UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-23970
NETWORK PERIPHERALS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0216135
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1371 McCarthy Boulevard
Milpitas, California 95035
(Address, including zip code of principal executive offices)
(408) 321-7300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Common Stock
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 5, 1999 was $82,541,679 based upon the closing price of
the Registrant's Common Stock on the Nasdaq National Market System on that date.
The number of shares of the Registrant's Common Stock outstanding as of March 5,
1999 was 12,342,681.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting of
stockholders to be held on April 29, 1999 are incorporated by reference into
Part III of this Annual Report on Form 10-K.
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NETWORK PERIPHERALS INC.
FORM 10-K
TABLE OF CONTENTS
PART I Page
ITEM 1. Business............................................................ 3
ITEM 2. Properties.......................................................... 9
ITEM 3. Legal Proceedings................................................... 9
ITEM 4. Submission of Matters to a Vote of Security Holders................. 9
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters............................................. 10
ITEM 6. Selected Financial Data............................................. 11
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 12
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.......... 16
ITEM 8. Financial Statements and Supplementary Data......................... 17
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 33
PART III
ITEM 10. Directors and Executive Officers of the Registrant.................. 34
ITEM 11. Executive Compensation.............................................. 34
ITEM 12. Security Ownership of Certain Beneficial Owners and Management...... 34
ITEM 13. Certain Relationships and Related Transactions...................... 34
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 35
Signatures.......................................................... 37
Supplemental Schedule............................................... 38
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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 office
is located at 1371 McCarthy Boulevard, Milpitas, California 95035, and its
telephone number is (408) 321-7300.
BUSINESS
The Company designs, manufactures, markets and supports a full range of
10/100/1000 Layer 2 and Layer 3 Ethernet switching products for workgroups,
wiring closets and network backbones, and a full range of high performance FDDI
adapters and switches. These products are designed to increase the available
bandwidth and enhance the performance of corporate and departmental networks.
The Company delivers the most advanced high-speed network technologies to
preserve its customer's existing Ethernet investments.
The Company introduced its first FDDI network adapter products in 1990 and has
since established a leading share of the installed FDDI adapter market. The
Company also introduced its first FDDI concentrator product in 1991 and began
commercial shipments of its first FDDI LAN (local area network) switching
product, the EIFO series, in the first quarter of 1994. In 1995, the Company
announced its Fast Ethernet product line and made initial shipments of its Fast
Ethernet LAN switching products in early 1996. In 1997, the Company introduced
switches designed to interconnect workgroups to enterprise backbone networks,
switches with 10/100 auto-sensing features, and standard and custom OEM adapters
based on the industry standard PCI bus architecture. In the price-sensitive
market for Layer 2 switches, the Company in 1998 developed and shipped a full
range of 12-port, 16-port and 24-port Fast Ethernet hubs and switches with
advanced management features.
In March 1996, the Company acquired NuCom Systems, Inc. ("NuCom"), a
Taiwan-based networking company focused on Fast Ethernet switching products.
This acquisition enabled the Company to introduce a number of new Layer 2 Fast
Ethernet switching products during that year. A majority of the Company's
current Fast Ethernet product offerings are based on the switch architecture
developed by the research and development activities in Taiwan.
In April 1997, the Company acquired NetVision Corporation ("NetVision"), a
privately held company located in Long Island, New York. NetVision specialized
in the development of very high bandwidth Layer 3 LAN switching and gigabit
Ethernet technologies. This acquisition positioned the Company to develop its
next generation of Ethernet switching products to be introduced in mid-1999.
The Company markets its products worldwide through OEMs, distributors, VARs and
system integrators.
PRODUCTS
The Company's current line of products consists of a range of Fast Ethernet and
FDDI LAN switches and hubs, FDDI to Fast Ethernet bridges, FDDI Network
Interface Cards, and network management software. Most of these products are
based on core technology and proprietary ASIC components designed by the
Company. The products are offered in a variety of models, configurations and
forms.
The information in the following paragraphs contains forward-looking statements
describing new products that are expected to be available for shipment to the
Company's customers during 1999. The successful completion and shipment of these
products is subject to a number of uncertainties, including verification testing
to confirm that the products meet the Company's standards for quality,
reliability and interoperability; availability of components; pricing actions by
competitors that may render it unprofitable to introduce the products; market
acceptance of the products; and the emergence or broad acceptance of new
technologies that may render the products obsolete.
In the early stages of 1999, the Company once again consolidated its product
development efforts to better leverage core competencies and to bring
consistency and continuity to these efforts. Although the Company will continue
its sustaining engineering efforts of its legacy products, especially support of
its OEM base, the bulk of its engineering resources will concentrate on
development efforts to bring the NuWave Architecture Layer 3 gigabit family of
switches to market. The Company intends to introduce gigabit Ethernet solutions
aimed at the small-to-medium enterprises (SME) in mid-1999.
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NuSwitch Product Line
Network Adapter Products
The Company's line of FDDI network adapters connects high-performance servers or
desktop computers directly to 100 Mbps FDDI networks. The adapters support both
fiber and unshielded twisted pair (UTP) copper wiring and are available for
popular platform bus architectures, including SBus and PCI. Customized versions
have been developed for resale under OEM arrangements with Sun Microsystems and
Network Associates. The adapters and software developed for Sun Microsystems are
based on the Company's standard SBus architecture and PCI architecture. They
support Sun Microsystems' SPARC and UltraSPARC work station and server product
lines, including their current lines of PCI based workstations. The Network
Associates product is a customized version of the Company's PCI adapter with
enhanced features for use with the Network Associates Sniffer Network Analyzer.
The Company's adapters incorporate software drivers for leading network
operating systems including Novell NetWare, Microsoft NT, and Sun Microsystems'
Solaris. The Company provides a standard set of diagnostics, connection
management (CMT) and station management (SMT) software tools. CMT software
continuously monitors network connections for bit errors and network faults,
while SMT software provides network management and gathering of network
performance statistics.
LAN Switching Products
LAN Switches. In 1998, the Company added a number of new Fast Ethernet LAN
switching products to its NuSwitch product line that offers solutions ranging
from desktop to backbone connectivity, including the DS-12A and the DS-16, both
Layer 2 Ethernet switches. These two products are 10/100Mbps auto-sensing,
12-port and 16-port switches, with optional connections to either fiber or UTP.
They are designed to satisfy the requirements of mission critical networks
running high-demand applications in campus environments.
