UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1994
For the transition period from _______ to ________
Commission file number 0-23970
NETWORK PERIPHERALS INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0216135
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1371 McCarthy Boulevard
Milpitas, California 95035
(Address, including zip code, of principal executive offices)
(408) 321-7300
(Registrant's telephone number, including area code)
Indicate by check mark 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 such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares of the Registrant's Common Stock, $0.001 par value,
outstanding as of May 6, 1998 was 12,288,759.
This quarterly report on Form 10-Q consists of 13 pages of which this is page 1.
The Exhibit Index starts on page 12.
<PAGE>
<TABLE>
NETWORK PERIPHERALS INC.
INDEX TO FORM 10-Q
For the quarter ended
March 31, 1998
PART I. FINANCIAL INFORMATION
<CAPTION>
Item Page
- ---- ----
<S> <C>
1. Financial Statements (unaudited):
Consolidated Balance Sheets - March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations - Three Months Ended
March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-8
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-11
PART II. OTHER INFORMATION
6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
NETWORK PERIPHERALS INC.
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands, except share data)
<CAPTION>
March 31, December 31,
1998 1997
-------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,678 $ 16,094
Short-term investments 14,392 14,371
Accounts receivable, net of allowance for doubtful accounts and
returns of $756 and $1,184, respectively 5,813 5,170
Inventories 2,504 1,417
Income tax refund receivable 3,959 3,983
Prepaid expenses and other current assets 453 614
-------------- ----------------
Total current assets 41,799 41,649
Property and equipment, net 3,819 3,876
Other assets 319 364
-------------- ----------------
$ 45,937 $ 45,889
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,906 $ 1,415
Accrued liabilities 5,066 5,795
-------------- ----------------
Total current liabilities 8,972 7,210
-------------- ----------------
Stockholders' equity:
Preferred Stock, $0.001 par value, 2,000,000 shares authorized;
no shares issued or outstanding - -
Common Stock, $0.001 par value, 20,000,000 shares authorized;
12,260,000 and 12,252,000 shares issued and outstanding,
respectively 12 12
Additional paid-in capital 63,909 63,878
Accumulated deficit (26,956) (25,211)
-------------- ----------------
Total stockholders' equity 36,965 38,679
-------------- ----------------
$ 45,937 $ 45,889
============== ================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(in thousands, except per share data)
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
1998 1997
----------------- ----------------
<S> <C> <C>
Net sales $ 8,020 $ 12,005
Cost of sales 4,651 6,069
----------------- ----------------
Gross profit 3,369 5,936
----------------- ----------------
Operating expenses:
Research and development 2,857 2,385
Marketing and selling 1,773 3,853
General and administrative 866 1,270
----------------- ----------------
Total operating expenses 5,496 7,508
----------------- ----------------
Loss from operations (2,127) (1,572)
Interest income 382 414
----------------- ----------------
Loss before income taxes (1,745) (1,158)
Benefit from income taxes - 404
----------------- ----------------
Net loss $ (1,745) $ (754)
================= ================
Net loss per share:
Basic $ (0.14) $ (0.06)
================= ================
Diluted $ (0.14) $ (0.06)
================= ================
Weighted average common shares:
Basic 12,255 12,074
================= ================
Diluted 12,255 12,074
================= ================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
<CAPTION>
Three Months Ended
March 31,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,745) $ (754)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 477 619
Amortization of goodwill 10 104
Changes in assets and liabilities:
Accounts receivable (643) 193
Inventories (1,087) (324)
Income tax refund receivable 24 -
Prepaid expenses and other assets 196 (397)
Accounts payable 2,491 (303)
Accrued liabilities (729) (410)
------------- -------------
Net cash used in operating activities (1,006) (1,272)
------------- -------------
Cash flows from investing activities:
Holdback amount from acquisition - (1,116)
Purchases of short-term investments (21) (2,314)
Purchases of property and equipment (420) (540)
------------- -------------
Net cash used in investing activities (441) (3,970)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock 31 241
------------- -------------
Net cash provided by financing activities 31 241
------------- -------------
Effect of exchange rate changes on cash - 56
------------- -------------
Net decrease in cash and cash equivalents (1,416) (4,945)
Cash and cash equivalents, beginning of period 16,094 23,523
------------- -------------
Cash and cash equivalents, end of period $ 14,678 $ 18,578
============= =============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes $ 20 $ -
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
5
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, the accompanying unaudited consolidated financial
statements reflect all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the
Company's financial condition as of March 31, 1998 and December 31,
1997, and the results of its operations and its cash flows for the
three-month periods ended March 31, 1998 and 1997. These financial
statements should be read in conjunction with the audited consolidated
financial statements of the Company as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997,
including notes thereto, included in the Company's Annual Report on
Form 10-K (Commission File No. 0-23970).
