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 (Fee Required)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
Commission file number 0-23970
NETWORK PERIPHERALS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0216135
(State or other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
1371 McCarthy Boulevard
Milpitas, California 95035
(Address, including zip code of principal executive offices)
(408) 321-7300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the
Act:
Title of class
Common Stock
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 24, 1997 was $178,275,477 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 February
24, 1997 was 12,086,473.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting of
stockholders to be held on April 24, 1997 are incorporated by reference into
Part III of this Annual Report on Form 10-K.
<PAGE>
NETWORK PERIPHERALS INC.
FORM 10-K
Table of Contents
<TABLE>
<S> <C> <C>
PART I Page
Item 1. Business...................................................................................... 3
Item 2. Properties.................................................................................... 11
Item 3. Legal Proceedings............................................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders........................................... 11
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters...................................................................... 12
Item 6. Selected Financial Data....................................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................ 14
Item 8. Financial Statements and Supplementary Data................................................... 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................................... 33
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 34
Item 11. Executive Compensation........................................................................ 34
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 34
Item 13. Certain Relationships and Related Transactions................................................ 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 35
Signatures.................................................................................... 36
Supplemental Schedule......................................................................... 37
</TABLE>
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PART I
Item 1. Business
Network Peripherals Inc., ("the Company") was incorporated in California in
March 1989 and reincorporated in Delaware in June 1994. The Company's principal
offices are located at 1371 McCarthy Boulevard, Milpitas, California 95035, and
its telephone number is (408) 321-7300.
Business
The Company designs, develops, manufactures, markets and supports high
performance client/server workgroup networking solutions based on advanced
networking technologies and unique ASIC (application specific integrated
circuits) components designed by the Company. Network Peripherals' solutions are
designed to deliver substantial improvements in network performance to users in
departmental and workgroup networks which must satisfy the bandwidth
requirements of network servers, internetworking traffic and complex software
applications. The products offered by Network Peripherals are designed to
preserve customers' investment in existing network equipment, infrastructure and
in particular Ethernet networks commonly found in workgroups.
The Company introduced its first FDDI network adapter products in 1990 and has
established a leading share of the installed FDDI adapter market. Network
Peripherals introduced its first FDDI concentrator product in 1991 and began
commercial shipments of its first FDDI LAN (local area network) switching
product, the EIFO series, in the first quarter of 1994. In 1995, the Company
announced its Fast Ethernet product line and made initial shipments of its Fast
Ethernet LAN switching products in early 1996.
In March 1996, the Company purchased all of the outstanding shares of NuCom
Systems, Inc., a Taiwan-based networking company focused on Fast Ethernet
switching products. This acquisition enabled the Company to introduce a number
of new Fast Ethernet products during the year and was the principal reason sales
of Fast Ethernet products reached $9.7 million or 18% of net sales in 1996.
Network Peripherals markets its products worldwide through OEMs, VARs,
distributors and system integrators.
Products
The Company's product line currently consists of a full line of NuSwitch(TM)
FD-Series FDDI client/server switching hubs, FE-Series Fast Ethernet switching
hubs, NuCard(TM) FDDI and Fast Ethernet network adapters, NuHub(TM)
concentrators and NuSight(TM) network management applications.
Network Adapter Products
Network Adapter Hardware. The Company's line of NuCard FDDI network adapters
connects high-performance servers or PCs/workstations directly to 100 Mbps FDDI
networks. The Company has been shipping certified FDDI adapters since 1990.
NuCard adapters support both fiber and unshielded twisted pair (UTP) copper
wiring, and are available for all popular platform bus architectures -- EISA,
AT/ISA, SBus, Micro Channel Architecture and PCI. Customized versions have been
developed for resale under OEM arrangements with NCR, Network General, NetFRAME
and Sun Microsystems. The Network General product is a customized version of the
Company's EISA FDDI adapter with enhanced features for use with the Network
General Sniffer Network Analyzer. The product developed for NetFRAME is an FDDI
Network I/O Processor that provides high performance FDDI connectivity for the
NetFRAME line of network super servers. The FDDI adapter and custom software
developed for Sun Microsystems is
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based on the Company's SBus FDDI adapter and supports Sun Microsystems' SPARC
and UltraSPARC work station and server product lines.
The Company also offers a high-performance 10/100 Fast Ethernet network
interface card for PCI-bus architecture systems. Combining a 32-bit bus master
implementation with tightly integrated software drivers, the FE-560T provides
the optimal connection for servers and/or desktops migrating from Ethernet to
Fast Ethernet.
The Company's NuCard adapters incorporate software drivers for the leading
network operating systems: Novell NetWare, Microsoft NT, and Sun Microsystems
Solaris. The Company provides a standard set of diagnostics, connection
management (CMT) and station management (SMT) software tools. CMT software
continuously monitors network connections for bit errors and network faults,
while SMT software provides network management and gathering of network
performance statistics.
The Company's adapters connect high performance servers or PCs/workstations
directly to 100 Mbps Fast Ethernet and FDDI networks. The Company has developed
an FDDI core engine as part of the FDDI adapter design which implements FDDI
standard functions and is optimized for each standard bus architecture. The
Company's FDDI adapters support fiber and unshielded twisted pair (UTP) copper
wiring.
LAN Switching Products
LAN Switching Products, The LAN Switching products offered by the Company
include product lines consisting of a variety of models and configurations
providing Ethernet to Fast Ethernet LAN switching, Fast Ethernet to Fast
Ethernet LAN switching and Ethernet to FDDI LAN switching products.
The NuSwitch FE-Series of Fast Ethernet switching hubs provides an inexpensive
and reliable method for network administrators to segment current Ethernet LANs
using switched Ethernet, and deliver high-speed connections to multiple servers
using Fast Ethernet uplinks. The Company offers a range of models to meet the
requirements of enhancing existing Ethernet networks and to deliver increased
performance to the multiple LAN segments commonly deployed. The current product
line includes six models of 10Mbps to 100Mbps, Ethernet to Fast Ethernet
switching products. Each model provides the customers with a choice of
configuration and system price designed to meet their existing network
requirements. The models in the FE-Series serving this requirement include: the
FE-101, FE-105, FE-106, FE-210, FE-506 and FE-512. The Company offers the
FE-224C, a model featuring twenty-four 10Mbps Ethernet ports and two 100Mbps
Fast Ethernet ports designed to meet the growing need for increased desktop
performance.
The FE-200 Series of 100/100 two-port switches allows users to bridge Fast
Ethernet networks beyond the typical limitations of Ethernet, extending Fast
Ethernet connections up to two kilometers. The Company's FE-600 and FE-1200
100/100 switching hubs are designed to interconnect multiple high-speed segments
and offer up to 12 100BaseT switched ports per unit. Using a 2Gbps switching
backplane, these Fast Ethernet switching hubs can support full-duplex reception
and transmission over all ports, simultaneously.
High performance at relatively low cost is achieved in both the FD- and
FE-Series through the development of proprietary ASIC-based components and a
distributed switching architecture. Instead of sharing buffer memory, as in
typical shared-memory switching technologies, each NuSwitch Ethernet port has
its own dedicated buffer memory. Competitive switches frequently utilize either
a central processor or central ASIC, which can lead to potential memory
allocation problems that undermine switch performance.
Network Peripherals' NuSwitch FD-Series switching hubs combine FDDI server
uplinks with switched 10Base-T Ethernet segments for client connectivity. The
systems forward data between Ethernet and
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FDDI ports at rates up to 157,000 packets per second and can filter 400,000
packets per second. Introduced in 1994, the Company's FDDI switching hubs won
LAN Magazine's "Product of the Year" Award in 1995.
The NuSwitch FD-Series offers a number of switch configurations to connect FDDI
networks with switched 10BaseT Ethernet ports for client segment connectivity.
Utilizing a distributed memory switching architecture, the FD-Series forwards
data between Ethernet and FDDI ports at a rate of up to 157,000 packets per
second. The FD-Series is based upon Ethernet and FDDI industry standards,
providing compatibility with other network products including 10BaseT workgroup
hubs and enterprise hubs and routers, thereby preserving the users' investment
in existing network equipment. The FD-Series offers models with up to six FDDI
ports and 12 Ethernet ports with each Ethernet port supporting one network
segment or a single client.
LAN Concentrators. The Company's NuHub FE-5108 provides eight Class II 100BaseT
Fast Ethernet ports, each capable of half- or full-duplex transmission. Each
connected workstation can have access to all connected file servers over the
high-speed connection without changes to the desktop network. NuHub
concentrators have the same form factor and management software as the NuSwitch
switching hub, providing a convenient single-vendor 100Mbps connectivity
solution.
The Company has also designed and currently manufactures a custom FDDI
concentrator module for UB Networks. This product, available in a number of
different configurations, is designed to be integrated in UB Networks'
Access/One enterprise hub.
LAN Network Management Software. The Company believes that network management
software is an important capability for client/server networks that enables
network administrators to manage, maintain and control the operation of the
network remotely. The Company provides standards-based network management
software in all of its products. The Company's LAN switching products and LAN
concentrators are supplied with SNMP software which allows these hubs to be
controlled and statistics to be gathered from an SNMP management station. The
Company introduced in 1996 a new network management application, NuSight 1.0,
that provides a graphical view of the switching product to enable the network
administrator to manage network connections and configuration, gather statistics
to monitor network traffic and plan future growth. NuSight 1.0 is available on
Microsoft Windows 3.1, Windows95 and Windows NT.
The information in the following paragraph contains forward looking statements
describing new products that are expected to be available for shipment to the
Company's customers during 1997. The successful completion and shipment of these
products is subject to a number of uncertainties, including verification testing
to confirm that the products meet the Company's standards for quality,
reliability and interoperability; availability of components; pricing actions by
competitors that may render it unprofitable to introduce the products; market
acceptance of the products; and the emergence or broad acceptance of new
technologies that may render the products obsolete.
In addition to the Fast Ethernet products described above, in 1997 the Company
intends to develop and introduce a number of bridging products designed to
enable customers to interconnect workgoups to enterprise backbone networks,
including Fast Ethernet to FDDI, Fast Ethernet to ATM and FDDI to ATM, and
enhanced versions of FDDI adapters including standard and custom (OEM) products
based on the PCI bus architecture.
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Marketing, Sales and Support
The Company distributes and sells its product worldwide through OEMs, VARs,
distributors and system integrators. As of December 31, 1996, the Company
employed 71 full-time technically trained marketing, sales and support personnel
located in the United States, the Netherlands, Singapore and Taiwan. These
personnel, in addition to traditional marketing and sales functions, are
responsible for developing relationships with major end-user accounts and with
network operating system software leaders such as Novell, Sun Microsystems and
Microsoft. The Company believes that such relationships are crucial to early
development and deployment of optimal solutions for client/server network
applications.
As a result of the Company's strategy to cultivate business relationships with
influential networking and system vendors, a majority of the Company's
historical and current sales have been to OEMs. While the Company does not
generally obtain long-term purchase commitments from its OEM customers, it does
customarily enter into contracts with OEM customers to establish the terms and
conditions of sales made pursuant to orders from OEMs. Several major networking
vendors have contracted with the Company to have the Company design complex
custom modules for direct integration into their enterprise switches, super
servers and other networking products.
Beginning in 1995 and continuing in 1996, the Company implemented programs
designed to balance its distribution mix by expanding sales through VARs,
distributors and system integrators in both the North American and international
markets. The distribution mix in any particular period can be affected by the
presence or absence of large orders by OEMs, VARs, distributors and system
integrators, and changes in the distribution mix will affect the Company's gross
margins.
Internationally, the Company's products are sold through a variety of
locally-based distributors and resellers specializing in networking solutions,
many of whom also distribute networking products from Bay Networks, 3Com and
Cisco Systems. The Company's products are currently distributed internationally
in Europe, Asia, and the Middle-East. The Company has sales offices in the
Netherlands, Taiwan and Singapore. Sales to customers outside of North America
represented 21% of the Company's net sales in 1996. The geographic regions with
the major portions of export sales in 1996, and the approximate respective
percentages represented by each, were Europe, 8% and Asia, 13%. All payments for
sales outside the United States are made in U.S. dollars.
Sun Microsystems, Tech Data, and UB Networks accounted for 26%, 15%, and 12%,
respectively, of net sales in 1996. In the past, the Company has experienced
fluctuations in the volume of activity with individual OEM customers and
distributors as well as changes in its OEM customer and distributor base, and it
expects such fluctuations and changes to continue in the future. The loss of a
major customer, reductions of a major order or delay in a major shipment could
adversely affect the Company's business and financial performance.
OEM customers typically provide the Company with a rolling forecast with orders
placed two to three months in advance of shipment. Resellers typically provide
the Company with orders placed thirty days or less in advance of shipment. As a
result of these relatively short order cycles, the Company believes backlog may
not be indicative of revenues in future periods.
The information in the following paragraph contains forward looking statements
describing the Company's plans to increase sales through its distribution
channels and the expected mix of product shipments through various channels.
There are a number of uncertainties that could affect the success of those plans
including the timely availability of new products by the Company, reliability,
price and performance characteristics of the components, new and existing
products, the introduction of similar products by competitors, pricing actions
by competitors and the inability of the Company to recruit and retain required
sales and marketing staff with the needed skills.
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In 1997 the Company plans to increase its spending for marketing and selling
activities, both in North America and internationally. This is a continuation of
a commitment to growth which began in mid-1995 and is the result of efforts by
the Company to increase its sales through distributors, VARs and system
integrators.
Research and Development
The information in this section contains forward-looking statements describing
the Company's product development plans for 1997 and beyond. The successful
development and introduction of new products is subject to a number of
uncertainties, including the ability of the organization to recruit, train and
retain adequate numbers of professional engineers, successful design of
proprietary application specific circuits and computer software, design,
development and verification testing to confirm that the products meet the
Company's standards for quality, reliability and interoperability, availability
of components, pricing actions by competitors that may render it unprofitable to
introduce the products, unanticipated technical obstacles or delays, and the
emergence or wide acceptance of new technologies that could render the products
obsolete.
The Company has developed certain core competencies applicable to multiple
network technologies such as FDDI, Fast Ethernet, ATM and ASIC design and
client/server operating system drivers and software modules. The Company
believes its focus on these core competencies has been, and will continue to be,
a significant factor in its competitive ability to bring emerging network
solutions to the market in a timely manner.
System Architecture Interfaces and Network Protocol Software. Through the
development of its collection of 100 Mbps network adapters, the Company has
gained expertise in hardware and software support for a variety of standard and
proprietary system bus architectures and network operating systems.
Server Bandwidth Optimization. The Company has designed its network operating
system software to address the specific characteristics of each type of adapter
and server architecture. This design provides optimal network bandwidth to high
power servers. As new versions of network operating systems are introduced, the
Company plans to devote development efforts not only to maintain compatibility
with existing versions but also to take advantage of enhanced features and
performance improvements.
Network Bandwidth Switching. The Company has implemented its Distributed Memory
Switching Architecture and ASIC expertise in products based on both FDDI and
Fast Ethernet. The Company's unique ASIC components are manufactured by
semiconductor providers such as LSI Logic, TSMC and ATMEL.
As of December 31, 1996, the Company employed 63 personnel in research and
development. Key members of the Company's research and development team have
been active members of the various network standard committees since 1987,
before Network Peripherals was founded. The Company is a charter member of the
Advanced Network Test Center (ANTC), an FDDI interoperability certification
center, is a member of the ANSI FDDI Standards Committee, is a member of the
Gigabit Ethernet Alliance and is a principal member of the ATM Forum.
The Company has developed products designed for integration in the proprietary
systems of major networking companies including Sun Microsystems, UB Networks,
NetFRAME, NCR, and Network General. The Company believes that its relationships
with these network technology leaders establish credibility with end-user
customers who demand interoperability of their networking devices. The Company
has active development relationships with Novell, Microsoft and Sun Microsystems
for advanced products for NetWare, Windows NT and Solaris, respectively.
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The Company currently has active engineering programs underway involving:
o Multiple development teams designing unique ASICs for the Company's
next generation of LAN switching products;
o System development teams designing the Fast Ethernet LAN switching
products for delivery in 1997;
o PCI bus architectures to develop proprietary implementations for the
Company's future products that offer a PCI interface;
o Network management and other software required to support the latest
releases of Microsoft, Novell and Sun Microsystems operating systems;
and
o Design of next generation FDDI adapters to support PCI based systems
and the Sun Microsystems Sbus based systems.
Competition
The Company believes that the principal competitive factors in the networking
market include the completeness of product offerings, product quality, price and
performance, adherence to industry standards, the degree of interoperability
with other networking equipment and time to market for new products.
Notwithstanding the Company's belief that it currently competes favorably with
respect to these factors, the computer networking industry is intensely
competitive and is significantly affected by product introductions and market
activities of industry participants. Several competitors have recently
introduced, or announced their intentions to introduce, new products that would
compete with one or more of the Company's products. Many of the Company's
current and potential competitors have significantly broader product offerings
and greater financial, technical, marketing and other resources and larger
installed bases than the Company. Increased competition could result in price
reductions, reduced margins and loss of market share, all of which would
materially and adversely affect the Company's business, operating results and
financial condition. The Company's FDDI network adapters compete on a
product-by-product basis with products offered primarily from Interphase,
SysKonnect, Digital Equipment Corporation and 3Com. The Company's client/server
switching solutions compete with products offered by Cisco, 3Com, Bay Networks
and Cabletron. A number of the Company's competitors have been acquired. These
acquisitions are likely to permit the Company's competitors to devote
significantly greater resources to the development and marketing of new
competitive products and the marketing of existing products to their installed
bases. The Company expects that competition will increase as a result of these
and other industry consolidations and alliances. These competitive pressures
could adversely affect the Company's business and operating results.
Manufacturing
As of December 31, 1996, the Company employed 71 full-time personnel in
manufacturing. The Company uses third party manufacturing subcontractors for
assembly, test and quality control of material, components, subassemblies and
systems, thereby avoiding the significant capital investment required to
establish and maintain manufacturing and assembly facilities and allowing the
Company to concentrate its resources on product design and development. The
Company's manufacturing team is experienced in advanced manufacturing and test
engineering, in ongoing reliability/quality assurance and in managing third
party manufacturing subcontractors. The Company qualifies subcontractors using a
selection program that assesses a potential subcontractor's capacity, quality
standards and manufacturing process.
The Company performs final assembly, testing, packaging and shipping for most of
its products but uses qualified subcontractors that perform some, or all, of
these functions for certain other of its products. To ensure the integrity of
the subcontractors' quality assurance procedures, the Company has developed
detailed test procedures and test specifications for each product. The Company
is currently working towards obtaining an ISO 9001 certification.
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Certain key components used in the Company's products, such as microprocessors,
ASICs, communications controller chips, FDDI and Ethernet media interface
components and power supplies, are currently available only from single sources
or limited sources. In particular, the Company has designed into its products a
standard FDDI chipset available only from National Semiconductor. The Company
has also developed proprietary ASICs used in its LAN switching products and in
other products, each of which is currently being supplied by a single foundry.
While the Company believes it would be able to obtain alternative sources of
supply for the ASICs at its election, any future difficulty in obtaining any of
these key components or ASICs could result in delays or reductions in product
shipments which, in turn, could have a material adverse effect on the Company's
results of operations. In addition, the Company's strategy to have its products
assembled and, in certain cases, tested by third parties involves certain risks,
including the potential absence of adequate capacity, the unavailability of or
interruptions in access to certain process technologies and reduced control over
delivery schedules, manufacturing yields, quality and costs. In the event that
any significant subcontractor were to become unable or unwilling to continue to
manufacture and/or test the Company's products in required volumes, the Company
would have to identify and qualify acceptable replacements. This process of
qualifying manufacturing subcontractors and other suppliers could be lengthy and
no assurances can be given that any additional sources would become available to
the Company on a timely basis.
Proprietary Rights
The Company's success is dependent upon its proprietary technology. To date, the
Company has relied principally upon patent, copyright, and trade secret laws to
protect its proprietary technology. The Company generally enters into
confidentiality or license agreements with its employees, distributors,
customers and potential customers and limits access to, and distribution of, the
source code to its software and other proprietary information. The Company has
been issued one U.S. patent and has filed three additional U.S. patent
applications covering certain aspects of its technology. The process of
obtaining patents can be expensive, and there can be no assurance that the
patent application will result in the issuance of patents, that any issued
patents will provide the Company with meaningful competitive advantages, or that
challenges will not be issued against the validity or enforceability of any
patent issued to the Company.
The Company has entered into patent license agreements relating to certain
technologies used in FDDI networks. The Company believes that the terms of such
licenses are comparable to those made available to other companies in the
networking industry. In addition, certain technology used in the Company's
products is licensed from third parties, generally on a non-exclusive basis.
These licenses generally require the Company to pay royalties and to fulfill
confidentiality obligations. Termination of such licenses could adversely affect
the Company's business and operating results.
The Company has agreed in certain cases to indemnify its customers for liability
incurred in connection with the infringement of a third party's intellectual
property rights. Although the Company has not received notice from any of its
customers advising the Company of any alleged infringement of a third party's
intellectual property rights, there can be no assurance that such
indemnification of alleged liability will not be required from the Company in
the future.
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Executive Officers
The executive officers of the Company and their ages are as follows:
<TABLE>
Name Age * Position
- ---- ----- --------
<S> <C> <C>
Pauline Lo Alker 54 President, Chief Executive Officer, and Director
Truman Cole 54 Vice President of Finance and Chief Financial Officer
Fred Kiremidjian 49 Senior Vice President of World Wide Operations
Bob Lyon 55 Vice President of Human Resources
Donald J. Morrison 39 Senior Vice President of Marketing
Derek Obata 38 Vice President of World Wide Sales
Oliver Szu 40 Vice President and Chief Technology Officer
</TABLE>
* As of December 31, 1996.
Mrs. Alker has served as the President, Chief Executive Officer and a Director
of the Company since January 1991. Prior to joining the Company, she served as
President of the Network Computers Division and President of Sales and Marketing
of Acer North American Operations from October 1987 to September 1990. Prior to
Acer, Mrs. Alker co-founded Counterpoint Computers, Inc., a manufacturer of
modular, multiprocessor UNIX systems, where she served as Chairman, President
and Chief Executive Officer until it was acquired by Acer. Prior to Counterpoint
Computers, Mrs. Alker held various marketing and engineering management
positions with Intel and with Four Phase Systems and Amdahl Corporation, all of
which are computer systems manufacturers. From 1980 to 1984, Mrs. Alker was Vice
President of Marketing and subsequently Vice President and General Manager at
Convergent Technologies, Inc., a workstation manufacturer.
Mr. Cole has served as the Vice President of Finance and Chief Financial Officer
of the Company since February 1994. Prior to joining the Company, Mr. Cole
worked as an independent consultant from April 1993 to February 1994, and served
as the Vice President, Chief Administrative Officer and Chief Financial Officer
of Software Publishing Corporation, a desktop software supplier, from April 1990
to March 1993. From August 1988 to January 1990, he served as Vice President,
Controller of Tonka Corporation, a toy manufacturer. Mr. Cole also worked for 16
years for Fairchild Semiconductor Corp., a semiconductor manufacturer, most
recently serving as Director of Finance.
Mr. Kiremidjian has served as an executive officer since joining the Company in
July 1996. Prior to joining the Company, he served as Vice President and General
Manager of Personal Products Business Unit of Xerox Corporation. He has directed
research and development, engineering and manufacturing operations efforts for
leading Silicon Valley companies such as Acer, Convergent Technologies,
Counterpoint Computers, and Fairchild Semiconductor Corp.
Mr. Lyon has served as an executive officer since joining the Company in August
1996. From January 1995 to August 1996, he served as Vice President of Human
Resources and acting General Counsel for Syquest Technologies, a removable
cartridge disk drive manufacturer. Prior to joining Syquest, he served as Vice
President of Human Resources for Anthem Electronics and Vice President of
Administration at Xidex, an Anacomp Company. Additionally, Mr. Lyon served as
Labor Relations Manager and International Human Resources Manager at Intel
Corporation for eight years. He also held several key human resource and
management consulting positions at LLNL and Maxtor.
Mr. Morrison has served as an executive officer since joining the Company in
April 1995. Prior to joining the Company, he was the Vice President of Marketing
at Strategic Mapping, Inc., a software applications start-up company. From
October 1988 to December 1993, he was with The Santa Cruz Operation, holding
various marketing management positions, including Vice President of North
America VAR and Distributor Sales, responsible for U.S. reseller, retail, VAR
and distributor customers and revenues. Before that, Mr.
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Morrison held marketing management positions with Altos Computer Systems and
Fortune Computer Systems.
Mr. Obata has served as an executive officer since joining the Company in
November 1995. From April 1993 to April 1995, he served as Vice President of
Sales at Ministor Peripherals, a disk drive manufacturer. Before that, he worked
at Conner Peripherals, a disk drive manufacturer, where he held various sales
management positions.
Mr. Szu has served as an executive officer since joining the Company in March
1996, when the Company acquired NuCom Systems, Inc. He was one of the founders
of NuCom Systems, Inc. Prior to founding NuCom in 1994, he was the director of
the Internetworking Department at D-Link Systems, Inc. in Taiwan and served on
the D-Link Board of Directors from 1993 to 1994.
Employees
As of December 31, 1996 the Company employed 236 persons including 63 in
research and development activities, 71 in manufacturing, service, and support,
71 in sales, marketing, customer support and related activities, and 31 in
finance and administration. Additionally, as of December 31, 1996, 11 persons
provided services to the Company as contractors and temporary employees.
Approximately 112 employees were in international locations. None of the
Company's employees are currently represented by a labor union. The Company
considers its relations with its employees to be good. The Company attempts to
maintain competitive compensation benefits, equity participation and work
environment policies to assist in attracting and retaining qualified personnel.
Competition for employees in the Company's industry and geographical area is
intense and there can be no assurance that the Company will be successful in
attracting and retaining such personnel.