LAN Network Management Software. The Company believes that network management
software is an important tool for network administrators who need to manage,
maintain and control the operation of client/server remotely. The Company
provides standards-based network management software in all of its managed
products. The Company's LAN switching products come standard with SNMP and RMON
software that allows its switches to be configured and monitored from a
management station. In 1998, the Company introduced some revisions to its
NuSight SNMP management platform, which now provides RMON Manager tools for
network diagnostics and performance monitoring. NuSight 2.0 provides a graphical
view of the switching product to enable the network administrator to manage
network connections and configuration, gather statistics to monitor network
traffic and plan for future growth. It operates in a Microsoft Windows
environment, including Windows 95, Windows NT Workstation 4.0 and Windows NT
Server 4.0.
The Company intends to introduce a number of new products in 1999 based on its
revolutionary NuWave Architecture. NuWave products will be aimed at the rapidly
growing Layer 3 Fast Ethernet and gigabit switching markets. These products will
be high-density, low cost 10/100/1000 auto-sensing switches for use in
departmental networks and large corporate backbone networks.
NuWave Product Line
NuWave is an innovative line of Ethernet, Fast Ethernet, and gigabit Ethernet
solutions being designed for the SME market based on technology and ASICs
developed primarily by the Company.
The NuWave product family is expected to consist of very high bandwidth
switching platforms in flexible, "building block" form that offer high-density
switched/hub ports that are stackable and scaleable in performance and
configurations for networks up to 1,500 nodes with complex and stringent network
requirements. Networks of this scale require reliability, scalability and
flexibility since as many as 30% of their nodes move or change annually. Thus,
the devices themselves need to be intelligent, fault-tolerant and flexible in
their configurations while being affordable and simple to use.
The NuWave family of 10/100 and gigabit Ethernet switching solutions is being
designed with a 64-Gbps switching fabric to deliver wire-speed Layer 2 and Layer
3 (IP/IPX) switching for 10/100/1000 Mbps Ethernet networks in a scaleable and
non-blocking stackable form factor. The new platform is designed to accommodate
options such as high-speed LAN/WAN uplinks, advanced web-based management
functions, with intuitive, policy-based network management software, redundant
power supplies and flexible media connections -- capabilities that are found
currently only in expensive, large-scale enterprise systems.
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The NuWave switching family, with a very high bandwidth architecture and
flexible configuration plus a comprehensive collection of advanced switching and
network management functionalities, offers networking and system OEM customers a
next generation switching platform. The Company plans to use the NuWave
Architecture product line to penetrate the rapidly emerging gigabit and
stackable Layer 2/3 10/100 Ethernet switching market in 1999.
MARKETING, SALES AND SUPPORT
The Company sells its product worldwide through OEMs, VARs, distributors and
system integrators. As of December 31, 1998, the Company employed 24 full-time
technically trained marketing, sales and support personnel located in the United
States, the Netherlands, Singapore and Taiwan. These personnel, in addition to
traditional marketing and sales functions, are responsible for initiating and
developing relationships with major end-user accounts and with OEM leaders in
the computer networking industry. The Company believes that such relationships
are crucial to early development and deployment of optimal solutions for network
applications.
The majority of the Company's historical and current sales are to OEM customers
with the balance of the sales to distributors and VARs. While the Company does
not generally obtain long-term purchase commitments from its OEM customers, it
does customarily enter into contracts with OEM customers to establish the terms
and conditions of sales made pursuant to orders from OEMs. The Company's
standard products are distributed globally through the reseller channels in
North America, Asia and Europe.
In addition to North America, the Company's products are currently distributed
internationally, primarily in Europe and Asia. The Company has international
sales offices in the Netherlands, Taiwan and Singapore. Sales to customers
outside of North America represented 31% of the Company's net sales in 1998. The
geographic regions with the major portions of export sales in 1998, and the
approximate respective percentages represented by each, were Europe, 10% and
Asia, 21%. All payments for sales outside the United States are made in U.S.
dollars.
Sun Microsystems accounted for 35% of net sales in 1998. In the past, the
Company has experienced fluctuations in the volume of activity with individual
OEM customers and distributors as well as changes in its OEM customer and
distributor base, and it expects such fluctuations and changes to continue in
the future. The loss of a major customer, reductions of a major order or delay
in a major shipment could adversely affect the Company's business and financial
performance.
OEM customers typically provide the Company with a rolling forecast placed two
to three months in advance of shipment, while resellers typically provide the
Company with orders placed 30 days or less in advance of shipment. However, due
to order cancellations and order changes and depending on the mix between OEM
and reseller orders and the ability or resources of the Company to meet demand
schedules, the Company's backlog may or may not be indicative of revenue in the
future periods.
The information in the following paragraph contains forward looking statements
describing the Company's sales and marketing strategy. There are a number of
uncertainties that could affect the success of the plan including the timely
availability of new products by the Company, reliability, price and performance
characteristics of the components, new and existing products, the introduction
of similar products by competitors, pricing actions by competitors and the
inability of the Company to recruit and retain required sales and marketing
staff with the needed skills.
In 1999, the Company's sales and marketing strategy for its Layer 3 Fast
Ethernet and gigabit Ethernet switching products will emphasize on developing an
OEM customer base, a potentially lucrative market. The Company will continue its
commitment to support its existing base of resellers and seek new opportunities
in its reseller channels.
RESEARCH AND DEVELOPMENT
The information in this section contains forward-looking statements describing
the Company's product development plans for 1999 and beyond. The successful
development and introduction of new products is subject to a number of
uncertainties, including the ability of the organization to recruit, train and
retain adequate numbers of professional engineers, successful design of
proprietary application specific integrated circuits and computer software,
design, development and verification testing to confirm that the products meet
the Company's standards for quality, reliability and interoperability,
availability of components, pricing actions by competitors that may render it
unprofitable to introduce the products, unanticipated technical obstacles or
delays, and the emergence or wide acceptance of new technologies that could
render the products obsolete.
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The Company has developed certain core competencies applicable to multiple
network technologies such as FDDI and Ethernet, ASIC design, and client/server
operating system drivers and software modules. The Company believes its focus on
core competencies such as these has been, and will continue to be, a significant
factor in its competitive ability to bring emerging network solutions to the
market in a timely manner.