Operating results for the three-month period ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1998 or for any other future period.
2. NET LOSS PER SHARE
Statements of Financial Accounting Standards No. 128, "Earnings Per
Share," requires dual presentation of basic earnings per share ("EPS")
and diluted EPS on all statements of earnings issued after December 15,
1997 for all entities with complex capital structures. Basic EPS is
computed as net earnings divided by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur from common shares issuable through
stock-based compensation including stock options, restricted stock
awards, warrants, and other convertible securities using the treasury
stock method.
For the three months ended March 31, 1998 and 1997, the Company
incurred net losses, such that the inclusion of potential common shares
would result in an antidilutive per share amount. Accordingly, no
adjustment is made to basic EPS to arrive at the diluted EPS.
3. INVENTORIES
The components of inventories consist of the following (in thousands):
March 31, December 31,
1998 1997
--------------- -----------------
Raw materials $ 481 $ 158
Work-in-process 1,296 898
Finished goods 727 361
--------------- -----------------
$ 2,504 $ 1,417
=============== =================
6
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following (in thousands):
March 31, December 31,
1998 1997
--------------- -----------------
Computer and equipment $ 6,459 $ 6,918
Furniture and fixtures 854 895
Leasehold improvements 303 303
--------------- -----------------
7,616 8,116
Accumulated depreciation (3,797) (4,240)
--------------- -----------------
$ 3,819 $ 3,876
=============== =================
5. ACCRUED LIABILITIES
The components of accrued liabilities consist of the following (in
thousands):
March 31, December 31,
1998 1997
-------------- ---------------
Reserve for contract settlements $ 1,000 $ 1,000
Salaries and benefits 988 1,750
Royalty 750 746
Warranty 577 513
Holdback amount from acquisition 456 456
Restructuring expense 221 597
Other 1,074 733
-------------- ---------------
$ 5,066 $ 5,795
============== ===============
6. RESTRUCTURING
In the third quarter of 1997, the Company announced and began to
implement a restructuring plan aimed at reducing costs and restoring
profitability to the Company's operations. The restructuring plan was
necessitated by decreased demand for the Company's products and the
Company's adoption of a new strategic direction. These actions resulted
in a net charge of approximately $3.7 million to the consolidated
statement of operations in 1997. The restructuring actions principally
consisted of termination of approximately 70 employees, closure of
certain sales and manufacturing facilities, cancellation of the related
leases, and write-off of excess manufacturing equipment and goodwill.
The Company expects that most of the contemplated restructuring actions
will be completed in 1998 and will be financed through working capital.
The following table lists the restructuring accrual activities from
July 1, 1997 to March 31, 1998 (in thousands):
7
<PAGE>
<TABLE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<CAPTION>
Write-off
Write-off Reduction in Closure of Excess
of Goodwill Work Force Facilities Assets Other Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Reserve provided $ 962 $ 500 $ 200 $ 1,500 $ 500 $ 3,662
Reserve utilized in third quarter (962) - (100) - - (1,062)
Reserve utilized in fourth quarter - (373) (8) (1,122) (500) (2,003)
--------------------------------------------------------------------------
Balance at December 31, 1997 - 127 92 378 - 597
Reserve utilized in first quarter - (354) (22) - - (376)
--------------------------------------------------------------------------
Balance at March 31, 1998 $ - $ (227) $ 70 $ 378 $ - $ 221
==========================================================================
</TABLE>
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following forward-looking statements are made in reliance upon the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
future events described in such statements involve risks and uncertainties,
including:
* the timely development and market acceptance of new products;
* the market demand by customers for the Company's existing products, including
demand by OEM customers for custom products;
* competitive actions, including pricing actions and the introduction of new
competitive products, that may affect the volume of sales of the Company's
products;
* uninterrupted supply of key components, including semiconductor devices and
other materials, some of which may be sourced from a single supplier;
* uninterrupted service by subcontractors;
* the ability of the Company to recruit, train and retain key personnel,
including engineers and other technical professionals;
* the development of new technologies rendering existing technologies and
products obsolete; and
* general market conditions.
