousands): December 31, 1999 1998 -------------------------------------------------------- North America $ 3,593 $ 2,779 Europe 23 39 Asia 1,728 2,084 ---------------------- $ 5,344 $ 4,902 ====================== NOTE 12 - CONCENTRATIONS The Company's proprietary ASICs (Application-Specific Integrated Circuits) are currently manufactured by a single foundry. In the event that this foundry fails to deliver the expected volumes or meet the required quality standard of ASICs, the Company may experience delay in production of its NuWave products and loss of revenues, which could adversely impact the Company's operating results. The Company has a manufacturing facility located in Taipei, Taiwan, which manufactures the Company's legacy and NuWave products. In January 2000, the Company entered into a strategic partnership with a major turnkey manufacturer. Management believes having dual manufacturing resources will alleviate risks associated with a single source 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, 1999 1998 1997 - -------------------------------------------------------------------------- Customer A 36% 35% 39% Customer B - 11% - ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There is no reportable information under this item. 39 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item regarding directors is included under "Election of Directors" in our Proxy Statement for the 2000 Annual Meeting. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation of our Chief Executive officer, and the four other most highly compensated executive officers whose salary and bonus for the year ended December 31, 1999 exceeded $100,000. SUMMARY COMPENSATION TABLE
Annual Compensation LongTerm ------------------- Compensation Awards Name and Securities Underlying Principal Position Year Salary Bonus(1) Options (1) ------------------- ---- -------- -------- ----------- William F. Rosenberger 1999 $250,000 $ 75,000 0 President and CEO 1998 $125,000 $ 50,000 (2) 500,000 James Sullivan 1999 $246,086 (3) - 15,000 VP of Sales 1998 $253,574 (3) - 60,000 1997 $ 80,567 (3) - 100,000 (4) Jerry McDowell 1999 $180,000 - - VP of Marketing 1998 $ 27,346 150,000 Robert Zecha 1999 $152,884 $ 62,500 10,000 VP of Research & 1998 $167,875 - 20,000 Development Wilson Cheung 1999 $131,669 $ 13,200 95,000 (5) VP of Finance and CFO 1998 $ 93,433 $ 23,925 (6) 10,000
(1) From time to time, the Compensation Committee reviews the performance of the executive officers and may award cash bonuses and/or stock options to officers. (2) Bonus paid to Mr. Rosenberger in 1998 was pursuant to "sign-on" provisions in the employment contract. (3) Included in salary are commissions of $96,086, $103,574 and $15,664 in 1999, 1998 and 1997, respectively. (4) Option to purchase 50,000 shares was issued on October 31, 1997, replacing option to purchase 50,000 shares granted on July 7, 1997. (5) Option to purchase 65,000 shares in 1999 was based on Mr. Cheung's appointment to executive office. (6) Bonus paid to Mr. Cheung in 1998 was based on performance prior to him being appointed to executive office. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included under "Share Ownership by Principal Stockholders and Management" and "Election of Directors" in our Proxy Statement for the 2000 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 our Proxy Statement for the 2000 Annual Meeting. 40 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)(10) Development and Purchase Agreement with Sun Microsystems, Inc., dated February 25, 1994. 10.30 (8)(10) Corporate Supply Agreement with Sun Microsystems, Inc., dated March 31, 1997. 10.31 (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 (10) Amended 1997 Stock Plan. 10.40 (10) Third Modification Agreement, dated August 18, 1998, to amend certain terms of the Line of Credit Agreement with Sumitomo Bank of California. 10.41 (10) Employment Agreement with William Rosenberger dated June 11, 1998, and subsequent amendment dated October 19, 1998. 10.42 (10) Salary Continuation Agreement with Jerry McDowell dated October 19, 1998. 10.43 (10) Salary Continuation Agreement with Wilson Cheung dated January 13, 1999. 10.44 (10) Salary Continuation Agreement with Robert Zecha dated January 13, 1999. 10.45 (11) Agreement for Purchase and Sale of Assets dated June 14, 1999. 10.46 (12) Lease Agreement dated August 31, 1999. 10.47 Salary Continuation Agreement with Joseph Botta dated June 21, 1999. 10.48 Agreements with California Bank & Trust (formerly Sumitomo Bank of California), dated July 30, 1999 and October 29, 1999, to amend certain terms of the Line of Credit Agreement. 10.49 1999 Stock Plan. 21 (10) Subsidiaries of the Registrant. 23.3 Consent of Independent Accountants. 27 Financial Data Schedule.