Network Bandwidth Switching. The majority of the Company's research and
development efforts has been and will continue to be on developing its NuWave
family of products. The Company is designing a range of high-density ASICs that
provide the Company's NuWave architectural platform with a 64 Gbps switching
fabric for gigabit and stackable Layer 2 and 3 10/100/1000 Ethernet switches.
Through its acquisition of NetVision Corporation in April 1997, the Company
obtained a team of technologists experienced in very high bandwidth switching
architecture, specifically in Layer 3 gigabit Ethernet switching technology. The
Company has also implemented its Distributed Memory Switching Architecture and
ASIC expertise in products based on both FDDI and Fast Ethernet. Semiconductor
foundries, such as NEC, UMC, MMC and ATMEL, manufacture the Company's ASIC
components.
System Architecture Interfaces and Network Protocol Software. Through the
development of its collection of 100 Mbps network adapters, the Company has
gained expertise in hardware and software support for a variety of standard and
proprietary system bus architectures and network operating systems.
Server Bandwidth Optimization. The Company has designed its network operating
system software to address the specific characteristics of each type of adapter
and server architecture. This design provides optimal network bandwidth to high
power servers. As new versions of network operating systems are introduced, the
Company plans to devote development efforts not only to maintain compatibility
with existing versions but also to take advantage of enhanced features and
performance improvements.
As of December 31, 1998, the Company employed 38 personnel in research and
development. The Company has developed products designed for integration in the
proprietary systems of major networking companies including Sun Microsystems,
Newbridge Networks, Network Associates, NetFRAME, NCR, and 3Com. The Company
believes that its relationships with these network technology leaders establish
credibility with end-user customers who demand interoperability of their
networking devices. The Company has active development relationships with
Novell, Microsoft and Sun Microsystems for advanced products for NetWare,
Windows NT and Solaris, respectively.
MANUFACTURING
Throughout 1998 and in the early stages of 1999, the Company partnered with an
established turnkey manufacturer in the Silicon Valley to produce and ship the
Company's FDDI products. The Company also has an in-house manufacturing team in
Taiwan with recently purchased state-of-the-art manufacturing equipment, which
produced its Ethernet products. In the first half of 1999, the Company intends
to transition its entire manufacturing operations to Taiwan. The team of 51
full-time personnel in this manufacturing facility is highly experienced in
advanced manufacturing and test engineering in ongoing reliability/quality
assurance. The manufacturing operation is ISO certified. Dependent upon volumes
in 1999, the Company expects to reduce the cost of products substantially as a
direct result of this transition.
Certain key components used in the Company's products such as ASICs,
microprocessors and controller chips, media interface components and power
supplies are currently available only from single or limited sources. The
Company also has developed proprietary ASICs used in existing products and in
the NuWave Architecture, which will be sourced from a single foundry. While the
Company believes it would be able to obtain alternative sources for key
components and for the ASICs, difficulty in obtaining these supplies could have
a material adverse effect on the Company's results of operations.
COMPETITION
The Company believes that the principal competitive factors in the networking
market include the completeness of product offerings, product quality, price and
performance, adherence to industry standards, the degree of interoperability
with other networking equipment and time to market for new products.
The computer networking industry is intensely competitive and is significantly
affected by product introductions and market activities of industry
participants. A number of competitors offer products which compete, both in
price and functionality, favorably with one or more of the Company's products.
Many of the Company's current and potential competitors have significantly
broader product offerings, greater financial, technical, marketing and other
resources, and larger installed bases than the Company. Increased
competition could result in price reductions, reduced margins and loss
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of market share, all of which would materially adversely affect the Company's
business, operating results and financial condition. In a declining market, the
Company's FDDI network adapters compete on a product-by-product basis with
products offered primarily from Interphase, SysKonnect and 3Com. In a maturing
market, the Company's Layer 2 Fast Ethernet switching solutions compete with
products offered by Cisco, 3Com, Nortel, Cabletron and others. A number of
companies developing similar technologies have been acquired by the Company's
larger competitors. These acquisitions are likely to permit the Company's
competitors to devote significantly greater resources to the development and
marketing of new competitive products and the marketing of existing products to
their installed bases. The Company expects that competition will increase as a
result of these and other industry consolidations and alliances. These
competitive pressures could adversely affect the Company's business and
operating results. The Layer 3 Fast Ethernet and gigabit switching markets are
in the early stages of development with competition for these market coming from
relatively new market entrants such as Extreme Networks and Foundry Networks, as
well as from the more established companies such as Nortel, Cisco and 3Com. The
Company believes that this market will consolidate over time and that this
consolidation could adversely effect the Company's ability to compete
effectively with its larger competitors.
PROPRIETARY RIGHTS
The Company's success is dependent upon its proprietary technology. To date, the
Company has relied principally upon patent, copyright, and trade secret laws to
protect its proprietary technology. The Company generally enters into
confidentiality or license agreements with its employees, distributors,
customers and potential customers and limits access to, and distribution of, the
source code to its software and other proprietary information. The Company has
been issued one U.S. patent and has filed three additional U.S. patent
applications covering certain aspects of its technology. The process of
obtaining patents can be expensive, and there can be no assurance that the
patent application will result in the issuance of patents, that any issued
patents will provide the Company with meaningful competitive advantages, or that
challenges will not be issued against the validity or enforceability of any
patent issued to the Company.
The Company has entered into patent license agreements relating to certain
technologies used in FDDI networks. The Company believes that the terms of such
licenses are comparable to those made available to other companies in the
networking industry. In addition, certain technology used in the Company's
products is licensed from third parties, generally on a non-exclusive basis.
These licenses generally require the Company to pay royalties and to fulfill
confidentiality obligations. Termination of such licenses could adversely affect
the Company's business and operating results.
The Company has agreed in certain cases to indemnify its customers for liability
incurred in connection with the infringement of a third party's intellectual
property rights. Although the Company has not received notice from any of its
customers advising the Company of any alleged infringement of a third party's
intellectual property rights, there can be no assurance that such
indemnification of alleged liability will not be required from the Company in
the future.
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EXECUTIVE OFFICERS *
The executive officers of the Company and their ages are as follows:
Name Age Position
- --------------------------------------------------------------------------------
William Rosenberger 49 President, Chief Executive Officer, and
Director
Wilson Cheung 35 Vice President - Finance and Chief
Financial Officer
Jerry McDowell 53 Vice President - Marketing
James Sullivan 46 Vice President - Sales
Robert Zecha 41 Vice President - Research and Development
Mr. Rosenberger has served as the President, Chief Executive Officer and a
director of the Company since July 1998. From January 1996 to June 1998, Mr.