In evaluating these forward-looking statements, consideration should also be
given to the Business Risks discussed below in this interim report.
Results of Operations
Net Sales
Net sales for the three months ended March 31, 1998 (the quarter) were $8.0
million, compared to $12.0 million for the three months ended March 31, 1997
(the comparable quarter). The decline was primarily attributed to decreased
shipments of FDDI adapters, and to a lesser extent, lower revenues for Fast
Ethernet switching products. The reduction of FDDI adapter shipments reflected a
continual decrease in the demand for products based on FDDI technology in a
matured market. Although unit shipments of Fast Ethernet switching products
increased 75% from the comparable quarter, revenue declined by $424,000,
reflective of general price erosion in the swift Ethernet switch market and the
Company's introduction of the NuCleus product line, which are low-priced
switches in motherboard form.
Sales to OEM customers were $5.4 million for the quarter, or 67% of net sales, a
decrease of 32% from the comparable quarter. The balance of the sales were to
the distribution channel reflecting a decrease of 35% from the comparable
quarter. The quarter's shipments to North America and International customers
declined to $5.1 million and $2.9 million, respectively, from $9.0 million and
$3.0 million, respectively, in the comparable quarter. The transitioning of the
Company's strategy to refocus on OEM customers, combined with decreased demand
for FDDI products by North America OEM customers, contributed to the decrease in
the North America region.
The Company expects the declining sales of FDDI products and the competitive
price pressures on the current Fast Ethernet products to be partially offset by
an increase in volume and by the addition of three new switching products to the
Fast Ethernet product line, the DS24, the UpLink and the NuLink. However, until
shipment of the Company's next generation of switches commences in the latter
part of 1998, the Company does not expect significant growth in sales, if any.
9
<PAGE>
Gross Profit/Margin
Gross margin decreased to 42% for the quarter from 49% for the comparable
quarter. This decrease was due to competitive price pressures on existing Fast
Ethernet products and the introduction of the low-priced NuCleus products,
offset in part by decreased amortization of intangible assets. The Company
expects that the gross margins will remain at the current level or be slightly
lower than the current quarter for the remainder of 1998.
Research and Development
Research and development expense for the quarter was $2.9 million, or 36% of net
sales, compared to $2.4 million, or 20% of net sales, for the comparable
quarter. The increase in expense is the result of resources expended in the
development of the Company's next generation of switching products, designated
as NuWave. Expenses included increased staffing, facilities, non-recurring
engineering costs and other overhead costs. As the resources allocated to NuWave
have reached their planned level, the Company expects expenditures on research
and development for the remainder of 1998 to remain consistent in absolute
dollars with the current quarter.
Marketing and Selling
Marketing and selling expense for the quarter was $1.8 million, or 22% of net
sales, compared to $3.9 million, or 32% of net sales, for the comparable
quarter. The decrease in expense was achieved by the reduction in staff and
closure of sales offices as part of the Company's restructuring in the third
quarter of 1997. The restructuring effort was in alliance with the Company's
strategy to refocus on the broadening of its OEM customer base, which requires
less sales and marketing resources. With the restructuring actions substantially
completed, the Company expects expenditures on marketing and selling for the
remainder of 1998 to remain consistent in absolute dollars with the current
quarter.
General and administrative
General and administrative expense for the quarter was $866,000, or 11% of net
sales, compared to $1.3 million, or 11% of net sales, in the comparable quarter.
The decrease in expenditures reflected lower headcount and a reduction in use of
outside consultants. The Company expects general and administrative expenditures
for the remainder of 1988 to remain consistent in absolute dollars with the
current quarter.
Interest Income
Interest income for the quarter was $382,000, compared to $414,000 in the
comparable quarter. The decrease was the result of reduced level of invested
funds as a result of the acquisition of NetVision Corporation in the second
quarter of 1997.
Income Taxes
The Company recorded a 35% tax benefit in the comparable quarter and did not
record a tax benefit for the current quarter as the benefit associated with net
operating loss carryback credits were completely utilized in 1997. Furthermore,
it is uncertain whether or not the net operating loss carryforward credits can
be realized in the foreseeable future.