41 (b) Reports on Form 8-K ------------------- None (1) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (File No. 33-78350). (2) Confidential treatment has been granted as to part of this Exhibit. (3) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1994 (File No. 0-23970). (4) Incorporated by reference to the Registrant's report on Form 8-K filed on March 31, 1996 (File No. 0-23970). (5) Incorporated by reference to the corresponding exhibit in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-23970). (6) Incorporated by reference to the corresponding exhibit in the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 0-23970). (7) Incorporated by reference to the Registrant's report on Form 8-K filed on May 14, 1997 (File No. 0-23970). (8) The Registrant has filed portions of these agreements separately with the Commission and has requested that those portions be afforded confidential treatment. (9) Filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 (10) Filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (11) Incorporated by reference to the corresponding exhibit in the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1999. (12) Incorporated by reference to the corresponding exhibit in the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1999. 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on January 27, 2000. 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 January 27, 2000.
Signature Title /s/ William Rosenberger _________________________ President, Chief Executive Officer and William Rosenberger Director (Principal Executive Officer) /s/ Wilson Cheung _________________________ Vice President of Finance and Wilson Cheung Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Glenn Penisten __________________________ Chairman of the Board Glenn Penisten /s/ Charles Hart _________________________ Director Charles Hart /s/ Michael Gardner __________________________ Director Michael Gardner /s/ Steve Bell _________________________ Director Steve Bell
43 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, 1997 Allowance for doubtful accounts $ 209 $ 400 $ - $ (311) $ 298 Allowance for sales returns and other credits 945 2,841 - (2,900) 886 ------------------------------------------------------------------ Total allowances for doubtful accounts and sales returns 1,154 3,241 - (3,211) 1,184 Year ended December 31, 1998 Allowance for doubtful accounts 298 - - (215) 83 Allowance for sales returns and other credits 886 82 - (528) 440 ------------------------------------------------------------------ Total allowances for doubtful accounts and sales returns 1,184 82 - (743) 523 Year ended December 31, 1999 Allowance for doubtful accounts 83 47 - (71) 59 Allowance for sales returns and other credits 440 - - (135) 305 ------------------------------------------------------------------ Total allowances for doubtful accounts and sales returns $ 523 $ 47 $ - $ (206) $ 364 ==================================================================
44 EX-10.47 2 SALARY CONTINUATION AGREEMENT EXHIBIT 10.47 SALARY CONTINUATION AGREEMENT This Salary Continuation Agreement (the "Agreement") is made and entered into as of June 21, 1999 (the "Effective Date"), by and between Network Peripherals Inc., a Delaware corporation (the "Company"), and Joseph Botta ("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 (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 1 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; (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 2 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; an d (iii) such incapacity will, in the opinion of a qualified physician, be permanent and continuous during the remainder of the Employee's life. (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 3 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: (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; 4 (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) 50% of all unvested 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 if such date is on or before December 31, 1999; (2) 100% of all unvested 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 if such date is after December 31, 1999; (3) 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 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. 5 (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 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 6 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 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: 7 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. 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. 8 Network Peripherals Inc. Date: June 21, 1999 By: /s/ William Rosenberger --------------------------------- Signature Title: President and CEO Date: June 21, 1999 /s/ Joseph Botta ------------------------------------- Employee's Signature Address for Notice to Employee: 5396 Vicenza Way San Jose, CA 95138 Name of Designated Beneficiary: Address of Designated Beneficiary: Joan Botta 5396 Vicenza Way San Jose, CA 95138 9 EX-10.48 3 AGREEMENTS WITH CALIFORNIA BANK & TRUST EXHIBIT 10.48 July 30, 1999 Wilson Cheung Chief Financial Officer Network Peripherals, Inc. 1371 McCarthy blvd. Milpitas, CA 95035 Re: Credit Agreement Dated as of October 2, 1996 By and Among Network Peripherals, Inc. and Sumitomo Bank of California (Now known as California Bank & Trust) as Agent as amended from time to time ("Agreement"). The Agreement is hereby supplemented, amended and modified as follows, which terms shall supersede and prevail over any existing and conflicting provisions thereof: (a) The term "Letter of Credit Maturity Date" and "Maturity Date" in Section 1.1 of the Agreement are hereby deleted and replaced with the following: Letter of Credit Maturity Date. Means February 28, 2000. Maturity Date. Means October 31, 1999. All other terms and conditions of the Agreement or related documents remain in full force and effect and are unmodified by this letter. Please execute this Letter Agreement below and return it to us via fax and mail (original) at your earliest convenience. Sincerely, California Bank & Trust (f/k/a Sumitomo Bank of California) a California Banking Corporation By: /s/ Thomas Paton ------------------------------------------- Thomas C. Paton Vice President and Sr. Relationship Manager Network Peripherals, Inc. a Delaware Corporation By: /s/ Wilson Cheung ------------------------------------------- Wilson Cheung Chief Financial Officer October 29, 1999 Wilson Cheung Chief Financial Officer Network Peripherals, Inc. 1371 McCarthy blvd. Milpitas, CA 95035 Re: Credit Agreement Dated as of October 2, 1996 By and Among Network Peripherals, Inc. and Sumitomo Bank of California (Now known as California Bank & Trust) as Agent as amended from time to time ("Agreement"). Whereas: Pursuant to Section 5.7 (f) as added by the Third Modification Agreement dated August 18, 1998, for the fiscal quarters ending June 30, 1999 and September 30, 1999, Network Peripherals, Inc. was in violation of the Cash Position covenant; and pursuant to Section 5.7(b) of the Agreement, for the fiscal quarters ending March 31, 1999, June 30, 1999, and September 30, 1999, Network Peripherals, Inc. was in violation of the Profitability Covenant; and pursuant to Section 5.7 (d) of the Agreement, for the fiscal quarters ending March 31, 1999, June 30, 1999 and September 30, 1999, Network Peripherals, Inc. was in violation of the Consolidated Tangible Net Worth Covenant. California Bank & Trust hereby waives compliance with these covenants for the specific periods mentioned above only. The Agreement is hereby supplemented, amended and modified as follows, which terms shall supersede and prevail over any existing and conflicting provisions thereof: (a) The term "Letter of Credit Maturity Date" and "Maturity Date" in Section 1. 