Rosenberger was President and Chief Executive Office of NetAccess, Inc., a wide
area networking equipment manufacturer. From October 1995 to December 1995, Mr.
Rosenberger was Vice President of sales and business development for NetVision
Corporation, an Ethernet switching company. From March 1993 to June 1995, Mr.
Rosenberger was General Manager of ACSYS, Inc., a networking equipment
manufacturer. Prior to March 1993, Mr. Rosenberger was President and Chief
Executive Officer of Netronix, Inc., a networking hardware designer and
manufacturer.
Mr. Cheung has served as an executive officer since October 1998. Preceding the
appointment to this office, Mr. Cheung held various management positions since
joining the Company in July 1995. Prior to joining the Company, Mr. Cheung was a
financial analyst at Sybase Inc. from July 1994 through June 1995. From 1992
through June 1994, Mr. Cheung held various senior financial analyst positions at
Raychem Corp. Mr. Cheung was also a senior auditor at Coopers & Lybrand.
Mr. McDowell has served in executive positions and Boards of Directors for
several data communications research and manufacturing firms prior to joining
the Company in November, 1998. He was a co-founder, President and Executive
Director of Research of The Robert Frances Group, Vice President of Marketing
and Business Development at Objective Systems Integrators and Senior Director of
Marketing and Business Development at Boole & Babbage. Prior to those positions,
Mr. McDowell served in executive and management positions at Dataquest, The Meta
Group, Wang Laboratories Paradyne and others.
Mr. Sullivan has served as an executive officer since joining the Company in
July 1997. Prior to joining the Company, he was with Novell, Inc. from July 1995
to July 1997 where he held several sales management positions, including Vice
President of Worldwide OEM Sales and Senior Director of North American Channel
Sales. Prior to joining Novell, he held various sales positions with Arrow
Electronics, Canon and Lanier Business Products.
Mr. Zecha has served as Vice President of Research and Development since April
1997. From January 1997 to April 1997, Mr. Zecha served as President and Chief
Technology Officer of NetVision Corporation, an Ethernet switching company. From
November 1993 to January 1997, Mr. Zecha was a Vice President and Chief
Technology Officer of NetVision Corporation. Mr. Zecha co-founded and held a
Board of Director position with NetVision Corporation from November 1993 through
April 1997. Prior to November 1993, Mr. Zecha held engineering management
positions at Standard Microsystems Corporation, a networking company.
* As of December 31, 1998
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EMPLOYEES
As of December 31, 1998 the Company employed 133 persons including 38 in
research and development activities, 51 in manufacturing and support, 24 in
sales, marketing and technical support, and 20 in finance and administration.
Approximately 70 employees were in international locations. None of the
Company's employees are currently represented by a labor union. The Company
considers its relations with its employees to be good. The Company attempts to
maintain competitive compensation benefits, equity participation and work
environment policies to assist in attracting and retaining qualified personnel.
Competition for employees in the Company's industry and geographical area is
intense and there can be no assurance that the Company will be successful in
attracting and retaining such personnel.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Milpitas, California
and consist of approximately 18,000 square feet under lease that will expire in
October 2000. Additionally, the Company has research and development facilities
in Taiwan and Long Island, New York. The Company has international sales offices
in the Netherlands, Singapore, and Taiwan. The Company believes that its
existing facilities and equipment are generally adequate to meet its immediate
and foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
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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 March 5, 1999, there were approximately 4,000
stockholders of record. The following table sets forth, for the fiscal periods
indicated, the high and low closing prices for the Common Stock, all as reported
by Nasdaq.
1996 High Low
----------------------------------------------------------------
First Quarter $ 14.75 $ 10.25
Second Quarter 18.63 13.00
Third Quarter 16.63 12.25
Fourth Quarter 17.75 14.63
1997
----------------------------------------------------------------
First Quarter $ 20.88 $ 8.63
Second Quarter 10.94 6.50
Third Quarter 7.94 5.38
Fourth Quarter 7.25 4.94
1998
----------------------------------------------------------------
First Quarter $ 8.69 $ 6.25
Second Quarter 6.94 3.75
Third Quarter 4.88 3.00
Fourth Quarter 4.88 2.31
The Company has never paid or declared any cash dividends. It is the present
policy of the Company to retain earnings to finance the growth and development
of the business and, therefore, the Company does not anticipate paying cash
dividends on its Common Stock in the foreseeable future.
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<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 28,585 $ 34,798 $ 53,080 $ 47,144 $ 33,463
Cost of sales 17,250 25,341 28,590 24,690 17,507
-----------------------------------------------------------------------
Gross profit 11,335 9,457 24,490 22,454 15,956
-----------------------------------------------------------------------
Operating expenses:
Research and development 11,485 9,757 8,570 4,811 3,473
Marketing and selling 6,010 13,242 11,849 7,319 4,361
General and administrative 3,234 3,982 3,378 2,226 1,618
Acquired research and development in
process and product integration costs -- 6,462 13,732 -- --
Restructuring expense -- 3,662 -- -- --
-----------------------------------------------------------------------
Total operating expenses 20,729 37,105 37,529 14,356 9,452
-----------------------------------------------------------------------
Income (loss) from operations (9,394) (27,648) (13,039) 8,098 6,504
Interest income, net 1,505 1,680 1,745 2,236 577
-----------------------------------------------------------------------
Income (loss) before income taxes (7,889) (25,968) (11,294) 10,334 7,081
Provision for (benefit from) income taxes -- (3,526) 608 3,617 1,416
-----------------------------------------------------------------------
Net income (loss) $ (7,889) $(22,442) $(11,902) $ 6,717 $ 5,665
=======================================================================
Net income (loss) per share:
Basic $ (0.64) $ (1.85) $ (1.01) $ 0.60 $ 1.72
=======================================================================
Diluted $ (0.64) $ (1.85) $ (1.01) $ 0.57 $ 0.64
=======================================================================
Weighted average common shares:
Basic 12,281 12,154 11,760 11,147 3,302
=======================================================================
Diluted 12,281 12,154 11,760 11,736 8,906
=======================================================================
</TABLE>
December 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
Balance Sheet Data:
Working capital $26,070 $34,439 $54,997 $63,269 $55,720
Total assets 35,549 45,889 71,434 70,111 65,209
Stockholders' equity 30,972 38,679 59,857 65,709 57,758
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following forward-looking statements are made in reliance upon the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
future events described in such statements involve risks and uncertainties,
including:
o the timely development and market acceptance of new products;
o the market demand by customers for the Company's existing products,
including demand by OEM customers for custom products;
o competitive actions, including pricing actions and the introduction of new
competitive products, that may affect the volume of sales of the Company's
products;
o uninterrupted supply of key components, including semiconductor devices and
other materials, some of which may be sourced from a single supplier;
o uninterrupted service by subcontractors;
o the ability of the Company to recruit, train and retain key personnel,
including engineers and other technical professionals;
o the development of new technologies rendering existing technologies and
products obsolete;
o the economies of countries where the Company's products are distributed;
and
o general market conditions.