Item 2. Properties
The Company's principal executive offices, research and development, and
manufacturing facilities are located in Milpitas, California and consist of
approximately 49,000 square feet under lease that will expire in October 2000.
Additionally, the Company has research and development and manufacturing
facilities in Taiwan of approximately 29,000 square feet. The Company has
domestic sales offices in Georgia, Illinois, Maryland, Massachusetts, New
Jersey, New York, and Texas, and international sales offices in the Netherlands,
Japan, Singapore, and Taiwan. The Company believes that its existing and planned
facilities and equipment are generally adequate to meet its immediate and
foreseeable needs.
Item 3. Legal Proceedings
There are no material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1996.
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PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's Common Stock is traded in the over-the-counter market on the
Nasdaq National Market. As of February 24, 1997, there were approximately 198
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.
1994 High Low
---- ---- ---
Second Quarter (from June 28, 1994) $ 6.50 $ 6.00
Third Quarter 14.75 6.00
Fourth Quarter 27.00 14.25
1995
----
First Quarter $ 30.50 $ 19.75
Second Quarter 23.13 16.75
Third Quarter 21.75 13.75
Fourth Quarter 16.00 8.88
1996
----
First Quarter $ 14.75 $ 10.25
Second Quarter 18.63 13.00
Third Quarter 16.63 12.25
Fourth Quarter 17.75 14.63
The Company has never paid or declared any cash dividends. It is the present
policy of the Company to retain earnings to finance the growth and development
of the business and, therefore, the Company does not anticipate paying cash
dividends on its Common Stock in the foreseeable future.
12
<PAGE>
Item 6. Selected Financial Data
<TABLE>
Years Ended December 31,
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Statement of Operations Data: (in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $ 53,080 $ 47,144 $ 33,463 $ 10,687 $ 7,214
Cost of sales 28,590 24,690 17,507 5,633 3,989
-------- -------- -------- -------- --------
Gross profit 24,490 22,454 15,956 5,054 3,225
-------- -------- -------- -------- --------
Operating expenses:
Research and development 8,570 4,811 3,473 1,962 1,549
Marketing and selling 11,849 7,319 4,361 1,865 1,696
General and administrative 3,378 2,226 1,618 870 811
Acquired research and
development in process and
product integration costs 13,732 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses 37,529 14,356 9,452 4,697 4,056
-------- -------- -------- -------- --------
Income (loss) from operations (13,039) 8,098 6,504 357 (831)
Interest income, net 1,745 2,236 577 20 36
-------- -------- -------- -------- --------
Income (loss) before income taxes (11,294) 10,334 7,081 377 (795)
Provision for income taxes (608) (3,617) (1,416) (19) --
-------- -------- -------- -------- --------
Net income (loss) $(11,902) $ 6,717 $ 5,665 $ 358 $ (795)
======== ======== ======== ======== ========
Net income (loss) per share (1) $ (1.01) $ 0.57 $ 0.62 $ 0.05
======== ======== ======== ========
Weighted average common and
common equivalent shares (1) 11,760 11,736 9,199 7,224
======== ======== ======== ========
December 31,
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Balance Sheet Data: (in thousands)
<S> <C> <C> <C> <C> <C>
Working capital $54,997 $63,269 $55,720 $ 5,280 $ 3,272
Total assets 71,434 70,111 65,209 8,728 5,338
Long-term obligations, net of
current portion -- -- -- 172 247
Stockholders' equity (deficit) 59,857 65,709 57,758 (3,181) (3,559)
<FN>
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation of the method used to determine the number of shares
used to compute per share amounts. Net loss per share for the year ended December 31, 1992 is not considered meaningful and has not
been presented herein.
</FN>
</TABLE>
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Acquisition
Effective March 21, 1996, the Company purchased all of the outstanding shares of
NuCom Systems, Inc., (the "Acquisition"). (See Note 8 of Notes to Consolidated
Financial Statements). The Acquisition had a significant effect on financial
results in 1996.
As a result of the Acquisition, the Company's operating expenses increased
immediately whereas the increase in sales from products under development at
NuCom occurred gradually, primarily during the last six months of the year.
Additionally, the Company's gross profit was reduced as a result of the
amortization of intangible assets directly related to the Acquisition.
Net Sales
Net sales were $53.1, $47.1 and $33.5 million in 1996, 1995 and 1994,
respectively. The increase in sales in 1996 was primarily attributable to growth
of sales for Fast Ethernet switching products, partially offset by a decline in
sales of products based on FDDI technology. Higher shipments of FDDI adapters
and FDDI LAN switching products caused the growth from 1994 to 1995. Demand for
the Company's adapter products increased to 57% of sales in 1996 from 53% and
51% in the previous two years.
In 1996, sales to distribution channels grew to $22.6 million, from $19.2
million and $12.6 million in 1995 and 1994, respectively. Sales to OEM customers
grew to $30.5 million in 1996, from $27.9 and $20.9 million in the preceding two
years, respectively.
Gross Profit/Margin
The gross margin in 1996 was 46.1%, compared to gross margins in 1995 and 1994
of 47.6% and 47.7%, respectively. The gross margin in 1996 included the
amortization of intangible assets related to the Acquisition. Excluding the
amortization charges, the gross margin was 47.9%, consistent with the prior two
years. Continued changes in the product mix and sales channel mix, variables in
the development, introduction and marketing of new products, fluctuations in
cost of materials and components, as well as competitive factors, may adversely
impact the gross margin in future periods.
Research and Development
Research and development expenses represented 16.2%, 10.2% and 10.4% of net
sales in 1996, 1995 and 1994, respectively. In dollars, the expenditures
increased to $8.6 million in 1996 from $4.8 and $3.5 million in 1995 and 1994,
respectively. The expenses are net of contract funding from other companies of
$556,000, $906,000 and $371,000, for the years of 1996, 1995 and 1994,
respectively. The increase in 1996 reflected the addition of staff, facilities
and equipment resulting from the Acquisition. The sequential increases from 1994
to 1996 included costs for the development of new products and technologies, and
enhancements to an expanding product line.
Marketing and Selling
Marketing and selling expenses represented 22.3%, 15.5% and 13.0% of net sales
in 1996, 1995 and 1994, respectively. In dollars, the expenditures increased to
$11.8 million in 1996 from $7.3 and $4.4 million in 1995 and 1994, respectively.
The increase in expenditures in 1996 reflected the addition of staff, facilities
and equipment resulting from the Acquisition. The sequential increases from 1994
to 1996 included costs
14
<PAGE>
associated with pursuing the Company's marketing strategy to penetrate global
markets, including Asia and Europe, and to establish brand-name recognition. The
cost of implementing this strategy includes the addition of personnel and
related overhead costs, and the cost of advertising and promotional campaigns.
General and Administrative
General and administrative expenses represented 6.4%, 4.7% and 4.8% of net sales
in 1996, 1995 and 1994, respectively. In dollars, the expenditures increased to
$3.4 million in 1996 from $2.2 million and $1.6 in 1995 and 1994, respectively.
The increase in expenditures in 1996 reflected the addition of staff, facilities
and equipment resulting from the Acquisition. The increases in dollars from 1994
to 1996 included the costs of additional personnel, increased professional fees
and other overhead costs to support the increased activities of the Company.
Acquired Research and Development In-Process and Product Integration Costs
The Company incurred a one-time charge of $13.7 million for in-process research
and development and product integration costs related to the Acquisition.
Interest Income
Interest income was $1.7 million in 1996, compared to $2.2 million and $577,000
in 1995 and 1994, respectively. The decline in interest income in 1996 was the
result of a reduced level of invested funds following the Acquisition. The
increase in interest income from 1994 to 1995 was attributed to the increased
level of invested funds resulting from proceeds of the Company's public
offerings of Common Stock in 1994.
Income Taxes
The Company's effective tax rates for both 1996 and 1995 were 35% and for 1994
was 20%. The effective tax rate in 1996 excluded the non-recurring charge of
in-process research and development, a non-deductible item for tax purposes. The
effective tax rate applied throughout 1995 and 1996 was less than the combined
federal and state statutory rate due principally to the effects of tax exempt
interest income and tax credits available to the Company. The rate applied in
1994 was effected by operating loss carryforwards from prior years that were
used to offset taxable income.
Liquidity and Capital Resources
Cash provided by operating activities for the three years ended December 31,
1996 totaled $10.2 million, and was primarily attributable to net income,
excluding the non-recurring charge of in-process research and development
resulting from the Acquisition, and increases in current liabilities, offset in
part by increases in accounts receivable and inventories. The increases in
current liabilities, accounts receivable and inventories correspond principally
to increases in the volume of sales activities.
Net cash used in investing activities for the three years ended December 31,
1996 totaled $38.1 million, of which $10.4 million was for the acquisition of
NuCom and the remainder for the purchase of short-term securities and property
and equipment, partially offset by proceeds from the sale of short-term
investments.
Cash provided by financing activities of $47.3 million for the three years ended
December 31, 1996 was principally the result of the sale of Common Stock in the
Company's public offerings in 1994.
At December 31, 1996, the Company's principal sources of liquidity were its
cash, cash equivalents and short-term investments of $45.9 million and its $10
million bank line of credit. As of December 31, 1996, there were no borrowings
outstanding under the line of credit. The Company believes that its existing
cash
15
<PAGE>
balances, the bank line of credit and funds provided by operating activities
will be sufficient to meet the Company's capital and operating requirements for
the foreseeable future.
Business Outlook
The following forward-looking statements are made in reliance upon the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
future events described in such statements involve risks and uncertainties,
including:
o the timely development and market acceptance of new products;
o the market demand by customers for the Company's existing products,
including demand by OEM customers for custom products;
o competitive actions, including pricing actions and the introduction of new
competitive products, that may affect the volume of sales of the Company's
products;
o uninterrupted supply of key components, including semiconductor devices
and other materials, some of which may be sourced from a single supplier;
o the ability of the Company to recruit, train and retain key personnel,
including engineers and other technical professionals;
o the development of new technologies rendering existing technologies and
products obsolete; and
o general market conditions.
In evaluating these forward-looking statements, consideration should also be
given to the Business Risks discussed in a subsequent section of this Form 10-K.
The Company believes that any revenue growth in 1997 is likely to be derived
from sales of its Fast Ethernet switching products, which began shipping in
1996. Higher performance versions of the Fast Ethernet switching products are
planned for release throughout 1997. Shipments to the distribution channel, in
North America, Asia, and Europe are expected to increase from 1996 levels as a
result of the continuing marketing and sales efforts. Among other factors, the
expected growth in revenue is dependent upon the market's demand for Fast
Ethernet switching products, the timely release of new products, and the
effectiveness of its marketing strategy.
The Company expects gross margins to increase slightly in 1997 as a result of
lower levels of amortization of intangible assets related to the Acquisition,
lower cost of raw materials and components, and an increase in the relative mix
of products expected to be sold through the distribution channels, offset in
part by general price erosion of existing products. Products sold to the
distribution channel typically have higher prices and thus higher gross margins
than similar products sold to OEM customers.
The Company expects its operating expenses to increase in absolute dollars in
1997, but may decline as a percentage of net sales, depending on the actual
sales achieved during the year. The dollar increase expected in research and
development expense will be the result of increased resources to support new
product development and to acquire or develop new technologies in the LAN
switching field. The dollar increase expected in marketing and selling expense
will reflect the addition of personnel and other expenditures for advertising
and promotional campaigns, and for the continued development of the distribution
channel, including an increase in the number of sales offices in Asia and
Europe. The dollar increase expected in general and administrative expense will
be due to the addition of personnel and information systems to support the
increased activities of the Company.
Business Risks
In addition to the factors addressed in the preceding sections, certain
characteristics and dynamics of the Company's markets, technologies and
operations create risks to the Company's long-term success and to predictable
quarterly results. These risks will also affect the Company's ability to achieve
the results anticipated by the forward-looking statements contained in this
report. The Company's quarterly results have in the past varied, and are
expected in the future to vary significantly as a result of factors such as the
16
<PAGE>
timing and shipment of significant orders, new product introductions or
technological advances by the Company and its competitors, market acceptance of
new or enhanced versions of the Company's products, changes in pricing policies
by the Company and its competitors, the mix of distribution channels through
which the Company's products are sold, the mix of products sold, the accuracy of
resellers' forecast of end-user demand, the ability of the Company to obtain
sufficient supplies of sole or limited source components for the Company's
products and general economic conditions. In response to competitive pressures
or new product introductions, the Company may take certain pricing or marketing
actions that could materially and adversely affect the Company's operating
results. In the event of a reduction in the prices of its products, the Company
has committed to providing retroactive price adjustments on inventories held by
its distributors, which could have the effect of reducing margins and operating
results. In addition, changes in the mix of products sold and the mix of
distribution channels through which the Company's products are sold may cause
fluctuations in the Company's gross margins. The Company's expense levels are
based, in part, on its expectations of its future revenue and, as a result, net
income would be disproportionately affected by a reduction in revenue. The
absence of significant Company experience with new products limits the Company's
ability to plan for production, market demand and sales and may adversely affect
operating results if the Company misallocates resources to a new product. Due to
the potential quarterly fluctuation in operating results, the Company believes
that quarter-to-quarter comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indicators of future
performance.
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards, frequent new product introductions and
short product life cycles. These changes can adversely affect the business and
operating results of industry participants. The Company's success will depend
upon its ability to enhance its existing products and to develop and introduce,
on a timely and cost-effective basis, new products that keep pace with
technological developments and emerging industry standards and address
increasingly sophisticated customer requirements. The inability to develop and
manufacture new products in a timely manner, the existence of reliability,
quality or availability problems in the products or their component parts, the
failure to obtain reliable subcontractors for volume production and testing of
mature products, or the failure to achieve market acceptance would have a
material adverse effect on the Company's business and operating results.
The markets in which the Company competes are also characterized by intense
competition. Several of the Company's competitors have significantly broader
product offerings and greater financial, technical, marketing and other
resources, and larger installed bases of customers than the Company. These
larger competitors may also be able to obtain higher priority for their products
from distributors and other resellers that carry products of many companies. A
number of the Company's competitors were recently acquired, which is likely to
permit these competitors to devote significantly greater resources to the
development and marketing of competitive products. These competitive pressures
could adversely affect the Company's business and operating results.
The Company's sales are made through OEMs, VARs, distributors and system
integrators. The Company selects its OEMs, VARs, distributors and system
integrators based on a subjective evaluation of a combination of factors,
including potential sales volume, viability and anticipated financial stability,
expertise in the networking industry, potential distribution channel conflicts,
and geographic scope. There can be no assurance that the resellers selected by
the Company will in the future perform favorably with respect to such factors
and, to the extent that they do not, the adverse effect on the Company could be
material. The Company's VAR, distributor and system integrator customers
generally offer products of several different companies, including products
which are competitive with the Company's products. Accordingly, there is a risk
that these resellers may give higher priority to products of other suppliers,
thus reducing their efforts to sell the Company's products.
17
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements.
<TABLE>
Financial Statements: Page
<S> <C> <C>
Report of Independent Accountants.................................................. 19
Consolidated Balance Sheets at December 31, 1996 and 1995.......................... 20
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1995 and 1994............................................................. 21
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994.......................................... 22
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994............................................................. 23
Notes to Consolidated Financial Statements......................................... 24
Financial Statement Schedule:
For the three years ended December 31, 1996, 1995 and 1994 Schedule II
- Valuation and Qualifying Accounts............................................. 37
</TABLE>
Schedules other than those listed above have been omitted since they are either
not required or the information is included in the financial statements included
herewith.
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Network Peripherals Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the consolidated financial position of
Network Peripherals Inc. and its subsidiaries at December 31, 1996 and 1995 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
January 21, 1997
19
<PAGE>
NETWORK PERIPHERALS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
1996 1995
------- -------
ASSETS
Current assets:
Cash and cash equivalents $23,523 $27,210
Short-term investments 22,350 24,931
Accounts receivable, net of allowance for doubtful
accounts and returns; 1996, $1,154, and 1995, $738 8,359 5,364
Inventories 8,228 6,420
Deferred income taxes 2,271 2,189
Prepaid expenses and other current assets 1,843 1,557
-----------------
Total current assets 66,574 67,671
Property and equipment, net 3,575 2,280
Deferred income taxes and other assets 443 160
Goodwill 842 --
-----------------
$71,434 $70,111
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,736 $ 956
Accrued liabilities 8,841 3,446
-----------------
Total current liabilities 11,577 4,402
-----------------
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;
1996, 11,954,000, and 1995, 11,268,000
shares issued and outstanding 12 11
Additional paid-in capital 62,614 56,579
Notes receivable from stockholders -- (14)
Retained earnings (accumulated deficit) (2,769) 9,133
-----------------
Total stockholders' equity 59,857 65,709
-----------------
$ 71,434 $ 70,111
=================
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
<TABLE>
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<CAPTION>
Years Ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 53,080 $ 47,144 $ 33,463
Cost of sales 28,590 24,690 17,507
----------------------------------------------
Gross profit 24,490 22,454 15,956
----------------------------------------------
Operating expenses:
Research and development 8,570 4,811 3,473
Marketing and selling 11,849 7,319 4,361
General and administrative 3,378 2,226 1,618
Acquired research and development in process
and product integration costs 13,732 -- --
----------------------------------------------
Total operating expenses 37,529 14,356 9,452
----------------------------------------------
Income (loss) from operations (13,039) 8,098 6,504
Interest income 1,745 2,236 577
----------------------------------------------
Income (loss) before income taxes (11,294) 10,334 7,081
Provision for income taxes (608) (3,617) (1,416)
----------------------------------------------
Net income (loss) $(11,902) $ 6,717 $ 5,665
==============================================
Net income (loss) per share $ (1.01) $ 0.57 $ 0.62
Weighted average common and common
equivalent shares 11,760 11,736 9,199
The accompanying notes are an integral part of these financial statements.
</TABLE>
21
<PAGE>
<TABLE>
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<CAPTION>
Common Stock
------------------------
Additional Retained
Paid-In Notes Earnings
Shares Amount Capital Receivable (Accumulated Total
Deficit)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 2,893 $ 3 $ 82 $ (17) $ (3,249) $ (3,181)
Issuance of Common Stock to
employees for notes
receivable 398 - 63 (63) - -
Repayment of stockholders'
notes receivable - - - 25 - 25
Issuance of Common Stock upon
exercise of stock
options and warrants 130 - 110 - - 110
Issuance of Common Stock
under employee stock
purchase plan 16 - 84 - - 84
Issuance of Common Stock upon
conversion of
Mandatorily Redeemable
Convertible Preferred
Stock 3,719 4 9,073 - - 9,077
Sale of Common Stock to the
public, net of issuance
costs of $1,001 3,910 4 45,782 - - 45,786
Income tax benefit associated
with nonqualified stock
options - - 192 - - 192
Net income - - - - 5,665 5,665
---------------------------------------------------------------------------------
Balance as of December 31, 1994 11,066 11 55,386 (55) 2,416 57,758
Repurchase of Common Stock (15) - - - - -
Repayment of stockholders'
notes receivable - - - 41 - 41
Issuance of Common Stock upon
exercise of stock options 161 - 243 - - 243
Issuance of Common Stock
under employee stock
purchase plan 56 - 354 - - 354
Income tax benefit associated
with nonqualified stock
options - - 596 - - 596
Net income - - - - 6,717 6,717
----------- ------------ ------------- -------------- ------------- -------------
Balance at December 31, 1995 11,268 11 56,579 (14) 9,133 65,709
Repayment of stockholders'
notes receivable - - - 14 - 14
Issuance of Common Stock upon
exercise of stock options 200 - 228 - - 228
Issuance of Common Stock
under employee stock
purchase plan 45 - 385 - - 385
Income tax benefit associated
with nonqualified stock
options - - 28 - - 28
Issuance of Common Stock for
acquisition of NuCom
Systems 441 1 5,341 - - 5,342
Foreign currency translation
adjustment - - 53 - - 53
Net loss - - - - (11,902) (11,902)
Balance at December 31,1996 11,954 $ 12 $ 62,614 $ - $ (2,769) $ 59,857
=================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
22
<PAGE>
<TABLE>
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
<CAPTION>
Years Ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(11,902) $ 6,717 $ 5,665
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 2,111 1,309 732
Amoritzation of goodwill, net 665
Acquired research and development in-process 13,032
Deferred income taxes (56) (1,221) (1,012)
Changes in assets and liabilities (net effect of
NuCom acquisition):
Accounts receivable (1,845) (1,061) (2,673)
Inventories (664) 808 (5,242)
Prepaid expenses and other assets 862 (1,185) (249)
Accounts payable 1,439 (3,315) 2,865
Accrued liabilities 1,623 862 1,932
-------- -------- --------
Net cash provided by operating activities 5,265 2,914 2,018
-------- -------- --------
Cash provided by (used in) investing activities:
Cash paid for Acquisition, net of cash acquired (10,401) -- --
Holdback amount from Acquisition 1,115 -- --
Proceeds from the sale or maturity
of short-term investments 2,581 4,351 --
Purchases of short-term investments -- -- (29,282)
Purchases of property and equipment (2,927) (1,761) (1,772)
-------- -------- --------
Net cash provided by (used in) investing
activities (9,632) 2,590 (31,054)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock 613 597 47,236
Payments of Common Stock issuance costs -- -- (1,001)
Repayment (issuance) of stockholders' notes
receivable 14 41 (38)
Repayment of capital lease obligation -- -- (178)
-------- -------- --------
Net cash provided by financing activities 627 638 46,019
-------- -------- --------
Foreign currency translation 53 -- --
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (3,687) 6,142 16,983
-------- -------- --------
Cash and cash equivalents at beginning of period 27,210 21,068 4,085
-------- -------- --------
Cash and cash equivalents at end of period $ 23,523 $ 27,210 $ 21,068
======== ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 245 $ 4,852 $ 1,800
Cash paid for interest $ 7 $ 31 $ 47
Noncash transactions:
Income tax benefit associated with nonqualified
stock options $ 28 $ 596 $ 192
Common stock used for acquisition of NuCom $ 5,342 $ -- $ --
<FN>
The accompanying notes are an integral part of these financial statements
</FN>
</TABLE>
23
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY
Network Peripherals Inc. (the Company), a Delaware corporation, is engaged in
developing and manufacturing high performance client/server workgroup networking
solutions, which it markets primarily to original equipment manufacturers,
value-added resellers, distributors and system integrators. The Company's
solutions are designed to be used in departmental and workgroup networks.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated.
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.
Foreign Currency Translation
The functional currency of the Company's subsidiary in Taiwan is the local
currency. Assets and liabilities of this subsidiary are translated into U.S.
dollars at exchange rates in effect at the balance sheet date. Income and
expense items are translated at average exchange rates for the period.
Accumulated net translation adjustments are recorded in stockholders' equity.
Foreign exchange transaction gains and losses were not material in all periods
presented, and are included in the results of operations.
Cash, Cash Equivalents and Short-Term Investments
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reassesses the classification at each
reporting date.
The Company considers all highly liquid investments with maturity of 90 days or
less to be cash equivalents. All of the Company's short-term investments,
consisting primarily of fixed maturity securities, have been classified as
available for sale. For the years ended December 31, 1996 and 1995, there were
no material unrealized gains or losses. At December 31, 1996 the average
maturity of the short-term investments was approximately seven months.
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, returns and allowances, and retroactive price
adjustments are recorded at the time products are shipped. Funding under certain
development contracts is recognized based upon the percentage of completion
method, and in some instances, based upon achievement of specified contract
milestones. Such funding is recognized as an offset to the related development
costs and totaled approximately $556,000, $906,000, and $371,000 in 1996, 1995
and 1994, respectively.
24
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Sales Reserves
The Company provides allowances for accounts receivables deemed uncollectible,
and for sales returns and other credits, including credits for retroactive price
adjustments and for sales transacted within 90 days prior to the period-end. As
of December 31, 1996 and 1995, the Company's allowances for such potential
events totaled $1,154,000 and $738,000, respectively. As a percentage of sales
transacted within 90 days prior to December 31, 1996 and 1995, the allowances
for sales returns and other credits were 7.2% and 5.2%, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash, cash equivalents, short-term
investments and trade receivables. The Company's cash investment policies limit
investments to those that are short-term and low risk. Concentration of credit
risk with respect to trade receivables is generally limited due to the large
number of customers comprising the Company's customer base, their dispersion
across many different geographies, and the Company's on-going evaluation of its
customers' credit worthiness.
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.
Software Development Costs
The Company's software products are integrated into its hardware products and
are typically available for general release to customers within 30 days after
technological feasibility has been achieved. Accordingly, the production costs
incurred after the establishment of technological feasibility and before general
release to customers are immaterial, thus the Company does not capitalize any
software development costs.
Income Taxes
The Company accounts for income taxes under the liability method, which
recognizes deferred tax assets and liabilities for the expected tax consequences
of temporary differences between the tax basis of assets and liabilities and
their financial statement reported amounts.
Goodwill
Goodwill represents the excess of the purchase price of NuCom Systems Inc.
("NuCom", see Note 8) over the fair value of the identifiable net assets
acquired, and is amortized on a straight-line basis over the expected period of
benefit, which ranges from nine months to five years. Amortization of goodwill
for the year ended December 31, 1996 was included in cost of goods sold.
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.
25
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Employee Benefit Plans
The Company has a stock option plan and an employee stock purchase plan
(described in Note 6), vacation benefits which are accrued as they are earned,
and a 401(k) plan that does not require employer matching contributions. The
Company does not have postretirement or postemployment benefit plans; therefore,
Statements of Financial Accounting Standards No. 87, 106 and 112 regarding
pension, other postretirement and postemployment benefit plans do not affect the
financial statements of the Company.