1 of the Agreement are hereby deleted and replaced with the following: Letter of Credit Maturity Date, Means September 30, 2000. Maturity Date. Means May 31, 2000. (b) Sections 5.7 (a), 5.7 (b), 5.7 (c), 5.7 (d) and 5.7 (e) of the Agreement are deleted. (c) Section 5.7 (f) as added by the Third Modification Agreement dated August 18, 1998 is deleted and replaced with the following: (f) Cash Position. Borrower shall maintain a consolidated cash position on its balance sheet of at least $8,000,000.00 All other terms and conditions of the Agreement or related documents remain in full force and effect and are unmodified by this letter. Please execute this Letter Agreement below and return it to us via fax and mail (original) at your earliest convenience. Sincerely, California Bank & Trust (f/k/a Sumitomo Bank of California) a California Banking Corporation By: /s/ Thomas Paton ------------------------------------------- Thomas C. Paton, Jr. Vice President and Manager Network Peripherals, Inc. a Delaware Corporation By: /s/ Wilson Cheung ------------------------------------------- Wilson Cheung Chief Financial Officer EX-10.49 4 1999 STOCK PLAN EXHIBIT 10.49 NETWORK PERIPHERALS INC. 1999 STOCK PLAN 1. Establishment, Purpose and Term of Plan. --------------------------------------- 1.1 Establishment. The Network Peripherals Inc. 1999 Stock Plan (the "Plan") is hereby established effective as of December 20, 1999 (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 Options granted under the Plan have lapsed. 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, Stock Option 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. 1 (f) "Consultant" means a person engaged to provide consulting or advisory services (other than as an Employee or a Director) to a Participating Company, provided that the identity of such person, the nature of such services or the entity to which such services are provided would not preclude the Company from offering or selling securities to such person pursuant to the Plan in reliance on a Form S-8 Registration Statement under the Securities Act. (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 Optionee 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, the Stock is listed on a national or regional securities exchange or market system, 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 SmallCap 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 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) "Nonstatutory Stock Option" means an Option not intended to be an incentive stock option within the meaning of Section 422(b) of the Code. 2 (m) "Option" means a right to purchase Stock (subject to adjustment as provided in Section 4.2) pursuant to the terms and conditions of the Plan. All Options shall be Nonstatutory Stock Options. (n) "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. (o) "Optionee" means a person who has been granted one or more Options. (p) "Parent Corporation" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (q) "Participant" means a person who has been granted one or more Awards. (r) "Participating Company" means the Company or any Parent Corporation or Subsidiary Corporation. (s) "Participating Company Group" means, at any point in time, all corporations collectively which are then Participating Companies. (t) "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. (u) "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. (v) "Securities Act" means the Securities Act of 1933, as amended. (w) "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 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 3 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. (x) "Stock" means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2. (y) "Subsidiary Corporation" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) 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 Option 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 Option. 3.2 Authority of Officers. 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. 3.3 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 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 in the form of a Nonstatutory Stock Option or in the form of Restricted Stock; (c) to determine the Fair Market Value of shares of Stock or other property; 4 (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; 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; (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. 5 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 five hundred thousand (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, 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 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. 5. Eligibility and Option Limitations. ---------------------------------- 5.1 Eligibility. Awards may be granted only to Employees and Consultants. For purposes of the foregoing sentence, "Employees" and "Consultants" shall include prospective Employees and prospective Consultants to whom Awards, other than a Restricted Stock Bonus (as defined in Section 7 below), are granted in connection with written offers of an employment or other service relationship with the Participating Company Group. However, notwithstanding any other provision herein to the contrary, no person shall be eligible to be granted an Award under the Plan whose eligibility would require approval of the Plan by the stockholders of the Company under any law or regulation or the rules of any stock exchange or market system upon which the Stock may then be listed. If not inconsistent with any such law, regulation or rule, an Award may be granted to a person, not previously employed by a Participating Company, as an inducement essential to entering into an employment contract with the Participating Company. Eligible persons may be granted more than one (1) Award. 6 5.2 Options Authorized. Options granted under the Plan may only be Nonstatutory Stock Options. 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. No Option or purported Option shall be a valid and binding obligation of the Company unless evidenced by a fully executed Option Agreement. 