In evaluating these forward-looking statements, consideration should also be
given to the Business Risks discussed in a subsequent section of this annual
report.
RESULTS OF OPERATIONS
Net Sales
Net sales were $28.6, $34.8 and $53.1 million in 1998, 1997 and 1996,
respectively. The sequential decrease in sales from 1996 to 1998 was primarily
attributed to decreased shipments of products based on the FDDI technology. Net
sales of FDDI products totaled $17.5 million in 1998, compared to $22.9 million
in 1997. Net sales of Fast Ethernet switching products remained relatively
consistent: net sales totaled $11.1 million in 1998 and $11.9 million in 1997.
Unit shipments of Fast Ethernet switching products increased slightly in 1998
primarily due to the introduction of the Fast Ethernet commodity-like products
in 1998. However, the increase was offset by the declining average unit sales
price due to price competition in the commodity-like products market.
Sales to OEM customers were $19.4, $22.0 and $30.5 million in 1998, 1997 and
1996, respectively. As a percentage of net sales, shipments to OEM customers
represented 68%, 63% and 57% in 1998, 1997 and 1996, respectively. The balance
of sales was made to distribution channels. Distribution sales were $9.2, $12.8
and $22.6 million in 1998, 1997 and 1996, respectively. Sales to customers in
North America were $19.7, $25.8 and $42.0 million in 1998, 1997 and 1996,
respectively. The balance of sales to customers in Asia and Europe totaled $8.9,
$9.0 and $11.1 million in 1998, 1997 and 1996, respectively.
The decrease in sales to OEM customers and customers in North America in 1998
and 1997 reflected decreased shipments of FDDI products as discussed above. The
decrease in distribution sales as well as international sales was primarily
attributed to the Company's refocusing its effort to strengthen OEM
relationships, weakness in the Asian economies and the maturity of the Fast
Ethernet products in general.
As the factors attributable to the decrease in sales continue to exist, the
Company does not expect noticeable growth in sales until the volume shipment of
the next generation Layer 3 gigabit-class switches, NuWave, commences in
mid-1999. The majority of the NuWave products are expected to be sold to OEM
customers.
Gross Profit/Margin
The gross margin in 1998 was 40%, compared to gross margins of 27% and 46% in
1997 and 1996, respectively. The gross margin in 1998 improved from 1997 due to
the absence of significant inventory charges recorded in 1997. However, the 1998
gross margin was below the historical level (prior to 1997) due to decreased
sales of higher-margin FDDI products, competitive pricing on the Fast Ethernet
switching products, and the introduction of the lower-priced Fast
Ethernet commodity-like products in 1998. The gross margin in 1997
was exceptionally low, which reflected a write-off of slow-
12
<PAGE>
moving and obsolete inventories totaling $5.1 million and one-time charges
associated with the transfer of production of FDDI products to turnkey
manufacturers.
The Company expects that, prior to the introduction of the NuWave products in
mid-1999, the gross margin may decrease slightly from the 1998 level primarily
due to the declining sales of FDDI products and continued price competition. To
reduce manufacturing costs, the Company intends to terminate its turnkey
manufacturing model in the U.S. and relocate all manufacturing operations to its
facilities in Taiwan during the first half of 1999. This transition, in
conjunction with potentially higher margins of the NuWave products commencing
shipment in mid-year, is expected to yield a higher gross margin in 1999.
Research and Development
Research and development expenses were $11.5, $9.8 and $8.6 million, in 1998,
1997 and 1996, respectively. As a percentage of the respective net sales,
expenses were 40%, 28% and 16%. Expenses in 1997 and 1996 were net of contract
funding of $217,000 and $556,000, respectively. No contract funding was received
in 1998. The increase in expenses in 1998 and 1997 was primarily attributed to
increased resources expended in the development of the Company's next generation
Layer 3 gigabit-class switches, NuWave. Significant expenditures, including
outside consultant fees and non-recurring engineering charges, were incurred to
develop the NuWave ASICs (Application-Specific Integration Circuits). In
addition, the Company incurred a one-time charge of approximately $500,000 in
the third quarter of 1998 in connection with the elimination of certain
non-critical personnel in research and development, in an effort to further
streamline operations.
The Company continues to invest a substantial amount of its resources in
developing the NuWave products. However, the Company expects that the research
and development expenses will gradually decline from the current level after the
development of the ASICs is completed and the volume shipment of the NuWave
products commences in mid-1999.
Marketing and Selling
Marketing and selling expenses were $6.0, $13.2 and $11.8 million in 1998, 1997
and 1996, respectively. As a percentage of the respective net sales, expenses
were 21%, 38% and 22%. The decrease in expenses in 1998 was attributed to the
reduction in staff and closure of regional sales offices in conjunction with the
Company's restructuring of its business in 1997. The restructuring effort was in
alliance with the Company's strategy to focus on the broadening of its OEM
customer base, which required less sales and marketing resources. The increase
in expenses in 1997 primarily reflected an overall increase in payroll and
overhead costs as a result of the acquisition of NuCom and an escalated effort
to expand the existing distribution channel through mid-1997.
The Company expects to increase spending in marketing and selling activities in
1999 in order to launch the NuWave product line and to establish a leadership
presence within the industry through various advertising campaigns, direct
mailings and trade show exhibitions.
General and Administrative
General and administrative expenses were $3.2, $4.0 and $3.4 million in 1998,
1997 and 1996, respectively. As a percentage of net sales, expenses were 11% for
both 1998 and 1997 and 6% for 1996. The decrease in expenses in 1998 reflected a
reduction in payroll costs as a result of the restructuring in 1997 and a
diminished utilization of outside consultants. The increase in expenses in 1997
from 1996 reflected additional payroll and other overhead costs associated with
the acquisition of NuCom. The Company expects general and administrative
expenses in 1999 to remain relatively consistent with 1998.