Liquidity and Capital Resources
Cash used in operating activities for the quarter was $1.0 million and was
primarily due to a net loss and an increase in inventory, partially offset by an
increase in current liabilities. The increase in inventory reflected the ramp-up
for anticipated growth in sales of NuCleus products as well as the temporary
build-up of inventory during the transition to new turn-key manufacturers.
Accordingly, the increase in inventory also contributed to the increase in
accounts payable.
Cash used in investing activities for the quarter of $441,000 was primarily for
the purchase of capital equipment.
10
<PAGE>
At March 31, 1998, the Company's principal sources of liquidity were its cash,
cash equivalents and short-term investments of $29.1 million and its $10 million
bank line of credit. As of March 31, 1998, there were no borrowings outstanding
under the line of credit. The Company believes that its existing cash, cash
equivalents, short-term investments and the bank line of credit will be
sufficient to meet the Company's capital and operating requirements for at least
the next 12 months.
BUSINESS RISKS
In addition to the factors addressed in the preceding sections, certain
characteristics and dynamics of the Company's markets, technologies and
operations create risks to the Company's long-term success and to predictable
quarterly results. These risks will also affect the Company's ability to achieve
the results anticipated by the forward-looking statements contained in this
report. The Company's quarterly results have in the past varied and are expected
in the future to vary significantly as a result of factors such as the timing
and shipment of significant orders, new product introductions or technological
advances by the Company and its competitors, market acceptance of new or
enhanced versions of the Company's products, changes in pricing policies by the
Company and its competitors, the mix of distribution channels through which the
Company's products are sold, the mix of products sold, the accuracy of
resellers' and OEM's forecast of end-user demand, the ability of the Company to
obtain sufficient supplies of sole or limited source components for the
Company's products, the ability of turnkey manufacturers to meet the Company's
demand, and general economic conditions. In response to competitive pressures or
new product introductions, the Company may take certain pricing or marketing
actions that could materially and adversely affect the Company's operating
results. In the event of a reduction in the prices of its products, the Company
has committed to providing retroactive price adjustments on inventories held by
its distributors, which could have the effect of reducing margins and thereby
negatively impact operating results. In addition, changes in the mix of products
sold and the mix of distribution channels through which the Company's products
are sold may cause fluctuations in the Company's gross margins. The Company's
expense levels are based, in part, on its expectations of its future revenue
and, as a result, net income would be disproportionately affected by a reduction
in revenue. Due to the potential quarterly fluctuation in operating results, the
Company believes that quarter-to-quarter comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indicators of future performance.
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards, frequent new product introductions and
short product life cycles. These changes can adversely affect the business and
operating results of industry participants. The Company's success will depend
upon its ability to enhance its existing products and to develop and introduce,
on a timely and cost-effective basis, new products that keep pace with
technological developments and emerging industry standards and address
increasingly sophisticated customer requirements. The inability to develop and
manufacture new products in a timely manner, the existence of reliability,
quality or availability problems in the products or their component parts, the
failure to obtain reliable subcontractors for volume production and testing of
mature products, or the failure to achieve market acceptance would have a
material adverse effect on the Company's business and operating results.
The markets in which the Company competes are also characterized by intense
competition. Several of the Company's competitors have significantly broader
product offerings and greater financial, technical, marketing and other
resources and finished installed bases than the Company. These larger
competitors may also be able to obtain higher priority for their products from
distributors and other resellers that carry products of many companies. A number
of the Company's competitors were recently acquired, which is likely to permit
these competitors to devote significantly greater resources to the development
and marketing of competitive products. These competitive pressures could
adversely affect the Company's business and operating results.
11
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Description of Document
-------- -----------------------
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
None
12
<PAGE>
Signatures
Pursuant to the requirements of the Securities 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.
Date: May 13, 1998 By: \s\ ROBERT HERSH
-----------------
Robert Hersh
Vice President of Operations and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<CASH> 14,678
<SECURITIES> 14,392
<RECEIVABLES> 6,569
<ALLOWANCES> (756)
<INVENTORY> 2,504
<CURRENT-ASSETS> 41,799
<PP&E> 7,616
<DEPRECIATION> (3,797)
<TOTAL-ASSETS> 45,937
<CURRENT-LIABILITIES> 8,972
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 36,953
<TOTAL-LIABILITY-AND-EQUITY> 45,937
<SALES> 8,020
<TOTAL-REVENUES> 8,020
<CGS> 4,651
<TOTAL-COSTS> 4,651
<OTHER-EXPENSES> 5,496
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,745)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,745)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,745)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