Net Income Per Share
Net income per share is computed using the weighted average number of common and
common equivalent shares outstanding during the periods presented. Common
equivalent shares consist of Mandatorily Redeemable Convertible Preferred Stock
(using the if converted method) and stock options (using the treasury stock
method). Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin, common and common equivalent shares issued from April 1, 1993 through
the closing of the Company's initial public offering on July 3, 1994 have been
included in the 1994 computation using the treasury stock method as if they were
outstanding for all periods prior to the initial public offering. Furthermore,
in accordance with SEC staff policy, common equivalent shares from Mandatorily
Redeemable Convertible Preferred Stock that converted into Common Stock upon the
closing of the initial public offering are included using the if converted
method.
NOTE 3 -- BALANCE SHEET COMPONENTS (in thousands)
December 31,
Cash, cash equivalent, and short-term 1996 1995
investments: ------- -------
Cash and money market accounts $ 5,411 $ 567
Municipal obligations 18,112 26,643
------- -------
Cash and cash equivalents 23,523 27,210
------- -------
Certificates of deposit -- 7
Municipal obligations 21,238 23,919
Government securities 1,112 --
Preferred stock -- 1,005
------- -------
Short-term investments 22,350 24,931
------- -------
$45,873 $52,141
======= =======
26
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventories:
Raw materials $ 4,685 $ 3,629
Work-in-process 2,600 1,894
Finished goods 943 897
------- -------
$ 8,228 $ 6,420
======= =======
Property and equipment:
Computer and equipment $ 7,271 $ 4,085
Furniture and fixtures 817 607
Leasehold improvements 356 346
------- -------
8,444 5,038
Less: accumulated depreciation (4,869) (2,758)
------- -------
$ 3,575 $ 2,280
======= =======
Accrued liabilities:
Salaries and benefits $ 2,699 $ 915
Royalty 1,154 1,484
Warranty 717 681
Taxes payable 1,268 --
Holdback amount from Acquisition 1,115 --
Payments received in advance 605 --
Other 1,283 366
------- -------
$ 8,841 $ 3,446
======= =======
NOTE 4 -- LINE OF CREDIT
In 1996, the Company negotiated a line of credit with a bank to increase
available borrowings from $5 million to $10 million. Interest on borrowings
under the line are at the lower of the bank's prime rate or the London Interbank
Offered Rate plus 2.5%. The expiration date of the agreement is July 31, 1997.
Currently, there are no borrowings under this line of credit.
Borrowings under the line of credit are collateralized by the Company's
receivables, inventory, and other tangible assets. Under the terms of the line,
the Company is required to, among other things, maintain certain levels of
profitability, financial ratios of current assets and liabilities, and debt to
net worth, and maintain minimum tangible net worth. Interest on any borrowings
is payable monthly.
NOTE 5 --COMMITMENTS
The Company leases approximately 49,000 square feet in Milpitas, California
under non-cancelable operating leases that expire in October 2000. As part of
the NuCom acquisition (see Note 8), the Company also assumed certain operating
leases for buildings, approximately 29,000 square feet, under lease which will
expire in 1998. These buildings, including a manufacturing facility, are located
in Taiwan. Rent expense for all Company facilities was $868,000, $529,000, and
$282,000 in 1996, 1995, and 1994, respectively.
27
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future minimum lease payments as of December 31, 1996 are as follows (in
thousands):
Years ending December 31,
1997 $ 873
1998 731
1999 717
2000 618
--------
$2,939
========
The Company has entered into licensing agreements with third parties to use
certain technologies in the Company's products. Under the terms of the license
agreements, the Company pays a royalty based upon a percentage of the sales
price or units shipped. Royalty expenses incurred are charged to cost of sales
in the period of the related sales and are payable in quarterly installments.
NOTE 6 -- CAPITAL STOCK
Stock Plans
The Company's 1993 Stock Option Plan (the Plan), as amended, provides for the
issuance of Common Stock or the granting of incentive or nonqualified stock
options to qualified employees, directors and consultants up to 3,500,000 shares
of Common Stock. The price of stock issued and options granted under the Plan is
determined by the Company's Board of Directors. Incentive stock options are
granted at not less than the fair market value of the Common Stock at the date
of grant and nonqualified options are granted at not less than 50% of the fair
market value of the Common Stock on the date of grant. Options under the Plan
vest over a period determined by the Board of Directors, which is generally four
years. Options may be exercised in exchange for cash or, in certain cases at the
discretion of the Board of Directors, for promissory notes payable to the
Company. At December 31, 1996, 4,218 shares of Common Stock had been issued
subject to repurchase by the Company; options to purchase 2,089,256 shares of
Common Stock were outstanding, of which 552,602 shares were exercisable at
exercise prices of $0.10 to $20.00 per share; 594,816 shares were available for
future grants; and 2,684,072 shares of Common Stock were authorized but unissued
under the Plan.
A total of 250,000 shares has been reserved for issuance under the Company's
Employee Stock Purchase Plan, which permits eligible employees to purchase
Common Stock at a discount through payroll deductions during concurrent 24-month
offering periods. Each offering period is divided into four consecutive
six-month purchase periods. The price at which the Common Stock is purchased
under the Employee Stock Purchase Plan is equal to 85% of the fair market value
of the Common Stock on the first day of the offering period or the last market
day of the purchase period, whichever is lower. At December 31, 1996, a total of
117,584 shares has been issued at an aggregate purchase price of $839,227 and
132,416 shares remain reserved for future issuance under the Employee Stock
Purchase Plan.
The 1994 Outside Directors Stock Plan, which provides for the automatic granting
of nonqualified stock options to directors of the Company who are not employees
of the Company (Outside Director), has a total of 150,000 shares reserved for
issuance. Prior to an amendment to the Plan, effective September 1996, each
current Outside Director was automatically granted an option to purchase 2,000
shares of Common Stock on the date of each annual meeting of stockholders. Each
new Outside Director elected or appointed after the effective date of the
Outside Directors Plan was automatically granted an option to purchase 10,000
shares of Common Stock on their date of election or appointment. After the
amendment, the Board unanimously approved amending the Outside Directors Plan to
provide for an initial option grant for the purchase of 15,000 shares of Common
Stock with annual grants thereafter on the date of the annual meeting in the
amount of 5,000 shares. The exercise price of the options will be the fair
market value of the
28
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Common Stock on the date of grant, and vest over a period of four years. At
December 31, 1996, options to purchase 12,000 shares of Common Stock were
outstanding, of which 2,499 shares were exercisable at an exercise price of
$20.00 per share; 138,000 shares were available for future grants; and 150,000
shares of Common Stock were authorized but unissued under the Plan.
In July 1996, the Board of Directors adopted the 1996 Nonstatutory Stock Option
Plan, (the "1996 Plan"), which provides for the issuance of Common Stock or
granting of Non-qualified Stock Options to qualified employees and consultants
of up to 1,000,000 shares of Common Stock. The price granted under the 1996 Plan
is at the sole discretion of the Board, provided the price is not less than 50%
of the fair market value of the Common Stock on the date of grant. Options vest
over a period determined by the Board, which is generally four years. At
December 31, 1996, options to purchase 729,111 shares of Common Stock were
outstanding, of which no shares were exercisable; 270,889 shares were available
for future grants; and 1,000,000 shares of Common Stock were authorized but
unissued under the 1996 Plan.
The following table summarizes option activity under the 1993 Stock Option Plan,
the 1994 Outside Directors Plan, and the 1996 Plan:
Options Price Per Share
------- ---------------
Balance at December 31, 1993 1,032,100 $ 0.10 - $ 1.50
Granted 338,800 1.50 - 25.25
Exercised (456,647) 0.10 - 0.35
Canceled (24,828) 0.10 - 5.50
-----------
Balance at December 31,1994 889,425 0.10 - 25.25
Granted 533,900 10.25 - 25.00
Exercised (161,382) 0.10 - 7.25
Canceled (141,817) 0.17 - 25.25
-----------
Balance at December 31, 1995 1,120,126 0.10 - 25.25
Granted 2,905,155 11.63 - 18.63
Exercised (199,698) 0.10 - 10.25
Canceled (995,216) 0.30 - 25.25
-----------
Balance at December 31, 1996 2,830,367 $ 0.10 - $ 20.00
===========
At December 31, 1996, options for the purchase of 555,101 shares of Common Stock
were vested.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1996 and
1995, consistent with the provisions of SFAS No. 123, the Company's net earnings
and earnings per share would have been reduced to the pro forma amounts
indicated below:
1996 1995
---- ----
(in thousands, except per share data)
Net income (loss) - as reported $ (11,902) $ 6,717
Net income (loss) - pro forma $ (14,782) $ 5,791
Earnings (loss) per share - as reported $ (1.01) $ 0.57
Earnings (loss) per share - pro forma $ (1.26) $ 0.49
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: zero dividend
29
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
yield, expected volatility of 69.36%, risk-free interest rate of 5.48%, and all
options are exercised at vesting.
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
Outstanding Exercisable
--------------------------------------------------- ---------------------------
Weighted Weighted
Exercise Price Average Remaining Average Average
Range Shares Contractual Life Exercise Price Shares Exercise Price
- -------------------- ------------ --------------------- ---------------- ---------- ----------------
<C> <C> <C> <C> <C> <C>
$ 0.10 - $ 5.00 307,314 6.08 years 1.10 244,301 0.74
$ 5.01 - $10.00 13,652 7.54 years 6.98 6,235 6.99
$10.01 - $15.00 1,210,751 9.02 years 13.42 113,750 12.45
$15.01 - $20.00 1,298,650 9.42 years 16.62 190,815 16.07
</TABLE>
Stock options expire in 10 years from the date they are granted; options vest
over service periods that range from one to four years.
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7 -- INCOME TAXES
The following is a geographical breakdown of consolidated income (loss) before
income taxes (in thousands):
Year ended December 31,
1996 1995 1994
-------- -------- --------
Domestic $ (1,626) $ 10,334 $ 7,081
Foreign (9,668) -- --
-------- -------- --------
$(11,294) $ 10,334 $ 7,081
======== ======== ========
The provision for income taxes consists of the following (in thousands):
Year ended December 31,
1996 1995 1994
------- ------- -------
Current tax expense:
Federal $ 174 $ 3,862 $ 1,750
State 54 976 647
Foreign 436 -- --
------- ------- -------
664 4,838 2,397
------- ------- -------
Deferred tax benefit:
Federal (46) (1,058) (790)
State (10) (163) (191)
------- ------- -------
(56) (1,221) (981)
======= ======= =======
$ 608 $ 3,617 $ 1,416
======= ======= =======
Deferred tax assets consist of the following (in thousands):
December 31,
1996 1995
------ ------
Deferred tax assets:
Reserves and accruals not currently deductible $1,286 $1,275
Inventory 572 510
Depreciation 18 44
State taxes and other 413 404
------ ------
Gross deferred tax assets 2,289 2,233
Deferred tax assets valuation allowance -- --
------ ------
Net deferred tax assets $2,289 $2,233
====== ======
Current $2,271 $2,189
Noncurrent 18 44
------ ------
$2,289 $2,233
====== ======
31
<PAGE>
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 income
(loss) as follows:
Year ended December 31,
1996 1995 1994
---- ---- ----
Federal statutory rate (35.0%) 35.0% 35.0%
State tax, net of federal impact .3 5.1 4.2
Net operating loss carryforward utilized -- -- (5.2)
Research and development tax credits (1.1) (1.2) (5.5)
Tax-exempt interest income (4.5) (6.9) (1.7)
Recognition of deferred tax assets realized
in prior years -- -- (10.3)
Nondeductible acquisition costs 45.6 -- --
Other .1 3.0 3.5
---- ----- ----
5.4% 35.0% 20.0%
==== ===== ====
NOTE 8 - ACQUISITION
Effective March 21,1996, the Company completed its acquisition of NuCom Systems,
Inc., a Taiwan-based company, by purchasing all the outstanding shares of NuCom
in exchange for $11,158,134 in cash, 440,748 shares of Network Peripherals'
common stock valued at $5,341,866, plus product integration costs for an
aggregate purchase price of $17.1 million. The transaction was accounted for
using the purchase method. Accordingly, the purchase price was allocated to the
assets acquired and liabilities assumed based on their estimated fair market
values at the date of acquisition. The research and development in process
represents the estimated current fair market value, using a risk-adjusted income
approach, of specifically identified technologies which had not reached
technological feasibility. The results of operations of NuCom were included with
those of the Company beginning with the quarter ended June 30, 1996. The
allocation of the purchase price was as follows (in thousands):
Research and development, in process $13,032
Other intangible assets 1,716
Cash and cash equivalents 1,357
Current assets 3,138
Non-current assets 613
Property and equipment 479
Current liabilities assumed (3,235)
-------
Total $17,100
=======
The total purchase price is as follows:
Cash payment $11,158
Issuance of Common Stock 5,342
Other expenses 600
-------
Total $17,100
=======
NOTE 9- MARKET DATA
The Company operates in one industry segment. Export sales to customers outside
of North America represented 21%, 25% and 15%, of the Company's net sales for
the years ended December 31, 1996, 1995 and 1994, respectively. As a percentage
of net sales, export sales to Europe and Asia represented 8% and 13%,
respectively, in 1996. In 1995, the sales percentages were 17% and 8% for Europe
and Asia,
32
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
respectively, and in 1994, the sales percentages were 11%, 3%, and 1% for
Europe, Middle East, and Asia, respectively.
The following table summarizes the percentage of sales accounted for by the
Company's significant customers with sales of 10% or more:
Years ended December 31,
1996 1995 1994
---- ---- ----
Customer A 26% 17% 12%
Customer B - 15% -
Customer C 15% 10% -
Customer D 12% - 12%
Customer E - - 15%
Customer F - - 13%
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There is no reportable information under this item.
33
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item regarding directors is included under
"Election of Directors" in the Company's Proxy Statement for the 1997 Annual
Meeting.
Item 11. Executive Compensation.
The information required by this item is included under "Compensation of
Executive Officers" and "Report of the Compensation Committee on Executive
Compensation" in the Company's Proxy Statement for the 1997 Annual Meeting.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is included under "Share Ownership by
Principal Stockholders and Management" and "Election of Directors" in the
Company's Proxy Statement for the 1997 Annual Meeting.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is included under "Compensation Committee
Interlocks and Insider Participation Decisions" in the Company's Proxy Statement
for the 1997 Annual Meeting.
34
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The information required by subsections (a)1 and (a)2 of this item are included
in the response to Item 8 of Part III of this Annual Report on Form 10-K.
(a) Exhibits
<TABLE>
<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation.
3.2(1) By-Laws.
4.1(1) Fourth Amended and Restated Investor Rights Agreement dated July 15, 1993.
10.1(1) Form of Indemnity Agreement for directors and officers.
10.2(1) Amended and Restated 1993 Stock Option Plan and forms of agreement thereunder.
10.3(1) 1994 Employee Stock Purchase Plan.
10.4(1) 1994 Outside Directors Stock Option Plan and form of agreement thereunder.
10.6(1) Business Loan Agreement, and collateral agreements, with Silicon Valley Bank dated August 9,
1991, as amended May 5, 1992, April 15, 1993, February 1, 1994
and April 4, 1994 and Warrant dated August 10, 1991.
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.
10.13(1)(2) Authorized Distributor Agreement with Westcon, Inc. dated March 4, 1993.
10.14(3) Amendment No. 1 to Facilities Lease dated June 1, 1994 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.
10.15(3) Facilities Lease dated June 1, 1994 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.
10.16(4) Salary continuation agreement dated as of March 22, 1995 with Pauline Lo Alker.
10.18(5) Purchase Agreement among Network Peripherals Inc., Network Peripherals, Ltd., NuCom Systems,
Inc., and the shareholders of NuCom, dated January 31, 1996.
10.19(6) Salary continuation agreement dated as of May 1996 with Truman Cole.
10.20(6) Salary continuation agreement dated as of May 1996 with Don Morrison.
10.21 Employment agreement dated January 1997 with Truman Cole.
10.22 Line of Credit Agreement with Sumitomo Bank dated October 2, 1996.
10.23 Agreement with Glenn Penisten dated May 15, 1996.
27 Financial Data Schedule
</TABLE>
(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 corresponding exhibit in the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995 (File No. 0-23970).
(5) Incorporated by reference to the Registrant's report on Form 8-K filed on
March 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,
1996 (File No. 0-23970).
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NETWORK PERIPHERALS INC.
By: \s\ TRUMAN COLE
---------------------------
Truman Cole
Vice President, Finance and
Chief Financial Officer
(Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title
\s\ PAULINE LO ALKER President, Chief Executive Officer and
- --------------------------- Director (Prinicpal Executive Officer)
Pauline Lo Alker
\s\ TRUMAN COLE Vice President, Finance and Chief
- --------------------------- Financial Officer
Truman Cole (Principal Financial Officer)
\s\ ANN S. BOWERS Director
- ---------------------------
Ann S. Bowers
\s\ CHARLES HART Director
- ---------------------------
Charles Hart
\s\ KENNETH LEVY Director
- ---------------------------
Kenneth Levy
\s\ GLENN PENISTEN Chairman of the Board
- ---------------------------
Glenn Penisten
\s\ WILLIAM P. TAI Director
- ---------------------------
William P. Tai
36
<PAGE>
<TABLE>
NETWORK PERIPHERALS INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
SCHEDULE II
<CAPTION>
Additions
Balance at Charged to Charged Balance at
Beginning Costs and to Other End
of Year Expenses Accounts Deductions of Year
------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts $ 68 $ - $ 100 $ (3) $ 165
Allowance for sales returns and
other credits 75 - 769 (100) 744
----------------------------------------------------------------------
Total allowances for doubtful accounts
and sales returns 143 - 869 (103) 909
Deferred tax assets valuation allowance 1,484 - - (1,484) -
Year ended December 31, 1995
Allowance for doubtful accounts 165 - 88 (53) 200
Allowance for sales returns and other
credits 744 - 1,664 (1,870) 538
----------------------------------------------------------------------
Total allowances for doubtful accounts
and sales returns 909 - 1,752 (1,923) 738
Year ended December 31, 1996
Allowance for doubtful accounts 200 - 21 (12) 209
Allowance for sales returns and other
credits 538 - 6,743 (6,336) 945
----------------------------------------------------------------------
Total allowances for doubtful accounts
and sales returns $ 738 $ - $ 6,764 $ (6,348) $ 1,154
======================================================================
</TABLE>
37
EXHIBIT 10.21
January 3, 1997
Truman Cole
51 Hawthorn Drive
Atherton, CA 94027
Dear Truman:
This letter represents the agreement between you and Network Peripherals Inc.
(the "Agreement") regarding your separation from the Company.
1. Termination
a) Your last day as an Officer and employee of Network Peripherals Inc. (NPI)
will be May 15, 1997 (your "Termination Date). Through that date you will
continue to carry out all your existing duties as Vice President and Chief
Financial Officer in a professional manner, consistent with your past
performance and the responsibilities of the position.
b) Your current salary and existing employee benefits will remain in effect
through your Termination Date.
c) The executive bonus for 1996 will be determined in accordance with the
agreed upon terms of the executive bonus program and paid to you at the
same time as other bonuses are distributed to executive officers. You will
not be eligible for an executive bonus for 1997.
d) The Salary Continuation Agreement dated May 24, 1996 between you and NPI
will end on your Termination Date.
e) The Indemnity Agreement dated June 28, 1994 between you and NPI will remain
in full force and effect after the Termination Date and continue in full
force and effect throughout the consulting period defined in paragraph 3,
below.
2. Early Termination
With a minimum of 30 days prior written notice, NPI may change your Termination
Date described in paragraph 1.a., above, to any date prior to May 15, 1997, but
in no event later than May 15, 1997 unless agreed in writing by both parties.
3. Consulting
a) Effective upon your Termination Date you will become a consultant to the
Company reporting directly to me.
b) The consulting period shall continue until the earlier of:
- November 15, 1997; or,
- That date on which you become a full-time employee of another company.
You agree to promptly notify NPI on, or before, the date that this
occurs.
- That date on which you consult, or enter into an agreement to consult,
for a competitor of NPI. Consulting for a competitor shall result in
immediate termination of the benefits described in sections 3.c. and
3.d. of this Agreement.
<PAGE>
AGREEMENT BETWEEN NPI & TRUMAN COLE
JANUARY 3,1997
PAGE 2 OF 3
c) As a consultant, you will be paid $11,250 per month, in two equal
installments on the 15th and last day of each month, less any required
withholdings.
d) You will continue to receive existing health care coverage pursuant to
COBRA and NPI will pay the costs of such coverage during this consulting
period. Additionally, NPI agrees to reimburse you for any out-of-pocket
expenses incurred as a result of your consulting activities with such
reimbursement subject to NPI's normal travel and expense reimbursement
policy. If requested by you, NPI will provide continued use of voicemail
and email during the consulting period.
e) Your existing stock options will continue to vest throughout the consulting
period, and you will have 90 days following the end of the consulting
period in which to exercise any vested options.
f) During the consulting period you agree to be available by phone or in
person, as may be mutually agreed, with respect to accounting, financial,
investor relations and other related matters. Additionally, you agree to
use reasonable efforts to make yourself available, by phone or in-person,
to support NPI in its litigation with Extreme Networks, including
depositions and other activities. It is understood that your duties
relative to these consulting activities will not exceed a total of 24 days
during the consulting period. If you agree to provide consulting services
in excess of 24 days, you will be compensated for such consulting at the
rate of $2,800 per day.
4. Release
In exchange for the benefits described above, you and your successors and
assigns release and absolutely discharge the Company and its stockholders,
directors, employees, agents, attorneys legal successors and assigns of and from
any and all claims, actions and causes of action, whether now known or unknown,
which you now have, or at any other time had, or of any matter, cause fact,
thing act or omission whatsoever occurring or existing at any time to and
including the date hereof, including, but not limited to, any claims of wrongful
termination, breach of contract or national origin, race, age sex or other
discrimination under the Civil Rights Act of 1964 the Age Discrimination In
Employment Act of 1967, the Americans with Disabilities Act, the Fair Employment
and Housing Act or any other applicable law. You hereby waive any right or
benefit which you have or may have under section 1542 of the Civil Code of the
State of California, to the full extent that you may lawfully waive such rights
and benefits, pertaining to the subject matter of this general release of
claims. You acknowledge that you have read section 1542 of the Civil Code of the
State of California that is set forth below in its entirety:
A general release does not extend to claims that the creditor does not
know or suspects exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
5. Proprietary Information Agreement
You acknowledge and agree that you shall continue to be bound by, and comply
with, the terms of any proprietary rights or confidentiality agreements between
the Company and you.
<PAGE>
6. Non-solicitation of employees
You agree that for a period of one year after your Termination Date, you shall
not, either directly or indirectly, solicit the services, or attempt to solicit
the services of any employee of NPI or its affiliated entities to any other
person or entity.
7. Non-disclosure
Both NPI and you agree that neither party shall directly or indirectly disclose
any of the terms of this Agreement to anyone (other than your immediate family
or counsel), except as such disclosure may be required for accounting or tax
reporting purposes or as may be required by law. Further, the timing and content
of any public announcements of your separation from the Company must be mutually
agreed between you and NPI.
8. Recovery of legal costs
The prevailing party shall be entitled to recover from the losing party its
attorneys' fees and costs incurred in any lawsuit or other action brought to
enforce any right arising out of this Agreement.
9. Entire agreement
This letter constitutes the entire agreement between the parties with respect to
the subject matter hereof, and supersedes all prior negotiations and agreements,
whether written or oral, with the exception of the agreements described in
paragraphs 1.d., 1.e. and 5. This Agreement may not be altered or amended except
by a written document signed by the Company and you.
Sincerely,
/s/ Pauline Lo Alker
- --------------------------------
Pauline Lo Alker
President and Chief Executive Officer
- --------------------------------------------------------------------------------
I understand that I should consult with an attorney prior to signing this
Agreement and that I am giving up any legal claims I have against the Company by
signing this Agreement. Further, I understand that I may have 21 days to
consider this Agreement, that I may revoke it at any time during the 7 days
after I sign it and that it shall not become effective until that 7 day period
has passed. I further acknowledge that I am signing this Agreement knowingly,
willingly and voluntarily in exchange for the benefits described in Paragraphs 1
through 3, above.
/s/ Truman Cole
- ----------------------- ----------
Truman Cole Date
Exhibit 10.22
U.S. $10,000,000
CREDIT AGREEMENT
DATED AS OF OCTOBER 2, 1996
--------------------
BY AND BETWEEN
NETWORK PERIPHERALS INC.
AND
SUMITOMO BANK OF CALIFORNIA, AS AGENT
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT ("Agreement") is made as of October 2, 1996 by
and among NETWORK PERIPHERALS INC., a Delaware corporation ("Borrower"), having
its chief executive office at 1371 McCarthy Boulevard, Milpitas, California
95035, SUMITOMO BANK OF CALIFORNIA, a banking association ("Sumitomo"), having
its head office at 320 California Street, San Francisco, California, and each
other lender whose name is set forth on the signature pages hereof or which may
hereafter execute and deliver an instrument of assignment with respect to this
Agreement (individually, the "Bank," and collectively, the "Banks") and
Sumitomo, as Agent.
I
DEFINITIONS
.1 Definitions. All capitalized terms used in this Agreement or in the
Note or in any certificate, report or other document made or delivered pursuant
to this Agreement (unless otherwise defined therein) shall have the meanings
assigned to them below:
Acquisition. Any transaction, or any series of related transactions, by
which any Borrower or any of its Subsidiaries directly or indirectly (a)
acquires any ongoing business or all or substantially all of the assets of any
firm, partnership, joint venture, corporation or division thereof, whether
through purchase of assets, merger or otherwise, or (b) acquires (in one
transaction or as the most recent transaction in a series of transactions)
control of at least a majority of the stock of a corporation having ordinary
voting power for the election of directors, or (c) acquires control of fifty
percent (50%) or more of the ownership interest in any partnership or joint
venture.