Acquired Research and Development In Process and Product Integration Costs
In April 1997, the Company acquired NetVision Corporation, a company
specializing in LAN switching and gigabit Ethernet technologies. The Company
expensed $6.5 million of acquired research and development in process as a
result of the acquisition. In March 1996, the Company acquired NuCom Systems,
Inc., a Taiwan-based company developing Fast Ethernet LAN switching products.
The Company expensed $13.7 million of acquired research and development in
process and product integration costs as a result of the acquisition. See Note 8
of Notes to Consolidated Financial Statements for more details in connection
with the acquisitions discussed above.
13
<PAGE>
Restructuring
In the third quarter of 1997, the Company incurred a charge of $3.7 million for
the restructuring of its business. The restructuring included a reduction in
work force, closure of certain sales and manufacturing facilities, retirement of
impaired assets and write-off of goodwill associated with the acquisition of
NuCom. The Company completed the restructuring in the second quarter of 1998.
See Note 9 of Notes to Consolidated Financial Statements.
Interest Income
Interest income was $1.5 million in 1998, compared to $1.7 million in 1997 and
1996. The decrease was primarily due to a lower aggregate balance of cash, cash
equivalents and short-term investments in 1998. The Company maintained a
comparable return on investment of $1.7 million in 1997 compared to 1996,
despite a lower invested fund balance in 1997. This higher rate of return
reflected a shift from short-term investments in tax-exempt securities to
taxable corporate securities in mid-1997.
Income Taxes
The Company did not record a tax benefit associated with the net loss incurred
in 1998, as the realization of deferred tax assets is deemed uncertain based on
evidence currently available and, accordingly, a full valuation allowance has
been provided. During 1998, the Company received an income tax refund of $4
million as a result of the carryback claim of the 1997 net operating loss to
offset net income recognized in 1995 and 1994. The related tax benefit was fully
recognized in 1997.
The Company's effective tax rate for 1997 and 1996 was a benefit of 13.6% and a
provision of 5.4%, respectively. The effective tax rate for 1997 reflected a net
loss and was reduced by a full valuation allowance provided against deferred tax
assets. The effective tax rates for 1997 and 1996 excluded the charges of
acquired research and development in process, which are non-deductible for
income tax purposes.
Euro Conversion
The Company has a wholly owned subsidiary in the Netherlands, which is one of
the 11 European countries participating in the adoption of a common currency,
the Euro, on January 1, 1999. Following the introduction of the Euro, the legacy
currency in each participating country remains as legal tender until January 1,
2002. During the transition period, either the Euro or the legacy currency may
be used to pay for goods and services. Beginning January 1, 2002, participating
countries will issue new Euro-denominated bills and coins, and the legacy
currency will no longer be the legal tender for any transactions after July 1,
2002.
The Company's subsidiary in the Netherlands is a sales office for the entire
European region. Sales made to all European countries are denominated in US
dollars. Expenses incurred by this subsidiary are currently paid in guilders,
the legacy currency. In 1998, sales to all European customers accounted for 10%
of the Company's total sales, and 6% of the Company's total operating expenses
were attributable to this subsidiary. Due to the immateriality of the
Netherlands subsidiary relative to the Company's operations as a whole, the
Company believes the Euro conversion will not have any significant impact to the
Company's results of operations during and after the transition period.
Year 2000 Compliance
Many computer systems were designed using two digits rather than four digits to
define a specific year. Thus as the Year 2000 approaches, the improper
identification of the year could result in system failures or erroneous
calculations. To address this issue, the Company is conducting a program (the
Program) to assess and address Year 2000 issues for its products, information
systems, operational infrastructure, and suppliers.
The Company has completed an assessment of its current and installed base of
products. The Company believes that substantially all products manufactured on
or after August 1, 1997 are Year 2000 compliant, with the exception of the EIFO
family of switches, which sold minimally in 1997 and 1998. For the older
products and the EIFO products, which are deemed not in compliance, the Company
believes they will continue to perform all essential and material functions
after the year 2000; but in limited circumstances, they may incorrectly display
or report the date within the network management software. Given that the
installed base of non-compliant products has diminished as time elapsed and that
the non-compliant products will perform their standard functions, the Company
expects most of its end-users will not have issue with the Company's products in
the year 2000.
14
<PAGE>
The Company has substantially completed its assessment and remediation of its
information systems. With the recent implementation of an ERP (enterprise
resource planning) and standardization of its network and desktop applications
completed in 1998, the Company believes its information systems in its
headquarters are in compliance with year 2000. Similarly, the Company's remote
locations, in New York and in the Netherlands, have completed an update of its
information systems and are also believed to be in compliance. The Company's
manufacturing facility in Taiwan is in its final stages of upgrading its
information systems, including ERP, and is expected to be in compliance by June
1999.
In 1998, the Company purchased and put into operation a new SMT (surface mount
technology) line in its manufacturing facility where substantially all of its
manufacturing will be performed in 2000 and beyond. Certification from the
manufacturer of the equipment has not yet been received. However, due to the
newness of the equipment, the Company believes that embedded chips in this
equipment are likely to be year 2000 compliant. The Company's telecommunication
systems, security system, electrical power system and other mission critical
systems in its operational infrastructure in all locations are currently being
assessed for compliance. Completion of this phase of the Program is expected in
June 1999.
The Company is conducting a survey of all its suppliers and third parties for
their year 2000 readiness and is expected to complete this assessment by June
1999. The Company is currently developing a plan to address circumstances of
non-compliance of a supplier or third party.
A contingency plan is being established and is expected to be completed by June
1999. As the Company's Program is substantially complete, the incremental cost
to fully complete the Program in 1999 is expected to be less than $100,000.
Despite the Company's efforts (1) to identify the Year 2000 compliance of its
products and the effects of any non-compliance, (2) to assess and mitigate
non-compliance of its information systems and its operational infrastructure,
and (3) to address suppliers readiness, the Company cannot be certain that all
areas have been identified or that the solutions implemented to address
non-compliance will be successful. There remains a risk that the failures and
difficulties encounter in the Program may disrupt operations and cause material
adverse effects on the Company's result of operations and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $26.1 million and $34.4 million at December
31, 1998 and December 31, 1997, respectively, and the current ratio (ratio of
current assets to current liabilities) was 6.7 to 1 and 5.8 to 1, respectively.