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 Exercise Price. The exercise price for each Option shall be established in the discretion of the Board; provided, however, that the exercise price per share 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. Notwithstanding the foregoing, an 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 the manner described in Section 424(a) of the Code. 6.2 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 Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option and (b) no Option granted to a prospective Employee, prospective Director, or prospective Consultant may become exercisable prior to the date on which such person commences Service with a Participating Company. Subject to the foregoing, unless otherwise specified 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. 6.3 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 (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 such other consideration as may be approved by the Board from time to time to the extent permitted by applicable law, or (v) by any combination thereof. The Board may at 7 any time or from time to time, by adoption of or by amendment to the standard forms of Option Agreement described in Section 6.6, 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) Limitations on Forms of Consideration. (i) Tender of Stock. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock to the extent such tender or attestation 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, or attestation to the ownership, 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. (ii) 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. 6.4 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 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 Group arising in connection with the Option or the shares acquired upon the exercise thereof. The Fair Market Value of any shares of Stock withheld or tendered to satisfy any such tax withholding obligations shall not exceed the amount determined by the applicable minimum statutory withholding rates. The Company shall have no obligation to deliver shares of Stock until the Participating Company Group's tax withholding obligations have been satisfied by the Optionee. 6.5 Effect of Termination of Service. (a) Option Exercisability. Subject to earlier termination of the Option as otherwise provided herein and unless otherwise provided by the Board in the grant of an Option and set forth in the Option Agreement, an Option shall be exercisable after an Optionee's termination of Service as follows: 8 (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 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 6.5(a) is prevented by the provisions of Section 10 below, the Option shall remain exercisable until thirty (30) days (or such longer period of time as determined by the Board, in its discretion) 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 6.5(a) of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) 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. 6.6 Standard Forms of Option Agreement. Unless otherwise provided by the Board at the time the Option is granted, an Option shall comply with and be subject to the terms and conditions set forth in the form of Nonstatutory Stock Option Agreement adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. The 9 Board shall have the authority from time to time to vary the terms of the standard form 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. 6.7 Transferability of 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, an 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 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. 7.2 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 or prospective Consultant may become exercisable prior to the date on which such person commences Service with a Participating Company. 7.3 Payment of Purchase Price. 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 such other consideration as may be approved by the Board from time to time to the extent 10 permitted by applicable law, or (iii) 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 7.8, 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 Bonuses shall be issued in consideration for services actually rendered to the Participating Company Group or for its benefit. 7.4 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. 7.5 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, or other restrictions (the "Vesting Restrictions") as shall be determined by the Board 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 7.9. 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. 7.6 Voting Rights; Dividends. Except as provided in this Section and Section 7.5, 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 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. 7.7 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 11 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. 7.8 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. 7.9 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. Change in 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. (b) A "Change in 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 12 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 Change in Control on Awards. In the event of a Change in 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. Any Awards which are neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control shall terminate and cease to be outstanding effective as of the date of the Change in Control. Notwithstanding the foregoing, shares acquired upon exercise of an Award prior to the Change in Control and any consideration received pursuant to the Change in 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, 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 13 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, no termination or amendment of the Plan shall affect any then outstanding Award unless expressly provided by the Board. In any event, no termination or amendment of the Plan may adversely affect any then outstanding Award without the consent of the Participant, unless such termination or amendment is necessary to comply with any applicable law, regulation or rule. IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing sets forth the Network Peripherals Inc. 1999 Stock Plan as adopted by the Board on December 17, 1999. /s/ Wilson Cheung ----------------------------- 14 PLAN HISTORY ------------ December 17, 1999 Board adopts Plan, with an initial reserve of 500,000 shares. (No stockholder approval required because plan excludes from participation those persons whose participation would require stockholder approval under Nasdaq listing requirements). 15 EX-23.3 5 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.3 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 17, 2000 relating to the consolidated financial statements and financial statement schedule, which appears in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP San Jose, California January 28, 2000 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 4,730 4,985 792 (364) 3,830 15,508 9,384 (4,400) 20,852 2,943 0 0 0 13 17,896 20,852 10,231 10,231 9,410 9,410 16,688 0 0 (14,959) 0 (14,959) 0 0 0 (14,959) (1.19) (1.19)
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