Adjusted LIBOR Rate. Applicable to any Interest Period, shall mean a rate
per annum determined pursuant to the following formula:
ALR = [ LIBOR ]*
[ 1.00 - RP ]
ALR = Adjusted LIBOR Rate
LIBOR = London Interbank Offered Rate
RP = Reserve Percentage
* The amount in brackets shall be rounded upwards, if
necessary, to the next higher 1/100 of 1%.
<PAGE>
Where: "London Interbank Offered Rate" applicable to any LIBOR Loan for any
Interest Period means the rate of interest determined by Agent
to be the prevailing rate per annum at which deposits in U.S.
dollars are offered to Sumitomo by first-class banks in the
interbank eurodollar market in which it regularly participates
on or about 10:00 a.m. (California time) two (2) Business Days
before the first day of such Interest Period in an amount
approximately equal to the principal amount of the LIBOR Loan
to which such Interest Period is to apply for a period of time
approximately equal to such Interest Period.
"Reserve Percentage" applicable to any Interest Period means
the maximum reserve percentage (expressed as a decimal),
whether or not applicable to any Bank, under regulations
issued from time to time by the Board of Governors of the
Federal Reserve System for determining the maximum reserve
requirement (including, without limitation, any basic,
supplemental, emergency or marginal reserve requirement) with
respect to "Eurocurrency liabilities" as that term is defined
under such regulations.
The Adjusted LIBOR Rate shall be adjusted automatically as of the effective date
of any change in the Reserve Percentage.
Affected Loans. Has the meaning set forth in Section 2.9(a).
Agent. Sumitomo Bank of California, solely in its capacity as Agent.
Agreement. This Agreement, as the same may be supplemented or amended
from time to time.
Assignment and Acceptance. Has the meaning set forth in Section
9.10(a).
Authorized Officer. Has the meaning set forth in Section 2.2(a).
Bank or Banks. Sumitomo and each other lender which may hereafter
execute and deliver an instrument of assignment with respect to this Agreement.
Borrower. Network Peripherals Inc., a Delaware corporation.
Business Day. (i) For all purposes other than as covered by clause (ii)
below, any day other than a Saturday, Sunday or legal holiday on which Banks in
California are open for the conduct of a substantial part of their commercial
banking business; and (ii) with respect to all notices and determinations in
connection with, and payments of principal and interest on, LIBOR Loans, any day
that is a Business Day described in clause (i) and that is also a day for
trading by and between banks in U.S. dollar deposits in the London interbank
eurodollar market.
2.
<PAGE>
Capital Expenditures. Means all payments for acquisitions or for any
fixed assets or improvements or for replacements, substitutions or additions
thereto, that have a useful life of more than one (1) year and which are
required to be capitalized under generally accepted accounting principals,
including Capital Lease Obligations.
Capital Lease. Means, as to any person, any lease of any property by
such person as lessee that is, or should be, in accordance with Financial
Accounting Standards Board Statement No. 13, classified and accounted for as a
"capital lease" on the balance sheet of such person prepared in accordance with
generally accepted accounting principals.
Capital Lease Obligation. Means, with respect to any Capital Lease, the
amount of the obligation of the lessee thereunder that, in accordance with
generally accepted accounting principals, would appear on a balance sheet of
such lessee in respect of such Capital Lease or otherwise be disclosed in a note
to such balance sheet.
Closing Date. Means the date at which each of the conditions precedent,
set forth in Section III to the making of the initial Loan hereunder, shall have
been duly fulfilled or satisfied by Borrower.
Code. The Internal Revenue Code of 1986 and the rules and regulations
thereunder, collectively, as the same may from time to time be supplemented or
amended and remain in effect.
Commitment. The amount set forth next to the name of each Bank on
Schedule 1 now or hereafter attached hereto (and as adjusted from time to time).
Commitment Amount. $10,000,000 in the aggregate, or any lesser amount,
including zero, resulting from a termination or reduction of such amount in
accordance with Section 2.5 or Section 7.2.
Consolidated Current Assets. At any date as of which the amount thereof
shall be determined, all amounts that should, in accordance with generally
accepted accounting principles, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.
Consolidated Current Liabilities. At any date as of which the amount
thereof shall be determined, all amounts that should, in accordance with
generally accepted accounting principles, be included as current liabilities on
the consolidated balance sheet of Borrower and its Subsidiaries as at such date,
plus, to the extent not already included therein, all Loans and all Indebtedness
that are payable upon demand or within one (1) year from the date of
determination thereof.
3.
<PAGE>
Consolidated Tangible Net Worth. At any date as of which the amount
thereof shall be determined, the Consolidated Total Assets of Borrower and its
Subsidiaries minus (i) the sum of any amounts attributable to (a) goodwill, (b)
intangible items such as unamortized debt discount and expense, patents, trade
and service marks and names, copyrights and research and development expenses,
(c) all reserves not already deducted from assets, (d) any write-up in the book
value of assets resulting from any revaluation thereof subsequent to the date of
the financial statements referred to in Section 4.6, and (e) the value of any
minority interests in Subsidiaries, and (ii) Consolidated Total Liabilities,
plus (iii) the sum of non-cash charges to the book value of assets resulting
from accounting adjustments made in relation to the acquisition of NuCom
Systems, Inc. and such future Acquisitions, if any, as may be made pursuant to
the terms of this Agreement.
Consolidated Total Assets. At any date as of which the amount thereof
shall be determined, all assets that should, in accordance with generally
accepted accounting principles, be classified as assets on the balance sheet of
Borrower and its Subsidiaries.
Consolidated Total Liabilities. At any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
generally accepted accounting principles, be classified as liabilities on the
consolidated balance sheet of Borrower and its Subsidiaries, including in any
event all Indebtedness.
Contingent Liabilities. As applied to Borrower and its Subsidiaries,
(i) any Guarantee of Borrower or its Subsidiaries; and (ii) any direct or
indirect obligation or liability, contingent or otherwise, of Borrower or its
Subsidiaries, (a) in respect of any letter of credit or similar instrument
issued for the account of Borrower or its Subsidiaries as to which such entity
is otherwise liable for reimbursement of drawings, (b) to purchase any
materials, supplies or other property from, or to obtain the services of,
another person or entity if the relevant contract or other related document or
obligation requires that payment for such materials, supplies or other property,
or for such services, shall be made regardless of whether delivery of such
materials, supplies or other property is ever made or tendered, or such services
are ever performed or tendered, (c) with respect to the Indebtedness of any
partnership or joint venture as to which such entity is a partner or joint
venturer, or (d) in respect of any Rate Contract that is not entered into in
connection with a bona fide hedging operation that provides offsetting benefits
to Borrower or any of its Subsidiaries. The amount of any Contingent Obligation
shall (subject, in the case of Guarantees, to the last sentence of the
definition of "Guarantee") be deemed equal to the maximum reasonably anticipated
liability in respect thereof, and shall, with respect to item (ii)(d) of this
definition, be marked to market on a current basis.
Controlled Group. All trades or businesses (whether or not
incorporated) under common control that, together with Borrower, are treated as
a single employer under Section 414(b) or 414(c) of the Code or Section 4001 of
ERISA.
4.
<PAGE>
Current Maturity of Long Term Debt. At any date as of which the amount
thereof shall be determined, all amounts that should, in accordance with
generally accepted accounting principles, be included as the current portion of
all Loans and Indebtedness that are payable after one (1) year from the date of
determination thereof.
Default. An Event of Default or event or condition that, but for the
requirement that time elapse or notice be given, or both, would constitute an
Event of Default.
Designated Deposit Account. A demand deposit account maintained by
Borrower with Sumitomo.
Disclosure Letter. That letter of even date herewith of Borrower
disclosing certain exceptions to the representations and warranties set forth
herein.
Encumbrances. Has the meaning set forth in Section 6.4.
ERISA. The Employee Retirement Income Security Act of 1974 and the
rules and regulations thereunder, collectively, as the same may from time to
time be supplemented or amended and remain in effect.
Environmental Laws. Any and all applicable foreign, federal, state and
local environmental, health or safety statutes, laws, regulations, rules,
ordinances, policies and rules or common law (whether now existing or hereafter
enacted or promulgated), of all governmental agencies, bureaus or departments
which may now or hereafter have jurisdiction over Borrower or any of its
Subsidiaries and all applicable judicial and administrative and regulatory
decrees, judgments and orders, including common law rulings and determinations,
relating to injury to, or the protection of, real or personal property or human
health or the environment, including, without limitation, all requirements
pertaining to reporting, licensing, permitting, investigation, remediation and
removal of emissions, discharges, releases or threatened releases of Hazardous
Materials, chemical substances, pollutants or contaminants whether solid, liquid
or gaseous in nature, into the environment or relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of such Hazardous Materials, chemical substances, pollutants or
contaminants.
Event of Default. Has the meaning set forth in Section 7.1.
Federal Funds Effective Rate. For any day, a fluctuating interest rate
per annum equal to the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by federal
funds brokers, as published for such day (or, if such day is not a Business Day,
for the next preceding Business Day) by the Federal Reserve Bank of San
Francisco, or, if such rate is not so published for any day that is a Business
Day, the average of the quotations for such day on such transactions received by
Agent from three (3) federal funds brokers of recognized standing selected by
Agent.
5.
<PAGE>
Financial Institution. Any (i) bank, savings bank, savings and loan
association or insurance company, (ii) pension plan or portfolio or investment
fund managed or administered by any bank, savings bank, savings and loan
association or insurance company, (iii) investment company owned by any bank,
savings bank, savings and loan association or insurance company, or (iv)
investment banking company.
Financing Statements. Means the UCC-1 financing statements to be
executed and delivered by Borrower pursuant to Section 3.1(b).
Guarantees. As applied to Borrower and its Subsidiaries, all
guarantees, endorsements or other contingent or surety obligations with respect
to obligations of others whether or not reflected on the consolidated balance
sheet of Borrower and its Subsidiaries, including any obligation to furnish
funds, directly or indirectly (whether by virtue of partnership arrangements, by
agreement to keep-well or otherwise), through the purchase of goods, supplies or
services, or by way of stock purchase, capital contribution, advance or loan, or
to enter into a contract for any of the foregoing, for the purpose of payment of
obligations of any other person or entity. The amount of any Guarantee shall be
deemed equal to the stated or determinable amount of the primary obligation in
respect of which such Guarantee is made or, if not stated or if indeterminable,
the maximum reasonably anticipated liability in respect thereof.
Hazardous Material. Any substance (i) the presence of which requires or
may hereafter require notification, investigation or remediation under any
Environmental Law; (ii) which is or becomes defined as a "hazardous waste,"
"hazardous material" or "hazardous substance" or "controlled industrial waste"
or "pollutant" or "contaminant" under any present or future Environmental Law or
amendments thereto including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601
et seq.) and any applicable local statutes and the regulations promulgated
thereunder; (iii) which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes
regulated by any governmental authority, agency, department, commission, board,
agency or instrumentality of any foreign country, the United States, any state
of the United States, or any political subdivision thereof to the extent any of
the foregoing has or had jurisdiction over Borrower and any of its Subsidiaries;
or (iv) without limitation, which contains gasoline, diesel fuel or other
petroleum products, asbestos or polychlorinated biphenyls ("PCB's").
Indebtedness. As applied to Borrower and its Subsidiaries, (i) all
obligations for borrowed money or other extensions of credit whether or not
secured or unsecured, absolute or contingent, including, without limitation,
unmatured reimbursement obligations with respect to letters of credit and all
obligations representing the deferred purchase price of property, other than
accounts payable arising in the ordinary course of business, (ii) all
obligations evidenced by bonds, notes, debentures or other similar instruments,
(iii) all obligations secured by any mortgage, pledge, security interest or
other lien on property owned or acquired by Borrower or
6.
<PAGE>
any of its Subsidiaries whether or not the obligations secured thereby shall
have been assumed, (iv) that portion of all obligations arising under capital
leases that is required to be capitalized on the consolidated balance sheet of
Borrower and its Subsidiaries, (v) all Guarantees, (vi) all net obligations with
respect to Rate Contracts, and (vii) all obligations that are immediately due
and payable out of the proceeds of or production from property now or hereafter
owned or acquired by Borrower or any of its Subsidiaries.
Indemnified Person. Has the meaning set forth in Section 9.3(a).
Indemnified Liabilities. Has the meaning set forth in Section 9.3(a).
Intellectual Property Security Agreements. Means the grants of
intellectual property to be entered into as of the date hereof by Borrower,
substantially in the form of Exhibit C hereto.
Interest Period. With respect to each LIBOR Loan, the period commencing
on the date of the making or continuation of or conversion to such LIBOR Loan
and ending thirty (30), sixty (60) or ninety (90) days thereafter, as Borrower
may elect in the applicable Notice of Borrowing or Conversion; provided that:
(i) any Interest Period (other than an Interest Period
determined pursuant to clause (iii) below) that would otherwise end on
a day that is not a Business Day shall be extended to the next
succeeding Business Day unless, in the case of LIBOR Loans, such
Business Day falls in the next calendar month, in which case such
Interest Period shall end on the immediately preceding Business Day;
(ii) any Interest Period applicable to a LIBOR Loan that
begins on the last Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar month
at the end of such Interest Period) shall, subject to clause (iii)
below, end on the last Business Day of a calendar month;
(iii) any Interest Period during the Revolving Credit
Period that would otherwise end after the Maturity Date shall end on
the Maturity Date;
(iv) notwithstanding clause (ii) above, no Interest
Period applicable to a LIBOR Loan shall have a duration of less than
one (1) month, and if any Interest Period applicable to such Loans
would be for a shorter period, such Interest Period shall not be
available hereunder.
Investment. As applied to Borrower and its Subsidiaries, the purchase
or acquisition, valued at cost, of any share of capital stock, partnership
interest, joint venture interest, evidence of indebtedness or other equity
security of any other person or entity, any loan, advance or extension of credit
to, or contribution to the capital of, any other person or entity, any real
estate held for sale or investment, any commodities futures contracts held other
than in connection with
7.
<PAGE>
bona fide hedging transactions, any other investment in any other person or
entity, and the making of any commitment or acquisition of any option to make an
Investment.
Joint Venture. A corporation, partnership, joint venture or other
similar arrangement (whether created pursuant to contract or conducted through a
separate entity) now or hereafter formed or maintained by Borrower or any of its
subsidiaries with another person or entity in order to conduct a common venture
or enterprise with such person or entity.
Letter of Credit. Any letter of credit issued pursuant to Section 2.3
of this Agreement, and "Letters of Credit" means all such letters of credit,
collectively.
Letter of Credit Maturity Date. Means November 30, 1997.
Letter of Credit Sublimit. $5,000,000 in the aggregate, or any lesser
amount, including zero, resulting from a termination or reduction of such amount
in accordance with Section 2.5 or Section 7.2.
LIBOR Loan. Any Loan bearing interest at a rate determined with
reference to the Adjusted LIBOR rate.
Loan. A loan made to Borrower by the Banks pursuant to Section 2.1 and
may be a Prime Rate Loan or a LIBOR Loan depending upon the context. "Loans"
means all of such loans, collectively.
Loan Documents. Any and all of this Agreement, the Note, and any and
all other agreements, documents and instruments executed and delivered by or on
behalf or in support of Borrower to Agent on behalf of the Banks, or any Bank or
their authorized designee evidencing or otherwise relating to the Loans and the
Letters of Credit, as the same may from time to time be amended, modified,
supplemented or renewed.
Majority Banks. Means at any time the Banks then holding in excess of
fifty percent (50%) of the then aggregate unpaid principal amount of the Loans,
or, if no such principal amount is then outstanding, the Banks then having in
excess of fifty percent (50%) of the Commitments.
Material Adverse Effect. (i) a material adverse change in, or a
material adverse effect upon, the operations, business, properties, or condition
(financial or otherwise) of Borrower or Borrower and its Subsidiaries taken as a
whole; (ii) a material impairment of the ability of Borrower to perform under
any Loan Document and avoid any Event of Default; or (iii) a material adverse
effect upon the legality, validity, binding effect or enforceability of any Loan
Document.
Maturity Date. Means July 31, 1997.
8.
<PAGE>
Maximum Availability. Shall have the meaning set forth in Section
2.1(a).
NASDAQ. Means the National Association of Securities Dealers Automated
Quotations.
Note. A promissory note of Borrower, substantially in the form of
Exhibit A hereto, evidencing the obligation of Borrower to Agent, for and on
behalf of the Banks, to repay the Loans.
Notice of Borrowing or Conversion. Has the meaning set forth in Section
2.2.
Obligations. Any and all obligations of Borrower to the Banks and/or
Agent arising in connection with this Agreement or the other Loan Documents of
every kind and description, direct or indirect, absolute or contingent, primary
or secondary, due or to become due, now existing or hereafter arising,
regardless of how they arise or by what agreement or instrument, if any, and
including obligations to perform acts and refrain from taking action as well as
obligations to pay money.
Participant. Has the meaning set forth in Section 9.10(d).
PBGC. The Pension Benefit Guaranty Corporation or any entity succeeding
to any or all of its functions under ERISA.
Permitted Encumbrances. Has the meaning set forth in Section 6.4.
Plan. At any time, an employee pension or other benefit plan that is
subject to Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code and is either (i) maintained by Borrower or any member
of the Controlled Group for employees of Borrower or any member of the
Controlled Group or (ii) if such Plan is established, maintained pursuant to a
collective bargaining agreement or any other arrangement under which more than
one (1) employer makes contributions and to which Borrower or any member of the
Controlled Group is then making or accruing an obligation to make contributions
or has within the preceding five (5) Plan years made contributions.
Prime Rate. Equals the rate of interest set from time to time by
Sumitomo at its head office in San Francisco, California as its Prime Rate. The
Prime Rate is determined by Sumitomo as a means of pricing credit extensions to
some customers and is neither tied to any external rate of interest or index nor
is it necessarily the lowest rate of interest charged by Sumitomo at any given
time for any particular class of customers or credit extensions. Any changes in
the interest rate resulting from a change in the Prime Rate shall take effect
without notice on the date specified at the time the Prime Rate is set.
9.
<PAGE>
Prime Rate Loan. Any Loan bearing interest determined with reference to
the Prime Rate.
Qualified Investments. As applied to Borrower and its Subsidiaries,
investments in (i) notes, bonds or other obligations of the United States of
America or any agency thereof that as to principal and interest constitute
direct obligations of or are guaranteed by the United States of America; (ii)
certificates of deposit or other deposit instruments or accounts or commercial
paper of Sumitomo; (iii) certificates of deposit or other deposit instruments or
accounts of banks or trust companies organized under the laws of the United
States or any state thereof that have capital and surplus of at least
$200,000,000, (iv) commercial paper that is rated not less than prime-one or A-1
or their equivalents by Moody's Investors Service, Inc. or Standard & Poor's
Corporation, respectively, or their successors, (v) any repurchase agreement
secured by any one or more of the foregoing, and (vi) any Investments permitted
by Borrower's written and then-current investment policy, as amended from
time-to-time, provided that such investment policy (and any such amendments
thereto) has been approved in writing by the Requisite Banks, such approval not
to be unreasonably withheld.
Rate Contracts. Interest rate and currency swap agreements, cap, floor
and collar agreements, interest rate insurance, currency spot and forward
contracts and other agreements or arrangements designed to provide protection
against fluctuations in interest or currency exchange rates.
Related Documents. Has the meaning set forth in Section 2.3(d)(i).
Requirement of Law. As to any person or entity, any law (statutory or
common), treaty, rule or regulation or determination of an arbitrator or of a
governmental authority, in each case applicable to or binding upon the person or
entity or any of its property is subject.
Requisite Banks. At any time the Banks then holding at least seventy
percent (70%) of the then aggregate unpaid principal amount of the Loans, or, if
no such principal amount is then outstanding, the Banks then having at least
seventy percent (70%) of the Commitments.
Responsible Officer. The President and Chief Executive Officer, the
Chief Financial Officer or the Chairman of the Board of Borrower.
Revolving Credit Period. The period beginning on the date of this
Agreement and extending through and including the Maturity Date or such earlier
date on which the Commitments to make Loans are terminated or the Commitment
Amount is reduced to zero in accordance with the terms hereof.
Security Agreement. Means the Security Agreement to be entered into as
of the date hereof by and between Borrower and Agent, on behalf of the Banks,
substantially in the form of Exhibit B hereto.
10.
<PAGE>
Subsidiary. Any corporation, association, joint stock company, business
trust or other similar organization of which fifty percent (50%) or more of the
ordinary voting power for the election of a majority of the members of the board
of directors or other governing body of such entity is held or controlled by
Borrower or a Subsidiary of Borrower; or any other such organization the
management of which is directly or indirectly controlled by Borrower or a
Subsidiary of Borrower through the exercise of voting power or otherwise; or any
joint venture, whether incorporated or not, in which Borrower has a fifty
percent (50%) or more ownership interest.
.2 Accounting Terms. All terms of an accounting character shall have
the meanings assigned thereto by generally accepted accounting principles
applied on a basis consistent with the financial statements referred to in
Section 4.6 of this Agreement, modified to the extent, but only to the extent,
that such meanings are specifically modified herein. In the event that generally
accepted accounting principles change during the term of this Agreement such
that the financial covenants contained in Section 5.7 would then be calculated
in a different manner or with different components, (i) Borrower and Banks agree
to negotiate to amend this Agreement in such respects as are necessary to
conform those covenants as criteria for evaluating Borrower's financial
condition to substantially the same criteria as were effective prior to such
change in generally accepted accounting principles, and (ii) Borrower shall be
deemed to be in compliance with the financial covenants contained in such
Section 5.7, pending reaching agreement on such amendment, for a period of sixty
(60) days following any such change in generally accepted accounting principles
if and to the extent that the Borrower would have been in compliance therewith
under generally accepted accounting principles as in effect immediately prior to
such change.
II
DESCRIPTION OF CREDIT
.1 Commitment to Lend
(a) Revolving Line of Credit. Subject to the terms and conditions
hereof, each Bank severally agrees to make Loans to Borrower up to the amount of
its Commitment, from time to time until the close of business on the Maturity
Date, in such sums as Borrower may request, provided that the aggregate
principal amount of all Loans at any one time outstanding hereunder shall not
exceed the Commitment Amount less the aggregate principal amount undrawn under
Letters of Credit then outstanding (the "Maximum Availability").
(b) General Provisions Relating to Loans. Each Loan made by a Bank
hereunder shall, at Borrower's option in accordance with the terms of this
Agreement, be either in the form of a Prime Rate Loan or a LIBOR Loan; provided,
however, that the amount of any LIBOR Loan shall be not less than $500,000 or
any integral multiple of $100,000 in excess
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thereof. Borrower may borrow, prepay pursuant to Section 2.11 and reborrow, from
the Closing Date until the Maturity Date, the full amount of the Commitment
Amount or any lesser sum that is at least $100,000 provided, however, no LIBOR
Loan shall have an Interest Period ending after the Maturity Date.
(c) Repayment of Principal Amount of Loans. Subject to the terms of
this Agreement relating to optional earlier repayment of Loans and the
acceleration of maturities, the Loans shall be fully due and payable on the
Maturity Date.
(d) Conversion and Continuation Elections. Provided that no Default
shall have occurred and be continuing Borrower may:
(i) elect to convert, on any Business Day any Prime Rate
Loan (or any portion thereof in an amount equal to $500,000 or any integral
multiple of $100,000 in excess thereof) into a LIBOR Loan; or
(ii) elect to convert, on any Interest Payment Date, any
LIBOR Loan maturing on such Interest Payment Date (or any portion thereof) into
a Prime Rate Loan; or
(iii) elect to continue, on any Interest Payment Date,
any LIBOR Loan maturing on such Interest Payment Date (or any portion thereof in
an amount equal to $500,000 or any integral multiple of $100,000 in excess
thereof);
provided, that if the aggregate amount of LIBOR Loans shall have been reduced by
payment, prepayment or conversion of a portion thereof to be less than $500,000,
such LIBOR Loans shall automatically convert into Prime Rate Loans; provided,
further that in no event shall there be more than five (5) LIBOR Loans
outstanding at any one time. Borrower shall give Agent prior notice of each such
conversion or continuance (which notice shall be effective upon receipt) in
accordance with Section 2.2.
(e) Availability of Loans. The obligation of the Banks to make Loans
and issue or participate in Letters of Credit hereunder shall be limited at any
time to the Maximum Availability. Nothing contained in this Agreement shall
under any circumstance be deemed to require any Bank to make any Loan or
participate in the issuance of any Letter of Credit hereunder which, in the
aggregate principal amount, taking into account the making of such Loan or
participation in such Letter of Credit, exceeds such Bank's Commitment.
.2 Notice And Manner Of Borrowing Or Conversion Of Loans
(a) Whenever Borrower desires to obtain or continue a Loan hereunder
or convert an outstanding Loan into a Loan of another type provided for in this
Agreement, an Authorized Officer, as defined below, of Borrower shall notify
Agent (which notice shall be irrevocable) by telefax, telegraph or telephone
received no later than 10:00 a.m. San Francisco
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time on the date two (2) Business Days before the day on which the requested
Loan is to be made or continued as or converted to a Prime Rate Loan, and
received no later than 10:00 a.m. San Francisco time on the date three (3)
Business Days before the day on which the requested Loan is to be made or
continued as or converted to a LIBOR Loan. Such notice shall specify (i) the
effective date and amount of each Loan or portion thereof to be continued or
converted, subject to the limitations set forth in Section 2.1, (ii) the
interest rate option to be applicable thereto, and (iii) the duration of the
applicable Interest Period, if any (subject to the provisions of the definition
of Interest Period and Section 2.7). Each such notification (a "Notice of
Borrowing or Conversion") shall be immediately followed by a written
confirmation thereof by Borrower in substantially the form of Exhibit D hereto,
provided that if such written confirmation of a notice given by telefax,
telegraph or telephone differs in any material respect from the action taken by
Agent, the records of Agent shall control absent manifest error. For purposes of
this Agreement, "Authorized Officer" shall mean any officer of Borrower whose
name and signature are set forth in Borrower's resolution authorizing such
activity.