The aggregate balance of cash, cash equivalents and short-term investments,
which decreased to $23.4 million at December 31, 1998 from $30.5 million at
December 31, 1997, was used primarily to finance the Company's operations and
capital expenditures. In 1998, net cash used in operating activities was $4.2
million, which was principally attributed to the net loss for the year of $7.9
million, partially offset by an income tax refund of $4 million. In 1997, net
cash used in operating activities was $6.9 million, which was attributed to the
net loss for the year of $22.4 million, partially offset by non-cash charges of
$12.1 million in total and a decrease in inventories of $6.8 million. The
Company expects the deficiency in cash flow from operations to continue until
after the volume shipment of the NuWave products starts in mid-1999 and overall
sales begin to improve.
The Company's capital expenditures totaled $2.6 million and $2.3 million in 1998
and 1997, respectively, and were related to purchases of equipment used in
production and development activities and other computer software and equipment
for the upgrade and enhancement of the information systems. In 1999, the Company
plans to incur capital expenditures of approximately $1.3 million.
The Company's principal sources of liquidity are its cash, cash equivalents and
short-term investments. The Company also has a revolving line of credit
agreement, which provides for borrowings up to $5 million, none of which has
been drawn down. The Company was in compliance with all financial covenants
under the line-of-credit agreement. The Company believes that its current
balance of cash, cash equivalents, and short-term investments and its borrowing
capacity are sufficient to satisfy the Company's working capital and capital
expenditure requirements for the next 12 months.
BUSINESS RISKS
In addition to the factors addressed in the preceding sections, certain
characteristics and dynamics of the Company's markets, technologies and
operations create risks to the Company's long-term success and to predictable
quarterly results. These risks will also affect the Company's ability to achieve
the results anticipated by the forward-looking statements contained
in this report. The Company's quarterly results have in the
past varied and are expected in the future to vary
15
<PAGE>
significantly as a result of factors such as the timing and shipment of
significant orders, new product introductions or technological advances by the
Company and its competitors, market acceptance of new or enhanced versions of
the Company's products, changes in pricing policies by the Company and its
competitors, the mix of distribution channels through which the Company's
products are sold, the mix of products sold, the accuracy of resellers' and
OEM's forecast of end-user demand, the ability of the Company to obtain
sufficient supplies of sole or limited source components for the Company's
products, the ability of turnkey manufacturers to meet the Company's demand, and
general economic conditions. In response to competitive pressures or new product
introductions, the Company may take certain pricing or marketing actions that
could materially and adversely affect the Company's operating results. In the
event of a reduction in the prices of its products, the Company has committed to
providing retroactive price adjustments on inventories held by its distributors,
which could have the effect of reducing margins and operating results. In
addition, changes in the mix of products sold and the mix of distribution
channels through which the Company's products are sold may cause fluctuations in
the Company's gross margins. The Company's expense levels are based, in part, on
its expectations of its future revenue and, as a result, net income would be
disproportionately affected by a reduction in revenue. Due to the potential
quarterly fluctuation in operating results, the Company believes that
quarter-to-quarter comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indicators of future performance.
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards, frequent new product introductions and
short product life cycles. These changes can adversely affect the business and
operating results of industry participants. The Company's success will depend
upon its ability to enhance its existing products and to develop and introduce,
on a timely and cost-effective basis, new products that keep pace with
technological developments and emerging industry standards and address
increasingly sophisticated customer requirements. The inability to develop and
manufacture new products in a timely manner, the existence of reliability,
quality or availability problems in the products or their component parts,
failure by its foundry to fabricate and supply proprietary ASICs, the failure to
obtain reliable subcontractors for volume production and testing of mature
products, or the failure to achieve market acceptance would have a material
adverse effect on the Company's business and operating results.
The markets in which the Company competes are also characterized by intense
competition. Several of the Company's competitors have significantly broader
product offerings and greater financial, technical, marketing and other
resources and finished installed bases than the Company. These larger
competitors may also be able to obtain higher priority for their products from
distributors and other resellers that carry products of many companies. A number
of the Company's competitors were recently acquired, which is likely to permit
these competitors to devote significantly greater resources to the development
and marketing of competitive products. These competitive pressures could
adversely affect the Company's business and operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's cash equivalents and short-term investments ("investments") are
exposed to financial market risk due to fluctuation in interest rates and
foreign exchange rates, which may affect its interest income and the fair values
of its investments. The Company manages the exposure to financial market risk by
performing ongoing evaluation of its investment portfolio and investing in
short-term investment grade corporate securities, which mature within the next
12 months. In addition, the Company does not use investments for trading or
other speculative purposes. The effect of fluctuation in foreign exchange rates
is immaterial as the majority of the investments held by its foreign
subsidiaries are denominated in US dollars. For the year ended December 31,
1998, the average rate of return on the investments was approximately 5.5%. A
hypothetical 10% fluctuation in interest rate in 1999 may change the interest
income by approximately $130,000. Due to the short maturities of its
investments, the carrying value approximates the fair value, and the impact of
the fluctuation in interest rate to the carrying value is deemed immaterial.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements: Page
Report of Independent Accountants....................................... 18
Consolidated Balance Sheets at December 31, 1998 and 1997............... 19
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996.................................................. 20
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996..................................... 21
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996.................................................. 22
Notes to Consolidated Financial Statements.............................. 23
Financial Statement Schedule:
For the three years ended December 31, 1998, 1997 and 1996
Schedule II - Valuation and Qualifying Accounts...................... 38
Schedules other than those listed above have been omitted since either they are
not required or the information is included in the financial statements included
herewith.