(b) Agent shall promptly notify each Bank as to the content of each
Notice of Borrowing or Conversion and Agent's determination as to whether
conditions to the making of the Loan have been satisfied. Not later than 12:00
noon, San Francisco time, on the date of such borrowing, each Bank shall make
available its pro rata share of such borrowing in immediately available funds,
by wiring the proceeds thereof to Agent for the account of Borrower. Upon
satisfaction of the applicable conditions precedent set forth in Section 3, the
amount of the Loan shall be credited in immediately available funds to the
Designated Deposit Account.
.3 Letters Of Credit
(a) Subject to the terms and conditions of this Agreement and in
reliance upon the representations and warranties of Borrower set forth herein,
at any time and from time to time from the Closing Date hereof through the
Business Day immediately prior to the Maturity Date, Sumitomo shall issue for
the account of Borrower such letters of credit ("Letters of Credit") as Borrower
may request to a maximum aggregate principal amount equal to the Letter of
Credit Sublimit, which request shall be made by delivering to Agent a duly
executed letter of credit application on Sumitomo's standard form; provided that
each such Letter of Credit (i) is denominated in U.S. dollars, (ii) supports an
obligation maturing before the Letter of Credit Maturity Date, (iii) requires a
drawing based on a sight draft, and (iv) is issuable without violating any
Requirement of Law. Notwithstanding anything to the contrary contained in this
Agreement, upon issuing any such Letter of Credit, the aggregate principal
amount undrawn under all Letters of Credit then outstanding shall not exceed the
Commitment Amount less the amount of all Loans then outstanding. No Letter of
Credit shall have an expiration date that is later than the Letter of Credit
Maturity Date.
(b) Unless otherwise expressly provided therein, each beneficiary
named by Borrower with respect to a Letter of Credit issued hereunder shall be
permitted to make only one draw under such Letter of Credit. Upon the making of
such draw under a Letter of Credit by
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such beneficiary, the full amount of such draw shall be immediately due and
payable by Borrower to Sumitomo. Sumitomo shall immediately notify Borrower, the
Banks and Agent of the amount of such draw. Borrower shall reimburse Sumitomo,
in immediately available funds, for the full amount of such draw prior to 1:00
p.m. (San Francisco time) on the date of such draw. If Borrower does not
reimburse Sumitomo by 1:00 p.m. as provided in this Section, and upon receipt of
notice from Sumitomo, each Bank shall be deemed to have purchased a
participation from Sumitomo in the original principal amount of such Letter of
Credit equal to an amount proportionate to such Bank's pro rata share of the
Commitment Amount.
(c) Upon receipt of notice from Sumitomo that Borrower has not
reimbursed Sumitomo for any payment made by Sumitomo under a Letter of Credit
hereunder, Agent shall, with notice to all Banks, cause a Prime Rate Loan to be
made by the Banks in an aggregate amount equal to the amount drawn under the
Letter of Credit (plus any unpaid commission). The proceeds of such Prime Rate
Loan shall be applied to reimburse each Bank for such Bank's pro rata share of
the payment required to be made by Sumitomo under the Letter of Credit. In the
event that a Prime Rate Loan shall be made to Borrower pursuant to this Section,
such Prime Rate Loan shall be deemed to have been made as of the date of the
draw under the respective Letter of Credit and interest shall accrue thereon at
the same rate as provided for other Prime Rate Loans under this Agreement.
(d) Without limiting Borrower's rights as set forth in Section
2.3(e) below, the obligation of Borrower to immediately reimburse Sumitomo for
drawings made under Letters of Credit shall be absolute, unconditional and
irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever,
including, without limitation, the following circumstances:
(i) Any lack of validity or enforceability of a Letter
of Credit, the obligation supported by a Letter of Credit or any other agreement
or instrument relating thereto (collectively, the "Related Documents");
(ii) Any amendment or waiver of or any consent to or
departure from all or any of the Related Documents;
(iii) The existence of any claim, set-off, defense or
other rights which Borrower may have at any time against any beneficiary or any
transferee of a Letter of Credit (or any persons or entities for whom any such
beneficiary or any such transferee may be acting), the Banks, Agent or any other
person, whether in connection with the Loan Documents, the Related Documents or
any unrelated transaction;
(iv) Any breach of contract or other dispute between
Borrower and any beneficiary or any transferee of a Letter of Credit (or any
persons or entities for whom such beneficiary or any such transferee may be
acting), the Banks, Agent or any other person;
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(v) Any draft, statement or any other document presented
under a Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or inaccurate
in any respect whatsoever;
(vi) Any delay, extension of time, renewal, compromise
or other indulgence or modification granted or agreed to by Sumitomo, with or
without notice to or approval by Borrower in respect of any of Borrower's
indebtedness under this Agreement; or
(vii) Any other circumstance or happening whatsoever,
whether or not similar to any of the foregoing.
(e) Borrower assumes all risks of the acts or omissions of any
beneficiary and any transferee of each Letter of Credit; provided, however, this
assumption with respect to Agent and the Banks, including Sumitomo, is not
intended to, and shall not, preclude Borrower's pursuing such rights and
remedies as it may have against any such beneficiary or transferee of a Letter
of Credit at law or under any other agreement. Neither Agent, nor any Bank,
including Sumitomo, nor any of their officers or directors shall be liable or
responsible for: (i) the use which may be made of any Letter of Credit or for
any acts or omissions of any beneficiary and any transferee of any Letter of
Credit in connection therewith; (ii) the validity, sufficiency or genuineness of
documents, or of any endorsement(s) thereon, even if such documents should in
fact prove to be in any or all respects invalid, insufficient, fraudulent or
forged; or (iii) any other circumstances whatsoever in making or failing to make
payment under the Letter of Credit; provided, however, notwithstanding anything
to the contrary contained in the preceding clauses (i), (ii) and (iii), Borrower
shall have a claim against Sumitomo, and Sumitomo shall be liable to Borrower
for any direct damages, but not for any consequential or punitive damages,
suffered by Borrower which Borrower proves were caused by Sumitomo's willful
failure to pay under a Letter of Credit after the presentation to it by any
beneficiary (or person to whom such Letter of Credit has been transferred in
accordance with its terms) of a sight draft and certificate strictly complying
with the terms and conditions of such Letter of Credit or by Sumitomo's grossly
negligent payment under a Letter of Credit other than in accordance with the
terms thereof. In furtherance and not in limitation of the foregoing, Sumitomo
may accept documents that appear on their face to be in order, without
responsibility for further investigation, regardless of any notice or
information to the contrary.
.4 Fees
(a) Borrower shall pay to Agent, for its own account, a facility fee
equal to two-tenths of one percent (0.20%) of the Commitment Amount. Although
the facility fee is fully earned by and unconditionally due Agent on the Closing
Date, Agent has agreed that Borrower may pay such facility fee in four equal
quarterly installments of Five Thousand Dollars ($5,000), beginning with a
payment on the Closing Date and continuing on the same day of each subsequent
calendar quarter.
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(b) Borrower shall pay to Agent a nonrefundable issuance fee with
respect to each Letter of Credit issued hereunder equal to one and one-quarter
percent (1.25%) per annum of the face amount of such Letter of Credit which fee
shall be due and payable upon issuance.
.5 Reduction of Commitment Amount. Borrower may from time to time by
written notice delivered to Agent at least five (5) Business Days prior to the
date of the requested reduction, reduce by integral multiples of $1,000,000 any
unborrowed portion of the Commitment Amount or the Letter of Credit Sublimit,
provided that the effect of such reduction shall not cause the principal amount
of the Loans and the undrawn amount of the Letters of Credit then outstanding to
exceed the Commitment Amount as so reduced or cause the undrawn amount of the
Letters of Credit then outstanding to exceed the Letter of Credit Sublimit. No
reduction of the Commitment Amount shall be subject to reinstatement and no
reduction of the Commitment Amount shall result in a rebate or return of the
facility fee or any portion of the facility fee payable pursuant to Section 2.4.
.6 The Note
(a) The Loans shall be evidenced by the Note, payable to the order
of Agent for the account of the Banks, in the Commitment Amount and having a
final maturity of the Maturity Date. The Note shall be dated as of the date
hereof and shall have the blanks therein appropriately completed.
(b) Agent shall, and is hereby irrevocably authorized by Borrower
to, enter on the schedule forming a part of the Note or otherwise in its records
appropriate notations evidencing the date and the amount of each Loan, the
interest rate applicable thereto and the date and amount of each payment of
principal made by Borrower with respect thereto; and in the absence of manifest
error, such notations shall constitute conclusive evidence thereof. Agent is
hereby irrevocably authorized by Borrower to attach to and make a part of the
Note a continuation of any such schedule as and when required. No failure on the
part of Agent to make any notation as provided in this subsection (b) shall in
any way affect any Loan or the rights or obligations of the Banks or Borrower
with respect thereto.
(c) Upon the request of any Bank made through Agent, the Loans made
by the Banks may be evidenced by one or more notes in favor of each Bank and
Agent shall, upon redelivery of the Note to Borrower, substitute such notes in
lieu of the Note. After such substitution, each Bank shall endorse on the
schedules annexed to the note(s) in its favor the date, amount and maturity of
each Loan made by it and the amount of each payment of principal made by
Borrower with respect thereto. Each Bank is irrevocably authorized by Borrower
to endorse the note(s) in its favor and each Bank's record shall be conclusive
absent manifest error; provided, however, that the failure of a Bank to make, or
an error in making, a notation thereon with respect to any Loan shall not limit
or otherwise affect the obligations of Borrower hereunder or under any such note
to such Bank. After the substitution of notes in favor of the
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Note as contemplated in this Agreement, each reference herein to the Note shall
refer to all such notes issued in substitution therefor.
.7 Duration Of Interest Periods
(a) Subject to the provisions of the definition of Interest Period,
the duration of each Interest Period applicable to a LIBOR Loan shall be as
specified in the applicable Notice of Borrowing or Conversion. Subject to
Section III, Borrower shall have the option to elect a subsequent Interest
Period to be applicable to such LIBOR Loan, or to convert a LIBOR Loan to a
Prime Rate Loan, by giving notice of such election to Agent received no later
than 10:00 a.m. San Francisco time on the date two (2) Business Days before the
end of the then applicable Interest Period, if such LIBOR Loan is to be
converted to a Prime Rate Loan, and three (3) Business Days before the end of
the then applicable Interest Period if such Loan is to be continued as a LIBOR
Loan.
(b) If Agent does not receive a notice of election of duration of an
Interest Period for a LIBOR Loan pursuant to subsection (a) above within the
applicable time limits specified therein, or if, when such notice must be given,
a Default exists, Borrower shall be deemed to have elected to convert such LIBOR
Loan in whole into a Prime Rate Loan on the last day of the then current
Interest Period with respect thereto.
(c) Notwithstanding the foregoing, Borrower may not select an
Interest Period that would end, but for the provisions of the definition of
Interest Period, after the Maturity Date.
(d) Subject to the provisions of Section II and the provisions of
the definition of Interest Period, Borrower may elect from time-to-time to
convert outstanding Prime Rate Loans to LIBOR Loans by giving Agent notice no
later than required pursuant to Section 2.2(a). The duration of each Interest
Period applicable to the Prime Rate Loan to be converted to a LIBOR Loan shall
be specified in the applicable Notice of Borrowing or Conversion.
.8 Interest Rates And Payments Of Interest
(a) Prime Rate Loans. Each Prime Rate Loan shall bear interest on
the outstanding principal amount thereof at a rate per annum equal to the Prime
Rate. Such interest shall be payable on the first Business Day of each month
commencing on the first such day after the Closing Date, and when such Loan is
due (whether at maturity, by reason of acceleration or otherwise).
(b) LIBOR Loans. Each LIBOR Loan shall bear interest on the
outstanding principal amount thereof, for each Interest Period applicable
thereto, at a rate per annum equal to the Adjusted LIBOR Rate plus two and
one-half percent (2.50%). Such interest shall be payable for such Interest
Period on the last day thereof and when such LIBOR Loan is due (whether at
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maturity, by reason of acceleration or otherwise), and on the last Business Day
of each month during such Interest Period that has a duration of more than
thirty (30) days.
.9 Changed Circumstances
(a) In the event that:
(i) on any date on which the Adjusted LIBOR Rate would
otherwise be set, Agent or any Bank shall have determined in good faith
(which determination shall be final and conclusive) that adequate and fair
means do not exist for ascertaining the London Interbank Offered Rate, or
(ii) at any time Agent or any Bank shall have determined
in good faith (which determination shall be final and conclusive) that:
(A) the making or continuation of or conversion
of any Loan to a LIBOR Loan has been made impracticable or unlawful by (1)
the occurrence of a contingency that materially and adversely affects the
London interbank eurodollar market or the market for certificates of
deposit maintained by dealers in San Francisco of recognized standing or
(2) compliance by any Bank in good faith with any applicable law or
governmental regulation, guideline or order or interpretation or change
thereof by any governmental authority charged with the interpretation or
administration thereof or with any request or directive of any such
governmental authority (whether or not having the force of law); or
(B) the Adjusted LIBOR Rate shall no longer
represent the effective cost to any Bank for U.S. dollar deposits in the
interbank market for deposits in which it regularly participates;
then, and in any such event, Agent shall forthwith so notify Borrower thereof.
Until Agent notifies Borrower that the circumstances giving rise to such notice
no longer apply, the obligation of Agent to allow selection by Borrower of the
type of Loan affected by the contingencies described in this Section 2.9(a)
(herein called "Affected Loans") shall be suspended. If at the time Agent so
notifies Borrower, Borrower has previously given Agent a Notice of Borrowing or
Conversion with respect to one or more Affected Loans but such Loans have not
yet gone into effect, such notification shall be deemed to be void and Borrower
may borrow Loans of a non-affected type by giving a substitute Notice of
Borrowing or Conversion pursuant to Section 2.2 hereof.
Upon such date as shall be specified in such notice (which shall not be
earlier than the date such notice is given) Borrower shall, with respect to the
outstanding Affected Loans, prepay the same, together with interest thereon and
any amounts required to be paid pursuant to
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Section 2.14, and may borrow a Loan of another type in accordance with Section
2.1 hereof by giving a Notice of Borrowing or Conversion pursuant to Section 2.2
hereof.
(b) In case any law, regulation, treaty or official directive or the
interpretation or application thereof by any court or by any governmental
authority charged with the administration thereof or the compliance with any
guideline or request of any central bank or other governmental authority
(whether or not having the force of law):
(i) subjects Agent or any Bank to any tax with respect
to payments of principal or interest or any other amounts payable hereunder
by Borrower or otherwise with respect to the transactions contemplated
hereby (except for taxes on the overall net income of any Bank imposed by
the United States of America or any political subdivision thereof), or
(ii) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets
held by, or deposits in or for the account of, or loans by, any Bank (other
than such requirements as are already included in the determination of the
Adjusted LIBOR Rate), or
(iii) imposes upon any Bank any other condition with
respect to its performance under this Agreement,
and the result of any of the foregoing is to increase the cost to such Bank,
reduce the income receivable by such Bank or impose any expense upon such Bank
with respect to any Loans, such Bank shall notify Borrower thereof. Borrower
agrees to pay to such Bank the amount of such increase in cost, reduction in
income or additional expense as and when such cost, reduction or expense is
incurred or determined, upon presentation by such Bank of a statement in the
amount and setting forth the Bank's calculation thereof, which statement shall
be deemed true and correct absent manifest error; provided, however, that
Borrower shall not be liable for any such amount attributable to any period
prior to the date 180 days prior to the date of such statement; provided,
further, that before making such demand, each Bank or Agent, as the case may be,
agrees to use its reasonable efforts (consistent with its internal policy and
legal and regulatory restrictions) to designate a different lending office if
the making of such a designation would avoid, or reduce the amount of, such
additional cost or a reduced amount, and would not be, in the reasonable
judgment of such Bank or Agent, as the case may be, otherwise disadvantageous to
the Bank or Agent, as the case may be; provided, further, that Borrower shall
not be obligated to pay any Bank or Agent for any additional amount otherwise
payable pursuant to this Section 2.9, to the extent such amount is reflected in
adjustments to the interest rates applicable to the Loans.
Any and all payments by Borrower to each Bank or Agent under this
Agreement shall be made free and clear of, and without deduction or withholding
for, any and all present or future taxes, levies, imposts, deductions, charges
or withholdings, and all liabilities with respect thereto, excluding, in the
case of each Bank and Agent, such taxes (including income taxes or
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franchise taxes) as are imposed on or measured by each Bank's net income by the
jurisdiction under the laws of which such Bank or Agent, as the case may be, is
organized or maintains an office or any political subdivision thereof.
.10 Capital Requirements. If after the date hereof any Bank determines
that (i) the adoption of or change in any law, rule, regulation or guideline
regarding capital requirements for banks or bank holding companies, or any
change in the interpretation or application thereof by any governmental
authority charged with the administration thereof, or (ii) compliance by such
Bank or its parent bank holding company with any guideline, request or directive
of any such entity regarding capital adequacy (whether or not having the force
of law), has the effect of reducing the return on such Bank's or such holding
company's capital as a consequence of such Bank's commitment to make Loans
hereunder to a level below that which such Bank or such holding company could
have achieved but for such adoption, change or compliance (taking into
consideration such Bank's or such holding company's then existing policies with
respect to capital adequacy and assuming the full utilization of such entity's
capital) by any amount deemed by such Bank to be material, then such Bank shall
notify Borrower thereof. Borrower agrees to pay to such Bank the amount of such
reduction in the return on capital as and when such reduction is determined,
upon presentation by such Bank of a statement in the amount and setting forth
such Bank's calculation thereof, which statement shall be deemed true and
correct absent manifest error; provided, however, that Borrower shall not be
liable for any such amount attributable to any period prior to the date 180 days
prior to the date of such statement; provided, further, that Borrower shall not
be obligated to pay any Bank or Agent for any additional amount otherwise
payable pursuant to this Section 2.10 to the extent such amount is reflected in
adjustments to the interest rates applicable to the Loans; and provided,
further, that Borrower shall not be liable for any amount already accounted for
in accordance with provisions of Section 2.9(b). In determining such amount,
such Bank may use any reasonable averaging and attribution methods.
.11 Payments And Prepayments of the Loans. Loans that are LIBOR Loans
may be prepaid without premium or penalty on the last day of any Interest Period
applicable thereto and, subject to payment of amounts required pursuant to
Section 2.14, may be prepaid at any other time, in each case upon three (3)
Business Days' irrevocable notice. Loans that are Prime Rate Loans may be
prepaid at any time, without premium or penalty, upon one (1) Business Day's
irrevocable notice. If such notice is given by Borrower, Borrower shall make
such prepayment and the payment amount specified in such notice shall be due and
payable on the date specified therein, together with accrued interest to each
such date on the amount prepaid and any amounts required pursuant to Section
2.14. No prepayment of the Loans during the Revolving Credit Period shall affect
the Commitment Amount or impair Borrower's right to borrow as set forth in
Section 2.1.
.12 Method of Payment. All payments and prepayments of principal and
all payments of interest, fees and other amounts payable hereunder shall be made
by Borrower to Agent for the account of each Bank at 84 West Santa Clara Street,
Suite 700, San Jose,
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California 95113, Attention: Commercial Banking Office - Network Peripherals, in
immediately available funds, on or before 10:00 a.m. (San Francisco time) on the
due date thereof, free and clear of, and without any deduction or withholding
for, any taxes or other payments and without set-off, recoupment or counterclaim
on the last day of each month that such payment is due. Interest payments shall
be made by automatic direct debit to the Designated Deposit Account, or such
other accounts with Sumitomo as designated in writing by Borrower. If an Event
of Default has occurred and is continuing, with respect to any commitment fee,
facility fee, or other fee, or any other cost or expense, including reasonable
attorney costs, due and payable to Agent or Sumitomo under the Loan Documents,
Borrower hereby irrevocably authorizes Sumitomo to debit the Designated Deposit
Account, or such other accounts with Sumitomo as maintained by Borrower, in an
amount such that the aggregate amount debited from all such deposit accounts
does not exceed such fee or other cost or expense. If there are insufficient
funds in such deposit accounts to cover the amount of the fee or other cost or
expense then due, such debits will be reversed (in whole or in part, in
Sumitomo's sole discretion) and such amount not debited shall be deemed to be
unpaid. No such debit of fees, costs or expenses under this Section 2.12 shall
be deemed a setoff. Further, Agent may, and Borrower hereby authorizes Agent to,
debit the amount of any payment not made by such time to the Designated Deposit
Account of Borrower with Agent. Agent will promptly distribute to each Bank its
share of such payment according to each Bank's Commitment (or other applicable
share as expressly provided herein) of such principal, interest, fees or other
amounts, in like funds as received. Any payment which is received by Agent later
than 10:00 a.m. (San Francisco time) shall be deemed to have been received on
the immediately succeeding Business Day and any applicable interest or fee shall
continue to accrue.
.13 Overdue Principal. Overdue principal (whether at maturity, by
reason of acceleration or otherwise) and, to the extent permitted by applicable
law, overdue interest and fees or any other amounts payable hereunder or under
the Note shall bear interest from and including the due date thereof until paid,
compounded daily and payable on demand, at a rate per annum equal to (a) if such
due date occurs prior to the end of an Interest Period, two percent (2%) above
the interest rate applicable to such Loan for such Interest Period until the
expiration of such Interest Period, and thereafter, two percent (2%) above the
Prime Rate; and (b) in all other cases, two percent (2%) above the rate then
applicable to Prime Rate Loans.
.14 Payments Not at End of Interest Period. If Borrower for any reason
makes any payment of principal with respect to any LIBOR Loan on any day other
than the last day of an Interest Period applicable to such LIBOR Loan, or fails
to borrow or continue or convert to a LIBOR Loan after giving a Notice of
Borrowing or Conversion pursuant to Section 2.2, Borrower shall pay to Agent for
the account of each Bank an amount computed pursuant to the following formula:
L = (R - T) x P x D
360
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L = amount payable to Agent for the account of the Banks
R = interest rate on such Loan
T = effective interest rate per annum at which any
readily marketable bond or other obligation of the
United States, selected at Sumitomo's sole
discretion, maturing on or near the last day of the
then applicable Interest Period of such Loan and in
approximately the same amount as such Loan can be
purchased by Sumitomo on the day of such payment of
principal or failure to borrow or continue or convert
P = the amount of principal prepaid or the amount of the
requested Loan
D = the number of days remaining in the Interest Period
as of the date of such payment or the number of days
of the requested Interest Period
Borrower shall pay such amount upon presentation by Agent of a statement setting
forth the amount and Agent's calculation thereof pursuant hereto, which
statement shall be deemed true and correct absent manifest error.
.15 Computation of Interest and Fees. Interest and all fees payable
hereunder shall be computed daily on the basis of a year of 360 days and paid
for the actual number of days for which due. If the due date for any payment of
principal is extended by operation of law, interest shall be payable for such
extended time. If any payment required by this Agreement becomes due on a day
that is not a Business Day such payment may be made on the next succeeding
Business Day (subject to clause (i) of the definition of Interest Period), and
such extension shall be included in computing interest in connection with such
payment.
.16 Right to Replace Bank. If Borrower shall, as a result of the
requirements of Section 2.9(a), 2.9(b) or 2.10 be required to pay any Bank the
additional costs referred to in such Sections or if any Bank fails to make
available its ratable portion of any Borrowing, Borrower shall have the right to
substitute another Financial Institution satisfactory to Agent (whose approval
will not be unreasonably withheld) for such Bank which has submitted an invoice
for such additional cost or has failed to make available its ratable portion of
any Loan. Any such substitution shall be on terms and conditions satisfactory to
Agent. Until such time as such substitution shall be consummated, Borrower shall
continue to pay any additional cost invoiced by such Bank and shall continue to
pay all other amounts payable to such Bank hereunder. Upon any such
substitution, Borrower shall pay or cause to be paid to the Bank that is being
replaced, all principal, interest (as of the date of such substitution) and
other amounts owing hereunder to such Bank.
III
CONDITIONS OF LOAN
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.1 Conditions Precedent to Initial Loan. The obligation of the Banks to
make the initial Loan and to issue the first Letter of Credit hereunder is
subject to the condition precedent that the Banks shall have received, in form
and substance satisfactory to the Banks and their respective counsel, the
following:
(a) this Agreement and the Note, duly executed by Borrower;
(b) the Security Agreement, the Intellectual Property Security
Agreements, the Financing Statements and such other security documents as the
Banks require to create and perfect a first priority security interest in favor
of Agent and the Banks in all assets of Borrower, including but not limited to
all of Borrower's accounts receivable, inventory, general intangibles and fixed
assets, and excluding only such assets as are on lease to Borrower, duly
executed by Borrower;
(c) a certificate of the Secretary or an Assistant Secretary of
Borrower with respect to resolutions of its Board of Directors authorizing the
execution and delivery of this Agreement and the Loan Documents and identifying
the officer(s) authorized to execute, deliver and take all other actions
required under this Agreement and the Loan Documents, and providing specimen
signatures of such officers;
(d) the articles of incorporation of Borrower and all amendments and
supplements thereto, filed in the office of the Secretary of State of the state
of its incorporation, each certified by said Secretary of State as being a true
and correct copy thereof;
(e) the Bylaws of Borrower and all amendments and supplements
thereto, certified by its Secretary or an Assistant Secretary as being a true
and correct copy thereof;
(f) a certificate of the Secretary of State of each of Delaware and
California as to legal existence and good standing in such state and listing all
documents on file in the office of said Secretary of State;
(g) a certificate of each of the Delaware and California Franchise
Tax Boards as to the tax good standing of Borrower;
(h) an opinion addressed to Agent from Borrower's counsel, Gray Cary
Ware & Freidenrich, substantially in the form of Exhibit F hereto;
(i) certified copies, dated close to the date hereof, of requests
for copies or information (Form UCC-3 or equivalent), or certificates, dated
close to the date hereof, satisfactory to the Banks, of a UCC Reporter Service,
listing all effective financing statements which name Borrower and/or each of
Borrower's Subsidiaries as debtor and which are filed in the appropriate offices
in the State of California, together with copies of such financing statements,
and accompanied by written evidence (including UCC termination
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statements) satisfactory to the Banks that the Encumbrances indicated in any
such financing statements are either permitted hereunder or have been terminated
or released;
(j) payment from Borrower of the facility fee set forth in Section
2.4 hereof;
(k) payment from Borrower of an amount equal to the aggregate of
Agent's and the Banks' good faith estimate of all fees (including reasonable
attorneys' fees incurred in the initial drafting and preparation of the Loan
Documents), costs, expenses and other disbursements incurred by Agent and the
Banks in connection with this Agreement and the transactions contemplated
hereunder, including, without limitation, the negotiation and preparation of
this Agreement and the other Loan Documents, which payment shall be subject to
post-closing adjustment following receipt by Agent of all final invoices;
(l) the Disclosure Letter, duly executed by Borrower;
(m) an executed original of the Report of Chief Financial Officer in
the form of Exhibit E hereto dated as of the date of such initial loan showing
Borrower's financial condition as of the last day of the quarter most recently
ended;
(n) a copy of Borrower's current written investment policy certified
by Borrower's Chief Financial Officer as being a true and correct copy thereof;
and
(o) such other documents, and completion of such other matters, as
counsel for the Banks may deem necessary or appropriate.
.2 Conditions Precedent to All Loans. The obligation of the Banks to
make each Loan, including the initial Loan, or continue or convert Loans to
Loans of another type, or to issue, or extend or modify any Letter of Credit, is
further subject to the following conditions:
(a) timely receipt by Agent of the Notice of Borrowing or Conversion
as provided in Section 2.2;
(b) receipt by Agent of a certificate signed by a Responsible
Officer stating that: the representations and warranties contained in Section IV
are true and accurate in all material respects on and as of the date of the
Notice of Borrowing or Conversion and on the effective date of the making,
continuation or conversion of each Loan or issuance of each Letter of Credit as
though made at and as of each such date (except to the extent that such
representations and warranties expressly relate to an earlier date), and no
Default has occurred or is continuing, or will result from such Loan or Letter
of Credit;
(c) the resolutions referred to in Section 3.1(c) shall remain in
full force and effect;
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(d) no change shall have occurred in any law or regulation or
interpretation thereof that, in the opinion of counsel for Agent or any Bank,
would make it illegal or against the policy of any governmental agency or
authority for the Banks to make Loans or issue Letters of Credit hereunder; and
(e) Borrower shall have opened and maintained the Designated Deposit
Account.
The making of each Loan and issuance of each Letter of Credit shall be
deemed to be a representation and warranty by Borrower on the date of the
making, continuation or conversion of such Loan and issuance of such Letter of
Credit as to the accuracy of the facts referred to in subsection (b) of this
Section 3.2.
IV
REPRESENTATIONS AND WARRANTIES
In order to induce the Banks to enter into this Agreement and to make Loans
and issue Letters of Credit hereunder, Borrower represents and warrants to the
Banks that:
.1 Organization and Qualifications. Each of Borrower and its
Subsidiaries (a) is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation, (b) has all
requisite corporate power to own its property and conduct its business as now
conducted and as presently contemplated and (c) is duly qualified and in good
standing as a foreign corporation and is duly authorized to do business in each
jurisdiction where the nature of its properties or business requires such
qualification except where the failure to so qualify cannot reasonably be
expected to have a Material Adverse Effect.
.2 Corporate Authority. The execution, delivery and performance of this
Agreement and the Loan Documents and the transactions contemplated hereby are
within the corporate power and authority of Borrower and have been authorized by
all necessary corporate proceedings, and do not and will not (a) require any
consent or approval of the shareholders of Borrower, (b) contravene any
provision of the charter documents or by-laws of Borrower or any law, rule or
regulation applicable to Borrower, (c) contravene any provision of, or
constitute an event of default or event that, but for the requirement that time
elapse or notice be given, or both, would constitute an event of default under,
any other material agreement, instrument, order or undertaking binding on
Borrower, or (d) result in or require the imposition of any Encumbrance on any
of the properties, assets or rights of Borrower, other than Permitted
Encumbrances.
.3 Valid Obligations. This Agreement and the Loan Documents and all of
their respective terms and provisions are the legal, valid and binding
obligations of Borrower, enforceable in accordance with their respective terms
except as limited by bankruptcy,
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insolvency, reorganization, moratorium or other laws affecting the enforcement
of creditors' rights generally, and except as the remedy of specific performance
or of injunctive relief is subject to the discretion of the court before which
any proceeding therefor may be brought.
.4 Consents Or Approval. The execution, delivery and performance of
this Agreement and the Loan Documents and the transactions contemplated herein
do not require any approval or consent of, or filing or registration with, any
governmental or other agency or authority, or any other party, except as
contemplated by the Loan Documents.
.5 Title to Properties; Absence of Encumbrances. Each of Borrower and
its Subsidiaries has good and marketable title to all of the material
properties, assets and rights of every name and nature now purported to be owned
by it, including, without limitation, such properties, assets and rights as are
reflected in the financial statements referred to in Section 4.6 (except such
properties, assets or rights as have been disposed of in the ordinary course of
business since the date thereof), free from all Encumbrances except Permitted
Encumbrances.
.6 Financial Statements. Borrower has furnished Agent its consolidated
balance sheet as of December 31, 1995, and its consolidated statements of
income, changes in stockholders' equity and cash flow for the fiscal year then
ended, and related footnotes, audited and certified by Price Waterhouse.
Borrower has also furnished Agent its consolidated balance sheet as of March 31,
1996, and its consolidated statements of income for the three (3) months then
ended, certified by the chief financial officer of Borrower but subject,
however, to normal, recurring year-end adjustments that shall not in the
aggregate be material in amount. All such financial statements were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods specified and present fairly, in all material
respects, the consolidated financial position of Borrower and its Subsidiaries
as of such dates and the results of the consolidated operations of Borrower and
its Subsidiaries for such periods. There are no liabilities, contingent or
otherwise, as of the respective dates of such financial statements not disclosed
in such financial statements that involve a material amount.
.7 Changes. Since the date of the most recent financial statements
referred to in Section 4.6, there have been no changes, other than changes in
the ordinary course of business, in the assets, liabilities, financial
condition, or business of Borrower and its Subsidiaries the effect of which has,
in the aggregate, been materially adverse.
.8 Defaults As of the date of this Agreement, no Default exists.
.9 Taxes. Borrower and each Subsidiary have filed all federal, state
and other material tax returns required to be filed, and all material taxes,
assessments and other governmental charges due from Borrower and each Subsidiary
have been fully paid or Borrower or such Subsidiary has established on its books
reserves adequate for the payment of all federal, state and other material tax
liabilities.
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.10 Litigation. Except as described in the Disclosure Letter - Item
4.10, there are no claims, actions, suits, proceedings or other litigation
pending or, to the best of Borrower's knowledge, after due inquiry, threatened
against Borrower or any of its Subsidiaries, at law or in equity, before any
governmental agency or, to the best of Borrower's knowledge, after due inquiry,
any investigation by any governmental agency of Borrower's or any of its
Subsidiaries' affairs, properties or assets which could reasonably be expected
to have a Material Adverse Effect on Borrower and its Subsidiaries. Neither
Borrower nor any of its Subsidiaries has any Contingent Liabilities which would,
if adversely determined, have a Material Adverse Effect.
.11 Material Contracts. Except as described in the Disclosure Letter -
Item 4.11, there are no effective contracts or agreements (whether written or
oral) to which Borrower is a party and which (a) could involve the payment or
receipt by Borrower after the date of this agreement of more than $250,000 or
(b) otherwise materially affect the business, operations or financial condition
of Borrower. Except as disclosed in the Disclosure Letter - Item 4.11, there are
no material defaults under any of the foregoing contracts by Borrower, and, to
the best of Borrower's knowledge, by any other party to such contracts.
.12 Executive Offices and Inventory and Equiptment Locations. The
current location of Borrower's chief executive offices and principal places of
business as well as the location of any material amounts of inventory or
equipment are set forth in the Schedule 4.12.
.13 Use of Proceeds. Borrower does not own any "margin security", as
that term is defined in Regulations G and U of the Federal Reserve Board, and
the proceeds of the Loans and draws under Letters of Credit under this Agreement
will be used only for the purposes contemplated hereunder. None of the Loans or
Letters of Credit will be used, directly or indirectly, for the purpose of
purchasing or carrying any margin security, for the purpose of reducing or
retiring any indebtedness which was originally incurred to purchase or carry any
margin security or for any other purpose which might cause any of the Loans or
Letters of Credit under this Agreement to be considered a "purpose credit"
within the meaning of Regulations G, T, U or X.
.14 Subsidiaries. As of the date of this Agreement, all the
Subsidiaries of Borrower are listed on Schedule 4.14 hereto. Borrower or a
Subsidiary of Borrower is the owner, free and clear of all Encumbrances, except
for Encumbrances permitted under this Agreement, of all of the issued and
outstanding stock of each such Subsidiary, other than shares of Borrower's
foreign Subsidiaries issued to directors to meet foreign ownership requirements.
Except as listed on Schedule 4.14 hereto, all shares of such stock have been
validly issued and are fully paid and nonassessable, and no rights to subscribe
to any additional shares have been granted, and no options, warrants or similar
rights are outstanding.
.15 Investment Company Act. Neither Borrower nor any of its
Subsidiaries is subject to regulation under the Investment Company Act of 1940,
as amended.
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.16 Compliance With ERISA. Borrower and each member of the Controlled
Group have fulfilled their obligations under the minimum funding standards of
ERISA and the Code with respect to each Plan and are in compliance in all
material respects with the applicable provisions of ERISA and the Code, and have
not incurred any liability to the PBGC or a Plan under Title IV of ERISA; and no
"prohibited transaction" or "reportable event" (as such terms are defined in
ERISA) has occurred with respect to any Plan.
.17 Environmental Matters
(a) Borrower and each of its Subsidiaries have obtained all permits,
licenses and other authorizations which are required under all Environmental
Laws, except to the extent failure to have any such permit, license or
authorization would not have a Material Adverse Effect. Borrower and each of its
Subsidiaries are in compliance in all material respects with the terms and
conditions of all such permits, licenses and authorizations, and are also in
compliance with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
any applicable Environmental Law or in any regulation, code, plan, order,
decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder, except to the extent failure to comply would
not have a material adverse effect on the business, financial condition or
operations of Borrower and its Subsidiaries.
(b) To the best of Borrower's knowledge, after due inquiry, no
notice, notification, demand, request for information, citation, summons or
order has been issued, no complaint has been filed, no penalty has been assessed
and no investigation or review is pending or threatened by any governmental or
other entity with respect to any alleged failure by Borrower or any of its
Subsidiaries to have any permit, license or authorization required in connection
with conduct of its business or with respect to any Environmental Laws,
including, without limitation, Environmental Laws relating to the generation,
treatment, storage, recycling, transportation, disposal or release of any
Hazardous Materials, except to the extent that such notice, complaint, penalty
or investigation did not or could not result in the remediation of any property
owned or used by Borrower or any of its Subsidiaries costing in excess of
$100,000 per occurrence or $100,000 in the aggregate.
(c) To the best of Borrower's knowledge, after due inquiry, no
material oral or written notification of a release of a Hazardous Material has
been filed by or on behalf of Borrower or any of its Subsidiaries and no
property now or previously owned, leased or used by Borrower or any of its
Subsidiaries is listed or proposed for listing on the National Priorities List
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, or on any similar state list of sites requiring
investigation or clean-up.
(d) To the best of Borrower's knowledge, after due inquiry, there
are no liens or encumbrances arising under or pursuant to any Environmental Laws
on any of the real property or properties owned, leased or used by Borrower or
any of its Subsidiaries and no
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governmental actions have been taken or are in process which could subject any
of such properties to such liens or encumbrances or, as a result of which
Borrower would be required to place any notice or restriction relating to the
presence of Hazardous Materials at any property owned by it in any deed to such
property.
(e) Neither Borrower nor any of its Subsidiaries, nor, to the best
knowledge of Borrower, any previous owner, tenant, occupant or user of any
property owned, leased or used by Borrower or any of its Subsidiaries, has (i)
engaged in or permitted any operations or activities upon or any use or
occupancy of such property, or any portion thereof, for the purpose of or in any
way involving the handling, manufacture, treatment, storage, use, generation,
release, discharge, refining, dumping or disposal (whether legal or illegal,
accidental or intentional) of any Hazardous Materials on, under, in or about
such property, except to the extent commonly used in day-to-day operations of
such property and in such case only, in compliance with all Environmental Laws,
or (ii) transported any Hazardous Materials to, from or across such property
except to the extent commonly used in day-to-day operations of such property
and, in such case, in compliance with, all Environmental Laws; nor to the best
knowledge of Borrower have any Hazardous Materials migrated from other
properties upon, about or beneath such property, nor, to the best knowledge of
Borrower, are any Hazardous Materials presently constructed, deposited, stored
or otherwise located on, under, in or about such property except to the extent
commonly used in day-to-day operations of such property and, in such case, in
compliance with, all Environmental Laws.
V
AFFIRMATIVE COVENANTS
So long as the Banks have any commitment to lend hereunder or any Loan,
Letter of Credit or other Obligation hereunder, except those Obligations arising
under Section 9.3, remains outstanding or unreimbursed, and unless the Requisite
Banks shall otherwise consent in writing, Borrower covenants as follows:
.1 Financial Statements and Other Reporting Requirements. Borrower
shall furnish to the Banks in form and detail satisfactory to Agent and the
Requisite Banks:
(a) as soon as available, but in any event within ninety (90) days
after the end of each of its fiscal years, a consolidated balance sheet as of
the end of, and related consolidated statements of income, changes in
stockholders' equity and cash flow for, such year, audited and certified by
Price Waterhouse (or other independent certified public accountant acceptable to
Agent); and, concurrently with such financial statements, a copy of said
certified public accountant's management report;
(b) as soon as available, but in any event within forty-five (45)
days after the end of each of its fiscal quarters, a consolidated balance sheet
as of the end of, and a related
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consolidated statements of income and cash flow for, the period then ended, as
well as the results for the year-to-date period then ended, certified by the
chief financial officer of Borrower but subject, however, to normal, recurring
year-end adjustments that shall not in the aggregate be material in amount;
(c) after the occurrence of an Event of Default, as soon as
available, but in any event within twenty (20) days after the end of each month,
a detailed accounts receivable aging report (listing current receivables and
receivables of 30, 60, 90 and over 90 days duration) for all customers of
Borrower, in form and substance satisfactory to Agent;
(d) as soon as available, but in any event within ninety (90) days
after the end of each of its fiscal years, a three (3) year operating plan for
the new fiscal year, which operating plan shall detail, on a quarterly basis for
the then-current fiscal year and annually for the two (2) subsequent years,
Borrower's best estimate of revenue, expenses and balance sheet categories,
presented in the customary form of balance sheets, income statements and cash
flow statements.
(e) concurrently with the delivery of each financial statement
pursuant to subsections (a) and (b) of this Section 5.1, a report in
substantially the form of Exhibit E hereto signed on behalf of Borrower by its
chief financial officer;
(f) promptly after the receipt thereof by Borrower, copies of any
final reports submitted to Borrower by independent public accountant in
connection with any interim review of the accounts of Borrower made by such
accountant;
(g) promptly after the same are available, copies of all proxy
statements, financial statements and reports as Borrower shall send to its
stockholders generally and copies of all final registration statements (other
than on form S-8 or other registration statements relating to option plans) and
material reports (in each case without exhibits) as Borrower may file with the
Securities and Exchange Commission;
(h) if and when Borrower gives or is required to give notice to the
PBGC of any "Reportable Event" (as defined in Section 4043 of ERISA) with
respect to any Plan that might constitute grounds for a termination of such Plan
under Title IV of ERISA, or knows that any member of the Controlled Group or the
plan administrator of any Plan has given or is required to give notice of any
such Reportable Event, a copy of the notice of such Reportable Event given or
required to be given to the PBGC;
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(i) immediately upon a Responsible Officer becoming aware of the
existence of any condition or event that constitutes or may result in a Default,
written notice thereof specifying the nature and duration thereof and the action
being or proposed to be taken with respect thereto.
(j) promptly upon a Responsible Officer becoming aware of any
litigation or of any investigative proceedings by a governmental agency or
authority commenced or threatened against Borrower or any of its Subsidiaries of
which it has notice, the outcome of which would or might have a Material Adverse
Effect, written notice thereof and the action being or proposed to be taken with
respect thereto;
(k) promptly upon a Responsible Officer becoming aware of any
investigative proceedings by a governmental agency or authority commenced or
threatened against Borrower or any of its Subsidiaries regarding any potential
violation of Environmental Laws or any spill, release, discharge or disposal of
any Hazardous Material, written notice thereof and the action being or proposed
to be taken with respect thereto;
(l) from time to time, such other financial data and information
about Borrower or its Subsidiaries as any of the Banks may reasonably request;
and
(m) immediately upon a Responsible Officer becoming aware that
Borrower or any of its Subsidiaries shall enter into any settlement, or any
verdict, judgment or order for the payment of money shall be entered against any
of them by any court, or a warrant of attachment or execution or similar process
shall be issued or levied against property of Borrower or such Subsidiary,
whether or not such verdict, judgment, order, warrant or process shall have been
discharged or stayed, which settlement, verdict, judgment, order, warrant or
process has an aggregate value exceeding $250,000, written notice thereof and
the action being or proposed to be taken with respect thereto.
.2 Conduct of Business. Borrower shall and shall cause its Subsidiaries
to:
(a) duly observe and comply with all applicable laws and valid
requirements of any governmental authorities relative to its corporate
existence, rights and franchises, to the conduct of its business and to its
property and assets (including without limitation all Environmental Laws and
ERISA), and shall maintain and keep in full force and effect all licenses and
permits necessary to the proper conduct of its business, except where failure to
do so cannot be expected to have a Material Adverse Effect;
(b) maintain its corporate existence, provided, however, that the
corporate existence of any Subsidiary may be terminated if, in the good faith
judgment of the Board of Directors of Borrower, such termination is in the best
interests of Borrower and its Subsidiaries taken as a whole; and
(c) remain engaged substantially in the business of designing,
manufacturing, marketing and supporting client/server workgroup networking
solutions and activities reasonably related or incidental thereto.
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.3 Maintance and Insurance. Borrower shall maintain and cause its
Subsidiaries to maintain its properties in good repair, working order and
condition as required for the normal conduct of its business. Borrower shall at
all times maintain and cause its Subsidiaries to maintain liability and casualty
insurance covering their respective properties and assets, with financially
sound and reputable insurers in such amounts as the respective officers in the
exercise of their reasonable judgment deem to be adequate and as are customary
in Borrower's industry.
.4 Taxes. Borrower shall pay or cause to be paid all taxes, assessments
or governmental charges on or against it or any of its Subsidiaries or its or
their properties on or prior to the time when they become due; provided that
this covenant shall not apply to any tax, assessment or charge that is being
contested in good faith by appropriate proceedings and with respect to which
adequate reserves have been established and are being maintained in accordance
with generally accepted accounting principles if no lien shall have been filed
to secure such tax, assessment or charge.
.5 Inspection By Bank. Borrower shall permit any authorized
representatives designated by any Bank in writing, at Borrower's expense, upon
reasonable notice to Borrower during normal business hours and as often as may
be reasonably requested, (or if an Event of Default shall have occurred and is
continuing, at any time and without prior notice and at Borrower's expense) to
(i) visit and inspect the properties of Borrower and its Subsidiaries, (ii)
examine and make copies of and take abstracts from the books and records of
Borrower and its Subsidiaries, and (iii) discuss the affairs, finances and
accounts of Borrower and its Subsidiaries with their appropriate officers,
employees, attorneys, accountants or other agents. In handling such information,
each of Agent and the Banks shall exercise the same degree of care that it
exercises with respect to its own proprietary information of the same types to
maintain the confidentiality of any non-public information thereby received or
received pursuant to subsections 5.1(a), (b), or (c) except that disclosure of
such information may be made (i) to the subsidiaries or affiliates of Agent and
the Banks in connection with their present or prospective business relations
with Borrower, (ii) to prospective transferees or purchasers of an interest in
the Loans, (iii) as required by law, regulation, rule or order, subpoena,
judicial order or similar order and (iv) as may be required in connection with
the examination, audit or similar investigation of Agent or the Banks.
Notwithstanding any provision of this Agreement to the contrary, neither
Borrower nor any of its Subsidiaries will be required to disclose, permit the
inspection, examination, copying or making extracts of, or discussion of, any
document, information or other matter that (i) constitutes non-financial trade
secrets or other non-financial proprietary information unless an Event of
Default exists and is continuing in which case such inspection, examination,
copying or making of extracts of, or discussion of such documents and
information may, at agent's option, be required; or (ii) in respect of which
disclosure to such Bank (or a designated representative) is then prohibited by
law.
.6 Maintenance of Books and Records. Borrower shall keep and Borrower
shall cause its Subsidiaries to keep adequate books and records of account, in
which entries, true and complete in all material respects, will be made
reflecting all of its business and financial
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transactions, and such entries will be made in accordance with generally
accepted accounting principles consistently applied and applicable law.
.7 Financial Covenants. Borrower agrees and understands that the
following financial covenants shall be subject to quarterly compliance (as
measured on the last day of each fiscal quarter of Borrower beginning with the
quarter ending June 30, 1996) for each quarter in which a Loan or Letter of
Credit is outstanding under this Agreement or in which an Event of Default has
occurred and is continuing or in which Borrower is in violation of any such
financial covenants or upon a request of Agent, and in each case review by the
Banks of the respective fiscal quarter's consolidated financial statements
delivered to Agent by Borrower pursuant to Section 5.1:
(a) Quick Ratio. Borrower shall maintain a quick ratio (the
applicable ratio to be calculated as (i) the sum of cash plus accounts
receivable on a consolidated basis to (ii) Consolidated Current Liabilities
plus, to the extent not already included as Consolidated Current Liabilities,
the principal amount of the Loans and the principal amount undrawn under Letters
of Credit then outstanding) of not less than 2.00:1.
(b) Profitability. Borrower shall be profitable on an annual basis
and shall not have a net loss on a consolidated basis in any fiscal quarter as
measured quarterly for that fiscal quarter; provided, however, that for the
fiscal quarter ending September 30, 1996, Borrower may have a net loss on a
consolidated basis of not more than $1,000,000.
(c) Leverage Ratio. Borrower shall maintain a ratio of Consolidated
Total Liabilities (including the undrawn amount of all outstanding Letters of
Credit) to Consolidated Tangible Net Worth (the "Leverage Ratio") not to exceed
1.00:1.00.
(d) Consolidated Tangible Net Worth. Borrower shall maintain
Consolidated Tangible Net Worth of at least $52,000,000.
(e) Capital Expenditures. The consolidated Capital Expenditures of
Borrower and its Subsidiaries shall not exceed $3,000,000 during any fiscal
year.
.8 Use of Proceeds. Borrower will use the proceeds of the Loans
substantially for working capital purposes and not in contravention of any
Requirement of Law and Borrower will use the proceeds of the Letters of Credit
to support offshore local currency borrowing needs or supplier contracts and not
in contravention of any Requirement of Law. Without limiting the foregoing,
Borrower will not take or permit any agent acting on its behalf to take any
action which might cause this Agreement or any document or instrument delivered
pursuant hereto to violate any regulation of the Federal Reserve Board.
.9 Collateralization. At the Maturity Date, unless the Commitments
hereunder are renewed, or such earlier date as the commitment hereunder
terminates, Borrower shall deposit,
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as collateral, with Sumitomo, in cash, an amount equal to the face value of any
and all issued and undrawn Letters of Credit and shall execute all documents
reasonably requested by Sumitomo to perfect its security interest in such
collateral.
.10 Futher Assurances. At any time and from time to time Borrower
shall, and shall cause each of its Subsidiaries or other necessary parties to,
execute and deliver such further instruments and take such further action as may
reasonably be requested by Agent or the Requisite Banks to effect the purposes
of this Agreement and the Loan Documents.
VI
NEGATIVE COVENANTS
So long as the Banks have any commitment to lend hereunder or any Loan,
Letter of Credit or other Obligation remains outstanding, and unless the
Requisite Banks shall otherwise consent in writing, Borrower covenants as
follows:
.1 Indebtness. Neither Borrower nor any of its Subsidiaries shall
create, incur, assume, guarantee or be or remain liable with respect to any
Indebtedness other than the following:
(a) Indebtedness of Borrower or any of its Subsidiaries to the Banks
or any of their affiliates hereunder;
(b) Indebtedness existing as of the date of this Agreement and
disclosed on Schedule 6.1 hereto and other normal trade Indebtedness;
(c) Indebtedness secured by Permitted Encumbrances;
(d) Guarantees permitted under Section 6.2;
(e) unsecured Indebtedness of Network Peripherals International,
Ltd., in Taiwan, in an aggregate amount not to exceed U.S. $2,000,000;
(f) Indebtedness constituting the execution of bonds or the
endorsement of negotiable instruments received in the ordinary course of
business; and
(g) extensions, refinancings, modifications, amendments and
restatements of any of items of indebtedness set forth in (a) through (f) above,
provided that the principal amount thereof is not increased or the terms thereof
are not modified to impose more burdensome terms upon Borrower, on a
consolidated basis.
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.2 Contigent Liabilities. Neither Borrower nor any of its Subsidiaries
shall create, incur, assume or remain liable with respect to any Contingent
Liabilities other than the following:
(a) Guarantees in favor of the Banks or any of their affiliates
hereunder;
(b) Guarantees existing on the date of this Agreement and disclosed
on Schedule 6.2 hereto;
(c) Guarantees resulting from the endorsement of negotiable
instruments for collection in the ordinary course of business;
(d) Guarantees with respect to surety, appeal performance and return
of money and other similar obligations incurred in the ordinary course of
business (exclusive of obligations for the payment of borrowed money) not
exceeding in the aggregate at any time $250,000; and
(e) Guarantees of normal trade debt relating to the acquisition of
goods and supplies.
.3 Sale and Leaseback. Neither Borrower nor any of its Subsidiaries
shall enter into any arrangement, directly or indirectly, whereby it shall sell
or transfer any property owned by it in order to lease such property or lease
other property that Borrower or any of its Subsidiaries intends to use for
substantially the same purpose as the property being sold or transferred, except
in the ordinary course of business.
.4 Encumbrances. Neither Borrower nor any of its Subsidiaries shall
create, incur, assume or suffer to exist any mortgage, pledge, security
interest, lien or other charge or encumbrance, including the lien or retained
security title of a conditional vendor upon or with respect to any of its
property or assets ("Encumbrances"), or assign or otherwise convey any right to
receive income, including the sale or discount of accounts receivable with or
without recourse, except the following ("Permitted Encumbrances"):
(a) Encumbrances in favor of the Banks or any of their affiliates
hereunder;
(b) Encumbrances existing as of the date of this Agreement and
disclosed on Schedule 6.4 hereto;
(c) liens for taxes, fees, assessments and other governmental
charges to the extent that payment of the same may be postponed or is not
required in accordance with the provisions of Section 5.4;
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(d) landlords' and lessors' liens in respect of rent not in default
or liens in respect of pledges or deposits under workmen's compensation,
unemployment insurance, social security laws, or similar legislation (other than
ERISA) or in connection with appeal and similar bonds incidental to litigation;
mechanics', laborers' and materialmen's and similar liens, if the obligations
secured by such liens are not then delinquent; liens securing the performance of
bids, tenders, contracts (other than for the payment of money); and statutory
obligations incidental to the conduct of its business and that do not in the
aggregate materially detract from the value of its property or materially impair
the use thereof in the operation of its business;
(e) judgment liens that shall not have been in existence for a
period longer than thirty (30) consecutive days after the creation thereof or,
if a stay of execution shall have been obtained, for a period longer than thirty
(30) consecutive days after the expiration of such stay;
(f) rights of lessors under capital leases to Borrower;
(g) Encumbrances in respect of any purchase money obligations of
Borrower and its Subsidiaries for tangible property used in its business that
have been approved by the requisite Banks; provided, however, that any such
Encumbrances shall not extend to property and assets of Borrower not financed by
such a purchase money obligation;
(h) easements, rights of way, restrictions and other similar charges
or Encumbrances relating to real property and not interfering in a material way
with the ordinary conduct of its business;
(i) Encumbrances in favor of customs and revenue authorities arising
in a matter of law to secure payment of customs duties in connection with the
importation of goods and Encumbrances on insurance proceeds in favor of
insurance companies with respect to the financing of insurance premiums;
(j) Encumbrances which constitute rights of set-off of a customary
nature or bankers' liens with respect to amounts on deposit, whether arising by
operation of law or by contract, in connection with arrangements entered into
with banks or investment firms in the ordinary course of business;
(k) non-exclusive licenses and sublicenses granted to others not
interfering in any material respect with the business of Borrower or any of its
Subsidiaries and any interest or title of a licensor or under any license;
(l) Encumbrances on its property or assets created in connection
with the refinancing of Indebtedness secured by Permitted Encumbrances on such
property, provided that the amount of Indebtedness secured by any such
Encumbrance shall not be increased as a result
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of such refinancing and no such Encumbrance shall extend to property and assets
of Borrower or any Subsidiary not encumbered prior to any such refinancing.
.5 Merger; Consolidation; Sale or Lease of Assets. Neither Borrower nor
any of its Subsidiaries shall:e Of Assets
(a) sell, lease or otherwise dispose of all or any part of its
business assets or properties, whether now owned or hereafter acquired except as
permitted by Section 6.3, other than (i) sales of inventory in the ordinary
cause of business; (ii) sales of used, worn-out or surplus assets in the
ordinary course of business; (iii) sales of equipment, for fair and reasonable
consideration, to the extent that such equipment is exchanged for credit against
the purchase price of similar replacement equipment or the proceeds of such sale
are applied to the purchase price of such replacement equipment within ninety
(90) days of the date Borrower shall have provided Agent written notice of its
intent to sell specifically identified equipment and so apply the purchase
price; (iv) sales, transfers or liquidations of Investments permitted by Section
6.9 the proceeds of which are maintained in Borrower or its Subsidiaries, as
applicable; (v) the licensing of Borrower's technology on fair and reasonable
market-based terms; and (vi) sales of assets by a Subsidiary to Borrower or to
another wholly owned Subsidiary at fair market value as that value would be
determined between unrelated parties; or
(b) in one transaction as a series of transactions liquidate or
merge or recapitalize or consolidate into or with, or acquire all or
substantially all of the assets of, any other person or entity.
.6 Acquisitions and Joint Ventures. Except to the extent permitted by
Section 6.9, Borrower shall not, and shall not permit any of the Subsidiaries
to, make any Acquisitions or Joint Ventures or to enter into any agreement to
make any Acquisitions or Joint Ventures.
.7 Subsidiary Stock Issuance. Borrower shall not permit any of its
Subsidiaries to issue any additional shares of its capital stock or other equity
securities, any options therefor or any securities convertible thereto other
than to Borrower or any wholly owned Subsidiary (or to other persons in
connection with the issuance of directors shares or shares to satisfy local
ownership requirements). Neither of Borrower nor any of its Subsidiaries shall
sell, transfer or otherwise dispose of any of the capital stock or other equity
securities of a Subsidiary, except (i) to Borrower or any of its wholly-owned
Subsidiaries, or (ii) in connection with a transaction permitted by Section 6.5.
.8 Early Distrubutions. Borrower shall not pay any dividends on any
class of its capital stock or make any other distribution or payment on account
of or in redemption, retirement or purchase of such capital stock; provided,
however, that this Section shall not apply to (i) the issuance, delivery or
distribution by Borrower of shares of its common stock pro rata to
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its existing shareholders, or (ii) the purchase or redemption by Borrower of its
capital stock with the proceeds of the issuance of additional shares of capital
stock.
.9 Investments. Without prior written consent of the Requisite Banks,
neither Borrower nor any of its Subsidiaries shall make or maintain any
Investments other than
(a) Investments by Borrower in Subsidiaries existing on the date
hereof and disclosed on Schedule 6.9 and Investments by Subsidiaries in
Borrower;
(b) Qualified Investments;
(c) Investments existing on the date of this Agreement disclosed on
Schedule 6.9;
(d) Investments consisting of the endorsements of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business;
(e) Investments by Borrower or a Subsidiary as part of a transaction
permitted by Sections 6.2 and 6.6;
(f) Investments consisting of receivables owing to Borrower or its
Subsidiaries and advances to customers or suppliers, in each case, if created,
acquired or made in the ordinary course of business;
(g) Investments (including debt obligations) received in connection
with the bankruptcy or reorganization of customers or suppliers and in
settlement of delinquent obligations of, and other disputes with, customers or
suppliers arising in the ordinary course of business;
(h) Investments consisting of notes receivable of, or prepaid
royalties and other credit extensions to, customers and suppliers in the
ordinary course of business;
(i) Deposit accounts;
(j) Investments consisting of (i) compensation of employees,
officers and directors of Borrower or its Subsidiaries so long as the Board of
Directors of Borrower determines that such compensation is in the best interest
of Borrower, (ii) travel advances, employee relocation loans and other employee
loans and advances in the ordinary course of business, (iii) loans to employees,
officers or directors relating to the purchase of equity securities of Borrower,
and other loans to officers and employees, which loans have been approved by the
Board of Directors where such approval is required by law, all of the foregoing
of not more than $200,000 in the aggregate; and
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(k) Investments pursuant to or arising under currency agreements or
interest rate agreements entered into in support of commercial transactions done
in the ordinary course of business.
.10 ERISA. Neither of Borrower nor any member of the Controlled Group
shall permit any Plan maintained by it to (i) engage in any "prohibited
transaction" (as defined in Section 4975 of the Code, (ii) incur any
"accumulated funding deficiency" (as defined in Section 302 of ERISA) whether or
not waived, or (iii) terminate any Plan in a manner that could result in the
imposition of a lien or encumbrance on the assets of Borrower or any of its
Subsidiaries pursuant to Section 4068 of ERISA.
.11 Transactions with Subsidiaries. Borrower shall not directly or
indirectly enter into or permit to exist any transaction (including, without
limitation, the purchase, sale, lease or exchange of any property or the
rendering of any service) with any Subsidiary on terms less favorable to
Borrower than those that might be obtained from unrelated parties who are not
Subsidiaries.
VII
DEFAULTS
.1 Events of Default. There shall be an Event of Default hereunder if
any of the following events occurs:
(a) Borrower shall fail to pay when due (i) any amount of principal
of any Loans, or (ii) any amount of interest thereon or any fees or expenses
payable hereunder or under the Note within three (3) days of the same becoming
due and payable; or
(b) Borrower shall fail to perform any term, covenant or agreement
contained in Sections 5.1(a), (b), (c), and (h), 5.5, 5.7 through 5.10 or 6.1
through 6.11; or
(c) Borrower shall fail to perform any covenant contained in
Sections 5.1(g), 5.1(i), 5.1(j), 5.2 or 5.6, and such failure shall continue for
thirty (30) days; or
(d) Borrower shall fail to perform any term, covenant or agreement
(other than in respect of subsections 7.l(a) through (c) hereof) contained in
this Agreement and such default shall continue for thirty (30) days after notice
thereof has been sent to Borrower by Agent; or
(e) any representation or warranty of Borrower made in this
Agreement or in the Loan Documents or any other documents or agreements executed
in connection with the transactions contemplated by this Agreement or in any
certificate delivered hereunder shall prove
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to have been false in any material respect upon the date when made or deemed to
have been made; or
(f) any event or circumstance or set of events or circumstances
shall have occurred which has resulted, or could reasonably be expected to
result, in a Material Adverse Effect; or
(g) Borrower or any of its Subsidiaries shall fail to pay at
maturity, or within any applicable period of grace, any obligations for borrowed
monies or advances or for the use of real or personal property outstanding in a
principal amount of at least $100,000, or fail to observe or perform any term,
covenant or agreement evidencing or securing such obligations for borrowed
monies or advances or relating to such use of real or personal property, the
result of which failure is to permit the holder or holders of such Indebtedness
to cause such Indebtedness to become due prior to its stated maturity upon
delivery of required notice, if any; or
(h) Borrower or any of its Subsidiaries shall (i) apply for or
consent to the appointment of, or the taking of possession by, a receiver,
custodian, trustee, liquidator or similar official of itself or of all or a
substantial part of its property, (ii) be generally not paying its debts as such
debts become due, (iii) make a general assignment for the benefit of its
creditors, (iv) take any action or commence any case or proceeding under any law
relating to bankruptcy, insolvency, reorganization, winding-up or composition or
adjustment of debts, or any other law providing for the relief of debtors, (v)
fail to contest in a timely or appropriate manner, or acquiesce in writing to,
any petition filed against it in an involuntary case under any bankruptcy or
other law, (vii) take any action under the laws of its jurisdiction of
incorporation or organization similar to any of the foregoing, or (viii) take
any corporate action for the purpose of effecting any of the foregoing; or
(i) a proceeding or case shall be commenced, without the application
or consent of Borrower or any of its Subsidiaries in any court of competent
jurisdiction, seeking (i) the liquidation, reorganization, dissolution, winding
up, or composition or readjustment of its debts, (ii) the appointment of a
trustee, receiver, custodian, liquidator or the like of it or of all or any
substantial part of its assets, or (iii) similar relief in respect of it, under
any law relating to bankruptcy, insolvency, reorganization, winding-up or
composition or adjustment of debts or any other law providing for the relief of
debtors, and such proceeding or case shall continue undismissed, or unstayed and
in effect, for a period of sixty (60) consecutive days; or an order for relief
shall be entered in an involuntary case under any bankruptcy law against
Borrower or such Subsidiary; or action under the laws of the jurisdiction of
incorporation or organization of Borrower or any of its Subsidiary similar to
any of the foregoing shall be taken with respect to Borrower and shall continue
unstayed and in effect for any period of sixty (60) consecutive days; or
(j) a judgment or order for the payment of money shall be entered
against Borrower or any of its Subsidiaries by any court, or a warrant of
attachment or execution or
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similar process shall be issued or levied against property of Borrower or such
Subsidiary, that in the aggregate exceeds $250,000 in value and such judgment,
order, warrant or process shall continue undischarged or unstayed for thirty
(30) consecutive days;
(k) Borrower or any member of the Controlled Group shall fail to pay
when due any amount that it shall have become liable to pay to the PBGC or to a
Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans
shall be filed under Title IV of ERISA by Borrower, any member of the Controlled
Group, any plan administrator or any combination of the foregoing; or the PBGC
shall institute proceedings under Title IV of ERISA to terminate or to cause a
trustee to be appointed to administer any such Plan or Plans or a proceeding
shall be instituted by a fiduciary of any such Plan or Plans against Borrower
and such proceedings shall not have been dismissed within thirty (30) days
thereafter; or a condition shall exist by reason of which the PBGC would be
entitled to obtain a decree adjudicating that any such Plan or Plans must be
terminated; or
(l) Borrower fails to be listed on NASDAQ or other nationally
recognized exchange.
.2 Remedies. Upon the occurrence of an Event of Default described in
subsections 7.1(h) and (i), immediately and automatically, and upon the
occurrence of any other Event of Default, at any time thereafter while such
Event of Default is continuing, at the Majority Banks' option and upon the
Majority Banks' declaration:
(a) Agent shall file or record the Financing Statements, the
Intellectual Property Security Agreements and all other documents required to
perfect the first priority security interest in favor of Agent and the Banks in
all assets of Borrower created by the Security Agreement and the Intellectual
Property Security Agreements, and Borrower shall, and shall require its
Subsidiaries and any other necessary parties to, execute all other documents
required to perfect a first priority security interest in favor of Agent and the
Banks in all assets of Borrower; such documents may include, without limitation,
security agreements and UCC financing statements;
(b) the Banks' Commitments to make any further Loans or issue any
further Letters of Credit hereunder shall terminate;
(c) the unpaid principal amount of the Loans together with accrued
interest and all other Obligations hereunder shall become immediately due and
payable without presentment, demand, protest or further notice of any kind, all
of which are hereby expressly waived;
(d) Agent or the Banks may demand that Borrower (i) deposit cash
with Agent in an amount equal to the amount of any Letters of Credit remaining
undrawn, as collateral security for the repayment of any future drawings under
such Letters of Credit, and Borrower
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shall forthwith deposit and pay such amounts, and (ii) pay in advance all fees
and commissions scheduled to be paid or payable over the remaining terms of such
Letters of Credit; and
(e) Agent and the Banks may exercise any and all rights they have
under this Agreement, the Loan Documents or any other documents or agreements
executed in connection herewith, or at law or in equity, and proceed to protect
and enforce Agent's and the Banks' rights by any action at law, in equity or
other appropriate proceeding.
VIII
AGENT
.1 Appointment, Powers And Immunities
(a) Each Bank hereby appoints Sumitomo as Agent hereunder and under
the other Loan Documents and each Bank hereby irrevocably authorizes Agent to
act hereunder and thereunder as Agent of such Bank. Agent agrees to act as such
upon the express conditions contained in this Section 8. In performing its
functions and duties under this Agreement and under the other Loan Documents,
Agent shall act solely as Agent of the Banks and does not assume and shall not
be deemed to have assumed any obligation towards or relationship of agency or
trust with or for Borrower.
(b) Each Bank irrevocably authorizes Agent to take such action on
such Bank's behalf and to exercise such powers hereunder as are specifically
delegated to Agent by the terms hereof, together with such powers as are
reasonably incidental thereto. Agent shall have only those duties which are
specified in this Agreement and it may perform such duties by or through its
agents, representatives or employees. In performing its duties hereunder on
behalf of the Banks, Agent shall exercise the same care which it would exercise
in dealing with loans made or letters of credit issued for its own account, but
it shall not be responsible to any Bank for the execution, effectiveness,
genuineness, validity, enforceability, collectibility or sufficiency of all or
any of the Loan Documents, or for any representations, warranties, recitals or
statements made herein or therein or made in any written or oral statement or in
any financial or other statements, instruments, reports, certificates or any
other documents furnished or delivered in connection herewith or therewith by
Agent to any Bank or by or on behalf of Borrower to Agent or any Bank, or be
required to ascertain or inquire as to the performance or observance of any of
the terms, conditions, provisions, covenants or agreements contained herein or
therein or as to the use of the proceeds of the Loans or amounts drawn under the
Letters of Credit. Unless the officers of Agent acting in their capacity as
officers of Agent on Borrower's account have actual knowledge thereof or have
been notified in writing thereof by the Banks, Agent shall not be required to
ascertain or inquire as to the existence or possible existence of any Event of
Default. Neither Agent nor any of its officers, directors, employees,
representatives or agents shall be liable to the Banks for any action taken or
omitted hereunder or under any of the other Loan Documents or in connection
herewith or therewith unless caused by its or their gross
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negligence or willful misconduct. No provision of this Agreement or of any other
Loan Document shall be deemed to impose any duty or obligation on Agent to
perform any act or to exercise any power in any jurisdiction in which it shall
be illegal, or shall be deemed to impose any duty or obligation on Agent to
perform any act or exercise any right or power if such performance or exercise
(i) would subject Agent to a tax in a jurisdiction where it is not then subject
to a tax or (ii) would require Agent to qualify to do business in any
jurisdiction where it presently is not so qualified. Without prejudice to the
generality of the foregoing, no Bank shall have any right of action whatsoever
against Agent as a result of Agent acting or (where so instructed) refraining
from acting under this Agreement or under any of the other Loan Documents in
accordance with the instructions, request or consent of the Requisite Banks and
any action taken or failure to act, pursuant to such instructions, request or
consent shall be binding on all Banks. Agent shall be entitled to refrain from
exercising any power, discretion or authority vested in it under this Agreement
unless and until it has obtained the written instructions of the Requisite
Banks. The agency hereby created shall in no way impair or affect any of the
rights and powers of, or impose any duties or obligations upon Agent in its
individual capacity.
.2 Representations and Warranties; No Responsibility For Inspection.
Each Bank represents and warrants that it has made its own independent
investigation of the financial condition and affairs of Borrower in connection
with the making of the Loans and issuance of the Letters of Credit hereunder and
has made and shall continue to make its own appraisal of the creditworthiness of
Borrower. Agent shall have no duty or responsibility either initially or on a
continuing basis to make any such investigation or any such appraisal on behalf
of the Banks or to provide any Bank with any credit or other information (other
than information obtained under the provisions of this Agreement which Agent
shall make available to each Bank upon request by such Bank) with respect
thereto whether coming into its possession before the date hereof or any time or
times thereafter and shall further have no responsibility with respect to the
accuracy of or the completeness of the information provided to the Banks. With
respect to its participation in the Loans and the Letters of Credit hereunder,
Agent shall have the same rights and powers hereunder as any other Bank and may
exercise the same rights and powers as though it were not performing the duties
and functions delegated to it hereunder and the term "Bank" or "Banks" or any
similar term shall unless the context clearly indicates otherwise include Agent
in its individual capacity. Agent and each of its affiliates may accept deposits
from, lend money to and generally engage in any kind of business with Borrower
as if it were not Agent.
.3 Reliance By Agent
(a) Agent may consult with counsel, and any opinion or legal advice
of such counsel who are not employees of Agent or Borrower or any affiliate of
Borrower shall be full and complete authorization and protection in respect of
any action taken or suffered by Agent hereunder or under any other Loan
Documents in accordance therewith.
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(b) Agent may rely, and shall be fully protected in acting, upon any
resolution, statement, certificate, instrument, opinion, report, notice,
request, consent, order, bond or other paper or document that it has no reason
to believe to be other than genuine and to have been signed or presented by the
proper party or parties or, in the case of cables, telecopies and telexes, to
have been sent by the proper party or parties. In the absence of its gross
negligence or willful misconduct, Agent may conclusively rely, as to the truth
of the statements and the correctness of the opinions expressed therein, upon
any certificates or opinions furnished to Agent and conforming to the
requirements of this Agreement or any of the other Loan Documents.
(c) Agent shall not be under any obligation to exercise any of the
rights or powers granted to Agent by this Agreement and the other Loan Documents
at the request or direction of the Requisite Banks unless Agent shall have been
provided by the Requisite Banks with adequate security and indemnity against the
costs, expenses and liabilities that may be incurred by it in compliance with
such request or direction.
.4 Delegation of Duties. Agent may execute any of the powers hereof and
perform any duty hereunder either directly or by or through agents or
attorneys-in-fact. Agent shall be entitled to advice of counsel concerning all
matters pertaining to such powers and duties. Agent shall not be responsible for
the negligence or misconduct of any agents or attorneys-in-fact selected by it
without gross negligence or willful misconduct on the part of Agent.
.5 Right To Indemnity. Each of the Banks severally, but not jointly,
agrees (a) to indemnify and hold Agent (and any person acting on behalf of
Agent) harmless from and against and (b) promptly on receipt by each Bank of
Agent's statement, to reimburse Agent, according to such Bank's pro rata share
of the Commitment Amount, to the extent Agent shall not otherwise have been
reimbursed by Borrower on account of and for, any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses (including, without limitation, the fees and disbursements of counsel
and other advisors) or disbursements of any kind of nature whatsoever with
respect to Agent's performance of its duties under this Agreement and the other
Loan Documents. Such reimbursement shall not in any respect release Borrower
from any liability or obligation. If any indemnity furnished to Agent for any
purpose shall, in the opinion of Agent, be insufficient or become impaired,
Agent may call for additional indemnity and cease, or not commence, to do the
acts indemnified against until such additional indemnity is furnished.
.6 Resignation and Appointment of Successor Agent. Agent may, and at
the request of the Majority Banks shall, resign by giving thirty (30) days'
prior written notice thereof to the Banks and Borrower; provided, however, that
the retiring Agent shall continue to serve until a successor Agent shall have
been selected and approved pursuant to this Section 8.6. Upon any such notice or
request, the Majority Banks shall appoint a successor agent for the Banks. If no
successor agent is appointed prior to the effective date of the resignation of
Agent, Agent may appoint, after consulting with the Banks and Borrower, a
successor Agent from
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among the Banks. Upon the acceptance of any appointment as an Agent hereunder by
a successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations under
this Agreement. After any retiring Agent's resignation hereunder as Agent, the
provisions of this Section 8 shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was Agent under this Agreement.
.7 Conflicts. Sumitomo and its affiliates may accept deposits from,
lend money to, act as trustee under indentures of, act as merchant banker in any
transaction for, and generally engage in any kind of business with, Borrower and
any person who may do business with or own securities of Borrower, all as if
Sumitomo were not Agent and without any duty to account therefor to the Banks or
to disclose to the Banks confidential information which Sumitomo may receive
from Borrower in connection with such other activity or business.
.8 No Obligations of Borrower. Nothing contained in this Section 8
shall be deemed to impose upon Borrower any obligation in respect of the due and
punctual performance by Agent of its obligations to the Banks under any
provision of this Agreement, and Borrower shall have no liability to Agent or
any Bank in respect of any failure by Agent or any Bank to perform any of their
respective obligations to each other under this Agreement. Without limiting the
generality of the foregoing sentence, where any provision of this Agreement
relating to the payment of any amounts due and owing under the Loan Documents
provides that such payments shall be made by Borrower to Agent for the account
of the Banks, Borrower's obligations to the Banks in respect of such payments
shall be deemed to be satisfied upon the making of such payments to Agent in the
manner provided by this Agreement.
IX
MISCELLANEOUS
.1 Notices. Unless otherwise specified herein, all notices hereunder to
any party hereto shall be in writing and shall be deemed to have been given when
delivered by hand, when properly deposited in the mails postage prepaid, when
sent by telex, answerback received, or electronic facsimile transmission with
electronic confirmation of receipt, or when sent by telegraph or overnight
courier, addressed to such party at its address indicated below:
IF TO BORROWER AT: 1371 Mccarthy Boulevard
Milpitas, California 95035
Telephone: (408) 321-7300
Facsimile: (408) 321-9218
Attention: Truman Cole, Vice Pres. of Finance
IF TO AGENT AT: SUMITOMO BANK OF CALIFORNIA
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84 West Santa Clara Street, Suite 700
San Jose, California 95113
Telephone: (408) 288-6267
Facsimile: (408) 288-6292
Attention: Relationship Manager -
Network Peripherals Inc.
If to any Bank, at its address specified on the signature pages hereto, or
at any other address specified by such party in writing.
.2 Expenses. Borrower will pay promptly on demand, and subject to
Section 3.1(j), in any event within ten (10) days of invoice, all expenses of
Agent in connection with the preparation, waiver or amendment of this Agreement,
the Loan Documents or other documents executed in connection therewith, and all
expenses of Agent and each Bank in connection with the default on or collection
of the Loans or other Obligations or default, collection in connection with
Agent's or any Bank's exercise, preservation or enforcement of any of its
rights, remedies or options thereunder, including, without limitation,
reasonable fees of outside legal counsel or the allocated costs of in-house
legal counsel, accounting, consulting, brokerage or other similar professional
fees or expenses, and any fees or expenses associated with any travel or other
costs relating to any appraisals or examinations conducted in connection with
the Obligations,and the amount of all such expenses shall, until paid, bear
interest at the rate applicable to principal hereunder (including any default
rate).
.3 Indemnification
(a) General Indemnity. Borrower shall pay, indemnify, and hold each
Bank, Agent and each of their respective officers, directors, employees,
counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, charges, expenses or disbursements
(including reasonable attorneys' fees and costs) of any kind or nature
whatsoever with respect to the execution, delivery, enforcement, performance and
administration of this Agreement and any other Loan Documents, or the
transactions contemplated hereby and thereby, and with respect to any
investigation, litigation or proceeding (including any proceeding in bankruptcy
or appellate proceeding) related to this Agreement or the Loans or the use of
the proceeds thereof, whether or not any Indemnified Person is a party thereto
(all the foregoing, collectively, the "Indemnified Liabilities"); provided, that
Borrower shall have no obligation hereunder to any Indemnified Person with
respect to Indemnified Liabilities arising from the gross negligence or willful
misconduct of such Indemnified Person.
(b) Notice. Borrower shall be given prompt notice of the
commencement of any action or proceeding on any Indemnified Liability and of any
overt written threat of litigation on any Indemnified Liability, but the failure
to receive such notice shall not relieve Borrower
46.
<PAGE>
from any of its obligations under this Section 9.3, except to the extent
Borrower has been actually damaged thereby.
(c) Selection of Counsel. Borrower shall have the right, with the
consent of the Indemnified Person (which shall not be withheld unreasonably), to
select a firm of attorneys as legal counsel to defend any Indemnified Liability,
and Borrower shall pay the fees, expenses and disbursements of such counsel and
any special or local counsel; and if the Indemnified Person or such legal
counsel determines in good faith that representing such Indemnified Person would
or could result in a conflict of interest, or that a defense, crossclaim or
counterclaim is available to such Indemnified Person that is not available to
any other Person represented by such legal counsel in the same proceeding, then
to the extent reasonably necessary to avoid such a conflict of interest or to
permit unqualified assertion of such a defense, crossclaim or counterclaim, such
Indemnified Person shall be entitled to separate representation, at Borrower's
expense, by legal counsel selected by such Indemnified Person and reasonably
acceptable to Borrower, with all such legal counsel using reasonable efforts to
avoid unnecessary duplication of effort by counsel.
(d) Seperate Counsel. Each Indemnified Person shall have the right
to be represented by counsel of its own choosing (i) at Borrower's expense
whenever any Event of Default is continuing, except that Borrower shall be
obligated under this Section 9.3 only to pay the reasonable fees and expenses of
one firm of attorneys chosen by Agent to represent its interests and the other
Indemnified Person as a group, or (ii) when such Indemnified Person is entitled
to separate representation at Borrower's expense as set forth in Section 9.3(d),
and (iii) at any time and under any circumstances at such Indemnified Person's
expense; and Borrower and the attorneys selected by Borrower shall cooperate in
all reasonable respects with such counsel.
(e) Survival; Defense. The obligations in this Section 9.3 shall
survive payment of all other Obligations. At the election of any Indemnified
Person, Borrower shall defend such Indemnified Person using legal counsel
satisfactory to such Indemnified Person in such person's sole discretion, and
reasonably satisfactory to Borrower, at the sole cost and expense of Borrower.
All amounts owing under this Section 9.3 shall be paid within thirty (30) days
after demand.
.4 Set-Off
(a) Regardless of the adequacy of other means of obtaining repayment
of the Obligations, any deposits, balances or other sums credited by or due from
the head offices of Agent, the Banks or any of their branch offices to Borrower
may, at any time and from time to time after the occurrence of an Event of
Default hereunder, without notice to Borrower or compliance with any other
condition precedent now or hereafter imposed by statute, rule of law, or
otherwise (all of which are hereby expressly waived) be set off, appropriated,
and applied by Agent and the Banks against any and all obligations of Borrower
to Agent and the Banks or any
47.
<PAGE>
of their affiliates in such manner as the head offices of the Banks or any of
their branch offices in their sole discretion may determine.
(b) Unless otherwise expressly provided herein, all interest, fees
and principal payments on the Loans to Borrower hereunder are to be divided
among the Banks in the same proportion as each Bank's pro rata share of the
Commitment Amount. Any sums obtained from Borrower or any Subsidiary by any Bank
by reason of the exercise of its rights of set-off or banker's lien or otherwise
shall be shared among all the Banks in the same proportion and applied first to
Obligations of Borrower under this Agreement. Nothing in this Section 9.4(b)
shall be deemed to require the sharing by the Banks of collections (other than
by set-off or banker's lien) with respect to any other Obligations of Borrower
or any Subsidiary to any Bank.
.5 Term of Agreement. This Agreement shall continue in full force and
effect so long as the Banks have any Commitment to make Loans or issue Letters
of Credit hereunder or any Loan or Letter of Credit or any Obligation hereunder,
except Obligations arising under Section 9.3, shall be outstanding.
.6 No Waivers. No failure or delay by Agent or the Banks in exercising
any right, power or privilege hereunder or under the Note or under any other
documents or agreements executed in connection herewith shall operate as a
waiver thereof; nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein and in the Loan Documents provided are
cumulative and not exclusive of any rights or remedies otherwise provided by
agreement or law.
.7 Governing Law. This Agreement and the Loan Documents shall be deemed
to be contracts made under seal and shall be construed in accordance with and
governed by the laws of the State of California (without giving effect to any
conflicts of laws provisions contained therein).
.8 Amendments and Waivers. No amendment or waiver of any provision of
this Agreement or any other Loan Document, and no consent with respect to any
departure by Borrower therefrom, shall be effective unless the same shall be in
writing and signed by the Requisite Banks, Borrower and acknowledged by Agent,
and then such waiver shall be effective only in the specific instance and for
the specific purpose for which given; provided, however, that no such waiver,
amendment, or consent shall, unless in writing and signed by all Banks, Borrower
and acknowledged by Agent, do any of the following:
(a) increase or extend the Commitment of any Bank (or reinstate any
Commitment terminated pursuant to subsection 7.2(a)) or subject any Bank to any
additional obligations;
48.
<PAGE>
(b) postpone or delay any date fixed for any payment of principal,
interest, fees or other amounts due to Banks (or any of them) hereunder or under
any Loan Document;
(c) reduce the principal of, or the rate of interest specified
herein on any Loan, or of any fees or other amounts payable hereunder or under
any Loan Document;
(d) change the percentage of the Commitments or of the aggregate
unpaid principal amount of the Loans which shall be required for the Banks or
any of them to take any action hereunder;
(e) amend this Section 9.8 or Section 9.4(b); or
(f) discharge any guarantor of the Obligations, or release all or
substantially all of any collateral for the Obligations except as otherwise may
be provided in the Loan Documents or except where the consent of the Requisite
Banks only is specifically provided for;
and, provided further, that no amendment, waiver or consent shall, unless in
writing and signed by Agent in addition to the Requisite Banks or all Banks, as
the case may be, affect the rights or duties of Agent under this Agreement or
any other Loan Document.
.9 Binding Effect of Agreement. This Agreement shall be binding upon
and inure to the benefit of Borrower and Banks and their respective successors
and assigns; provided that Borrower may not assign or transfer its rights or
obligations hereunder. Banks may sell, transfer or grant participations in the
Note, without the prior written consent of Borrower, and Borrower agrees that,
in addition to such rights as a Bank may grant pursuant to Section 9.10 below,
any transferee or participant shall be entitled to the benefits of Sections 2.9,
2.10, 2.14, 5.5, 9.3 and 9.4 to the same extent as if such transferee or
participant were a Bank hereunder; provided that notwithstanding any such
transfer or participation, Borrower may, for all purposes of this Agreement,
treat such Banks as the persons entitled to exercise all rights hereunder and
under the Note and to receive all payments with respect thereto. Nothing in this
Section shall negate the provisions of Section 9.10 below.
.10 Assignments, Participations, Etc.
(a) Any Bank may, with the written consent of Borrower (at all times
other than during the existence of an Event of Default) and Agent, which
consents shall not be unreasonably withheld, at any time assign and delegate to
one or more financial institutions (provided that no written consent of Borrower
or Agent shall be required in connection with any assignment and delegation by a
Bank to an affiliate of such Bank) (each an "Assignee") all, or any ratable part
of all, of the Loans, the Commitments and the other rights and obligations of
such Bank hereunder, in a minimum amount of $5,000,000 (provided that Sumitomo
may assign and delegate such rights and obligations to any of its affiliates in
a minimum amount of $5,000,000); provided, however, that (i) Borrower and Agent
may continue to deal solely and
49.
<PAGE>
directly with such Bank in connection with the interest so assigned to an
Assignee until (A) written notice of such assignment, together with payment
instructions, addresses and related information with respect to the Assignee,
shall have been given to Borrower and Agent by such Bank and the Assignee; (B)
such Bank and its Assignee shall have delivered to Borrower and Agent an
Assignment and Acceptance in form and substance acceptable to Agent ("Assignment
and Acceptance") and (C) the assignor Bank or Assignee has paid to Agent Agent's
customary fee as agreed to by the assignor Bank, provided that no processing fee
shall be charged for any assignment to a Bank or a Bank's affiliate.
(b) From and after the date that Agent notifies the assignor Bank
that it has received an executed Assignment and Acceptance and payment of the
above-referenced processing fee, (i) the Assignee thereunder shall be a party
hereto and, to the extent that rights and obligations hereunder have been
assigned to it pursuant to such Assignment and Acceptance, shall have the rights
and obligations of a Bank under the Loan Documents, and (ii) the assignor Bank
shall, to the extent that rights and obligations hereunder and under the other
Loan Documents have been assigned by it pursuant to such Assignment and
Acceptance, relinquish its rights and be released from its obligations under the
Loan Documents.
(c) Immediately upon each Assignee's making its processing fee
payment under the Assignment and Acceptance, this Agreement shall be deemed to
be amended to the extent, but only to the extent, necessary to reflect the
addition of the Assignee and the resulting adjustment of the Commitments arising
therefrom. The Commitment allocated to each Assignee shall reduce such
Commitment of the assigning Bank pro tanto.
(d) Any Bank may at any time sell to one or more commercial banks or
other persons not affiliates of Borrower (a "Participant") participating
interests in any Loans, the Commitment of that Bank and the other interests of
that Bank (the "originating Bank") hereunder and under the other Loan Documents;
provided, however, that (i) the originating Bank's obligations under this
Agreement shall remain unchanged, (ii) the originating Bank shall remain solely
responsible for the performance of such obligations, (iii) Borrower and Agent
shall continue to deal solely and directly with the originating Bank in
connection with the originating Bank's rights and obligations under this
Agreement and the other Loan Documents, and (iv) no Bank shall transfer or grant
any participating interest under which the Participant shall have rights to
approve any amendment to, or any consent or waiver with respect to, this
Agreement or any other Loan Document, except to the extent such amendment,
consent or waiver would otherwise require unanimous consent of Banks.
(e) Notwithstanding any other provision in this Agreement, any Bank
may at any time create a security interest in, or pledge, all or any portion of
its rights under and interest in this Agreement and the Note held by it in favor
of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S.
Treasury Regulation 31 CFR ss. 203.14, and such Federal Reserve Bank may enforce
such pledge or security interest in any manner permitted under applicable law.
50.
<PAGE>
.11 Counterparts. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures hereto and thereto were
upon the same instrument.
.12 Partial Invalidity. The invalidity or unenforceability of any one
or more phrases, clauses or sections of this Agreement shall not affect the
validity or enforceability of the remaining portions of it.
.13 Captions. The captions and headings of the various sections and
subsections of this Agreement are provided for convenience only and shall not be
construed to modify the meaning of such sections or subsections.
.14 Waiver of Jury Trial. AGENT, THE BANKS AND BORROWER AGREE THAT NONE
OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY
LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT
OF, THIS AGREEMENT, ANY RELATED INSTRUMENTS, OR THE DEALINGS OR THE RELATIONSHIP
BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH
ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE
PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY AGENT, THE BANKS AND
BORROWER, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NEITHER AGENT
NOR THE BANKS NOR BORROWER HAS AGREED WITH OR REPRESENTED TO ANY OTHER THAT THE
PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
.15 Entire Agreement. This Agreement, the Note and the documents and
agreements executed in connection herewith constitute the final agreement of the
parties hereto and supersede any prior agreement or understanding, written or
oral, with respect to the matters contained herein and therein.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
BORROWER NETWORK PERIPHERALS INC.
By:
----------------------------------------
Printed Name:
------------------------------
Title:
-------------------------------------
AGENT SUMITOMO BANK OF CALIFORNIA
51.
<PAGE>
By:
----------------------------------------
Printed Name:
------------------------------
Title:
-------------------------------------
By:
----------------------------------------
Printed Name:
------------------------------
Title:
-------------------------------------
BANKS SUMITOMO BANK OF CALIFORNIA
By:
----------------------------------------
Printed Name:
------------------------------
Title:
-------------------------------------
By:
----------------------------------------
Printed Name:
------------------------------
Title:
-------------------------------------
Address for notices:
SUMITOMO BANK OF CALIFORNIA
84 West Santa Clara Street, Suite 700
San Jose, California 95113
Telephone: (408) 288-6267
Facsimile: (408) 288-6292
Attention: Relationship Manager -
Network Peripherals Inc.
52.
<PAGE>
SCHEDULE 1
REVOLVING COMMITMENT AMOUNT
BANK COMMITMENT
Sumitomo Bank of California $10,000,000.00
<PAGE>
SCHEDULE 4.12
EXECUTIVE OFFICES AND INVENTORY AND EQUIPMENT LOCATIONS
OF NETWORK PERIPHERALS INC.
1371 McCarthy Boulevard
Milpitas, CA 95035
USA
9F-6 No. 4, Land 609 Sec. 5
Chung Hsin Road
San Chung City, Taipei
Taiwan
140 Cecil Street #10-03
PIL Building
Singapore
Transmolenlaan 12
3447 GZ Woerden
The Netherlands
<PAGE>
SCHEDULE 4.14
SUBSIDIARIES OF NETWORK PERIPHERALS INC.
<TABLE>
JURISDICTION
NAME OF SUBSIDIARY OF INCORPORATION % OWNERSHIP
<S> <C> <C>
Network Peripherals International, Ltd. Delaware 100%
Network Peripherals FSC, Inc. Barbados 100%
</TABLE>
<PAGE>
SCHEDULE 6.1
INDEBTEDNESS OF NETWORK PERIPHERALS INC.
None.
<PAGE>
SCHEDULE 6.2
GUARANTEES OF NETWORK PERIPHERALS INC.
None.
<PAGE>
SCHEDULE 6.4
ENCUMBRANCES OF NETWORK PERIPHERALS INC.
None.
<PAGE>
SCHEDULE 6.9
INVESTMENTS OF NETWORK PERIPHERALS INC.
None.
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
SECTION I
<S> <C> <C> <C>
DEFINITIONS................................................ 1.
1.1 Definitions................................................................................... 1.
1.2 Accounting Terms..............................................................................10.
SECTION II
DESCRIPTION OF CREDIT...........................................11.
2.1 Commitment to Lend............................................................................11.
2.2 Notice And Manner Of Borrowing Or Conversion Of Loans.........................................12.
2.3 Letters Of Credit.............................................................................12.
2.4 Fees..........................................................................................15.
2.5 Reduction Of Commitment Amount................................................................15.
2.6 The Note......................................................................................15.
2.7 Duration Of Interest Periods..................................................................16.
2.8 Interest Rates And Payments Of Interest.......................................................16.
2.9 Changed Circumstances.........................................................................17.
2.10 Capital Requirements..........................................................................19.
2.11 Payments And Prepayments Of The Loans.........................................................19.
2.12 Method Of Payment.............................................................................20.
2.13 Overdue Payments..............................................................................20.
2.14 Payments Not At End Of Interest Period........................................................20.
2.15 Computation Of Interest And Fees..............................................................21.
2.16 Right To Replace Bank.........................................................................21.
SECTION III
CONDITIONS OF LOAN.............................................21.
3.1 Conditions Precedent To Initial Loan..........................................................21.
3.2 Conditions Precedent To All Loans.............................................................23.
SECTION IV
REPRESENTATIONS AND WARRANTIES.......................................24.
4.1 Organization And Qualification................................................................24.
4.2 Corporate Authority...........................................................................24.
4.3 Valid Obligations.............................................................................24.
4.4 Consents Or Approvals.........................................................................24.
4.5 Title To Properties; Absence Of Encumbrances..................................................25.
i.
<PAGE>
TABLE OF CONTENTS
(continued)
4.6 Financial Statements..........................................................................25.
4.7 Changes.......................................................................................25.
4.8 Defaults......................................................................................25.
4.9 Taxes.........................................................................................25.
4.10 Litigation....................................................................................25.
4.11 Material Contracts............................................................................25.
4.12 Executive Offices and Inventory and Equipment Locations.......................................26.
4.13 Use Of Proceeds...............................................................................26.
4.14 Subsidiaries..................................................................................26.
4.15 Investment Company Act........................................................................26.
4.16 Compliance With ERISA.........................................................................26.
4.17 Environmental Matters.........................................................................26.
SECTION V
AFFIRMATIVE COVENANTS...........................................28.
5.1 Financial Statements And Other Reporting Requirements.........................................28.
5.2 Conduct Of Business...........................................................................30.
5.3 Maintenance And Insurance.....................................................................30.
5.4 Taxes.........................................................................................30.
5.5 Inspection By Bank............................................................................30.
5.6 Maintenance Of Books And Records..............................................................31.
5.7 Financial Covenants...........................................................................31.
(a) Quick Ratio..........................................................................31.
(b) Profitability........................................................................31.
(c) Leverage Ratio.......................................................................32.
(d) Consolidated Tangible Net Worth......................................................32.
(e) Capital Expenditures.................................................................32.
5.8 Use Of Proceeds...............................................................................32.
5.9 Collateralization.............................................................................32.
5.10 Further Assurances............................................................................32.
SECTION VI
NEGATIVE COVENANTS.............................................32.
6.1 Indebtedness..................................................................................32.
6.2 Contingent Liabilities........................................................................33.
ii
<PAGE>
TABLE OF CONTENTS
(continued)
6.3 Sale And Leaseback............................................................................33.
6.4 Encumbrances..................................................................................33.
6.5 Merger; Consolidation; Sale Or Lease Of Assets................................................35.
6.6 Acquisitions And Joint Ventures...............................................................35.
6.7 Subsidiary Stock Issuance.....................................................................35.
6.8 Equity Distributions..........................................................................36.
6.9 Investments...................................................................................36.
6.10 ERISA.........................................................................................37.
6.11 Transactions with Subsidiaries................................................................37.
SECTION VII
DEFAULTS..................................................37.
7.1 Events Of Default.............................................................................37.
7.2 Remedies......................................................................................39.
SECTION VIII
AGENT...................................................40.
8.1 Appointment, Powers And Immunities............................................................40.
8.2 Representations And Warranties; No Responsibility For Inspection..............................41.
8.3 Reliance By Agent.............................................................................41.
8.4 Delegation Of Duties..........................................................................42.
8.5 Right To Indemnity............................................................................42.
8.6 Resignation And Appointment Of Successor Agent................................................42.
8.7 Conflicts.....................................................................................43.
8.8 No Obligations Of Borrower....................................................................43.
SECTION IX
MISCELLANEOUS...............................................43.
9.1 Notices.......................................................................................43.
9.2 Expenses......................................................................................44.
9.3 Indemnification...............................................................................44.
(a) General Indemnity....................................................................44.
(b) Notice...............................................................................44.
(c) Selection Of Counsel.................................................................44.
iii.
<PAGE>
TABLE OF CONTENTS
(continued)
(d) Separate Counsel.....................................................................45.
(e) Survival; Defense....................................................................45.
9.4 Set-Off.......................................................................................45.
9.5 Term Of Agreement.............................................................................45.
9.6 No Waivers....................................................................................46.
9.7 Governing Law.................................................................................46.
9.8 Amendments And Waivers........................................................................46.
9.9 Binding Effect Of Agreement...................................................................47.
9.10 Assignments, Participations, Etc..............................................................47.
9.11 Counterparts..................................................................................48.
9.12 Partial Invalidity............................................................................48.
9.13 Captions......................................................................................48.
9.14 Waiver Of Jury Trial..........................................................................48.
9.15 Entire Agreement..............................................................................49.
</TABLE>
iv.
<PAGE>
EXHIBITS
EXHIBIT A Form of Promissory Note
EXHIBIT B Form of Security Agreement
EXHIBIT C Form of Intellectual Property Security Agreements
EXHIBIT D Form of Notice of Borrowing or Conversion
EXHIBIT E Form of Report of Chief Financial Officer
EXHIBIT F Form of Opinion of Gray Cary Ware & Freidenrich
SCHEDULES
SCHEDULE 1 Commitments
SCHEDULE 4.12 Executive Offices and Inventory and Equipment Locations
SCHEDULE 4.14 Subsidiaries
SCHEDULE 6.1 Indebtedness
SCHEDULE 6.2 Guarantees
SCHEDULE 6.4 Encumbrances
SCHEDULE 6.9 Investments
v.
Exhibit 10.23
May 15, 1996
Mr. Glenn E. Penisten
545 Middlefield Road
Suite 170
Menlo Park, California 94025
Re: Network Peripherals, Inc.
Dear Glenn:
On behalf of the Board of Directors of Network Peripherals, Inc. (the
"Company"), I am pleased to confirm our recent discussions regarding you joining
the company as an employee to assist the Board and management in helping us
develop a strategic process, subject to the terms and conditions contained in
this letter. Upon acceptance of this letter by your signature, the Compensation
Committee of the Board will call a special meeting to approve the Agreement and
take the actions required.
1. Term. The Agreement will become effective today and remain in effect
for three years from that date (hereinafter referred to as the "Term").
2. During the Term of this Agreement, you will be employed in such
position as you and the Board may agree, unless your employment is sooner
terminated voluntarily or pursuant to the terms of this Agreement. As you know,
it is our goal for you to be employed as Chairmen of the Board of Directors at
an appropriate time.
3. During the period of your employment with the Company, you will:
a. devote such time and attention to your position as you and the
Board may agree from time to time, but no less than four days per month unless
you and the Board otherwise agree; and
b. perform such services and assume such duties and responsibilities
as are described in the position description attached hereto as you and the
Board may agree on from time to time;
4. Compensation. In consideration of your services to the Company
during the Term of this Agreement, you will receive the following:
a. An initial salary of $70,000 per year, paid in equal installments
on the Company's regular pay days, subject to applicable withholding.
<PAGE>
b. Such benefits as are appropriate and allowable for a person in
your position.
c. An option to acquire 400,000 shares of the Common Stock in the
Company (approximately 3% of the outstanding shares on a fully diluted basis) at
fair market value on the date that the options are granted by the Compensation
Committee of the Board of Directors pursuant to a Stock Option Agreement which
will provide among other things that:
(i) the option will vest one-third upon the
effectiveness of this Agreement and an additional one-third on the first and
second year anniversary of this Agreement.
(ii) the option will be presently exercisable with
the Company having the right to repurchase any unvested shares at the original
purchase price plus any interest you may pay in the event you exercise your
option with a note.
(iii) you will have the right to exercise the option
with cash for an amount equal to the par value of the stock acquired ($400) and
with a Promissory Note for the balance of the exercise price, having a maximum
term of five years and bearing interest at the minimum rate required to avoid
imputed interest (6.36% compounded annually if the loan is originated in May,
1996), such loan to be secured by the stock subject to the option and 20,000
shares of Company stock that you now own. The Promissory Note will have such
additional terms as are agreed upon between you and the Company after discussion
with the Company's advisors.
(iv) shares to be held in escrow to secure the note
and the Company's unvested share repurchase right.
(v) vesting on the option would accelerate and be
fully vested upon change of control if the option is not assumed by the
acquiring company or a substantially equivalent option is not substituted by the
acquiring company, or otherwise if, subsequent to a change of control, you are
assigned, without your written consent, any position, duties, responsibilities,
or status, substantially inconsistent with your position, duties
responsibilities or status with the Company.
d. NPI will reimburse you for travel and other out-of-pocket
expenses that you reasonably incurred in performance of your duties, including
travel from your home to NPI and intown expenses incurred while you are at NPI
and away from your home. Such expenses will be reimbursed shortly after your
presentation to the Company of appropriate documentation for such expenses.
5. Termination.
<PAGE>
a. This Agreement will terminate automatically three years after its
effective date.
b. This Agreement will terminate upon your death.
c. This Agreement will terminate if you become permanently disabled.
You will be deemed permanently disabled for purposes of this Agreement if you
become physically or mentally incapable of performing your duties under this
Agreement for a continuous period of ninety days, and such incapacity will, in
the opinion of a qualified physician, be permanent and continuous during the
remaining term of this Agreement.
d. Notwithstanding paragraph 1 above, you agree that the Company may
terminate your employment at any time for any reason and remove you as Chairman
of the Board or ask you to resign from you role as Chairman in accordance with
the Company's by-laws at any time. In the event of your termination of
employment by the Company for any reason or as a result of your death, you will
be entitled to: (i) payment of your salary through your termination date; (ii)
vesting of your stock option on a pro-rated basis through the last day of the
month in which your termination occurs; and (iii) the Company will buy back any
unvested stock options as of the end of the month in which your termination
occurs at the original purchase price plus interest paid, to the extent
allowable by law and applicable accounting regulations without material adverse
effect to the Company.
Subject to the above, you will be entitled to no further compensation
for anything arising out of your termination of employment.
5. Proprietary Matters. You will execute the Company's Employment
Agreement with respect to Proprietary Matters as pertains to individuals who
consult with the Company.
Glenn, if you find this acceptable, please execute the enclosed copy of
this letter.
By: /s/ Kenneth Levy
-----------------------------------------------
Kenneth Levy
Agreed to and Accepted by:
/s/ Glenn E. Pennisten
- -----------------------------------------------------------------------
Glenn E. Pennisten Date
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000922521
<NAME> Network Peripherals Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 23,523
<SECURITIES> 22,350
<RECEIVABLES> 9,513
<ALLOWANCES> (1,154)
<INVENTORY> 8,228
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0
0
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</TABLE>