17
<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, 1998 and 1997 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 25, 1999
18
<PAGE>
<TABLE>
NETWORK PERIPHERALS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<CAPTION>
December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,537 $ 16,094
Short-term investments 17,814 14,371
Accounts receivable, net of allowance for doubtful accounts and
returns; 1998, $523, and 1997, $1,184 3,430 5,170
Inventories 3,124 1,417
Income tax refund receivable -- 3,983
Prepaid expenses and other current assets 742 614
----------------------------
Total current assets 30,647 41,649
Property and equipment, net 4,560 3,876
Other assets 342 364
----------------------------
$ 35,549 $ 45,889
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,450 $ 1,671
Accrued liabilities 2,127 5,539
----------------------------
Total current liabilities 4,577 7,210
----------------------------
Commitments (Note 5)
Stockholders' equity:
Preferred Stock, $0.001 par value, 2,000,000 shares authorized;
no shares issued or outstanding -- --
Common Stock, $0.001 par value, 20,000,000 shares authorized;
1998, 12,292,000, and 1997, 12,252,000 shares issued and outstanding 12 12
Additional paid-in capital 64,060 63,878
Accumulated deficit (33,100) (25,211)
----------------------------
Total stockholders' equity 30,972 38,679
----------------------------
$ 35,549 $ 45,889
============================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<CAPTION>
Years Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 28,585 $ 34,798 $ 53,080
Cost of sales 17,250 25,341 28,590
----------------------------------------------
Gross profit 11,335 9,457 24,490
----------------------------------------------
Operating expenses:
Research and development 11,485 9,757 8,570
Marketing and selling 6,010 13,242 11,849
General and administrative 3,234 3,982 3,378
Acquired research and development in process and
product integration costs -- 6,462 13,732
Restructuring expense -- 3,662 --
----------------------------------------------
Total operating expenses 20,729 37,105 37,529
----------------------------------------------
Loss from operations (9,394) (27,648) (13,039)
Interest income 1,505 1,680 1,745
----------------------------------------------
Loss before income taxes (7,889) (25,968) (11,294)
Provision for (benefit from) income taxes -- (3,526) 608
----------------------------------------------
Net loss $ (7,889) $(22,442) $(11,902)
==============================================
Net loss per share:
Basic $ (0.64) $ (1.85) $ (1.01)
==============================================
Diluted $ (0.64) $ (1.85) $ (1.01)
==============================================
Weighted average common shares:
Basic 12,281 12,154 11,760
==============================================
Diluted 12,281 12,154 11,760
==============================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
20
<PAGE>
<TABLE>
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<CAPTION>
Retained
Additional Earnings
Common Stock Paid-In Notes (Accumulated
Shares Amount Capital Receivable Deficit) Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 11,268 $ 11 $ 56,579 $ (14) $ 9,133 $ 65,709
Repayment of stockholders' notes
receivable -- -- -- 14 -- 14
Issuance of Common Stock upon
exercise of stock options 200 -- 228 -- -- 228
Issuance of Common Stock under
employee stock purchase plan 45 -- 385 -- -- 385
Income tax benefit associated with
nonqualified stock options -- -- 28 -- -- 28
Issuance of Common Stock for
acquisition of NuCom Systems 441 1 5,341 -- -- 5,342
Foreign currency translation -- -- 53 -- -- 53
adjustment
Net loss -- -- -- -- (11,902) (11,902)
--------------------------------------------------------------------------------
Balance at December 31,1996 11,954 12 62,614 -- (2,769) 59,857
Issuance of Common Stock upon
exercise of stock options 224 -- 410 -- -- 410
Issuance of Common Stock under
employee stock purchase plan 74 -- 451 -- -- 451
Income tax benefit associated with
nonqualified stock options -- -- 403 -- -- 403
Net loss -- -- -- -- (22,442) (22,442)
--------------------------------------------------------------------------------
Balance at December 31, 1997 12,252 12 63,878 -- (25,211) 38,679
Issuance of Common Stock upon
exercise of stock options 8 -- 38 -- -- 38
Issuance of Common Stock under
employee stock purchase plan 32 -- 144 -- -- 144
Net loss -- -- -- -- (7,889) (7,889)
--------------------------------------------------------------------------------
Balance at December 31, 1998 12,292 $ 12 $ 64,060 $ -- $(33,100) $ 30,972
================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
21
<PAGE>
<TABLE>
NETWORK PERIPHERALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
<CAPTION>
Years Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (7,889) $(22,442) $(11,902)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,960 1,969 2,111
Amortization of goodwill 40 1,350 665
Acquired research and development in process -- 6,462 13,032
Deferred income taxes -- 2,289 (56)
Changes in assets and liabilities:
Accounts receivable 1,740 3,189 (1,845)
Inventories (1,707) 6,811 (664)
Income tax refund receivable 3,983 (3,580) --
Prepaid expenses and other assets (146) 1,026 862
Accounts payable 779 (1,321) 1,439
Accrued liabilities (2,956) (2,644) 1,623
--------------------------------------------
Net cash provided by (used in) operating activities (4,196) (6,891) 5,265
--------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (2,644) (2,270) (2,927)
Purchases of short-term investments (3,443) -- --
Proceeds from sales or maturity of short-term investments -- 7,979 2,581
Cash paid for acquisition, net of cash acquired -- (6,449) (10,401)
Holdback amount from acquisition (456) (659) 1,115
--------------------------------------------
Net cash used in investing activities (6,543) (1,399) (9,632)
--------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock 182 861 613
Repayment of stockholders' notes receivable -- -- 14
--------------------------------------------
Net cash provided by financing activities 182 861 627
--------------------------------------------
Effect of exchange rate changes on cash -- -- 53
--------------------------------------------
Net decrease in cash and cash equivalents (10,557) (7,429) (3,687)
Cash and cash equivalents, beginning of year 16,094 23,523 27,210
--------------------------------------------
Cash and cash equivalents, end of year $ 5,537 $ 16,094 $ 23,523
============================================
Supplemental disclosure of cash flow information
Cash paid during the year for:
Income taxes $ 67 $ 158 $ 245
Non-cash transactions:
Income tax benefit associated with nonqualified stock $ -- $ 403 $ 28
options
Common Stock issued for acquisition of NuCom $ -- $ -- $ 5,342
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
22
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Network Peripherals Inc., a Delaware corporation (the "Company"), designs,
develops, and manufactures high performance networking solutions, which it
markets primarily to original equipment manufacturers, distributors, value-added
resellers and system integrators. The Company's solutions are designed for use
in workgroups, wiring closets and backbones.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents. The Company's short-term
investments, which consist of debt securities with maturities greater than 90
days and less than one year, have been classified as available-for-sale. For the
years ended December 31, 1998 and 1997, there were no material unrealized gains
or losses. Substantially all short-term investments are held in the Company's
name by major financial institutions.
Revenue Recognition
Revenue from product sales is recognized upon product shipment, provided that no
significant obligations remain and collectability is probable. The Company
provides to certain distributors limited rights of return and price protection
on unsold inventory when specific conditions exist. Provisions for estimated
costs of warranty repairs, returns and allowances, and retroactive price
adjustments are recorded at the time products are shipped (see Sales Reserves
below).
Funding under certain development contracts is recognized based upon the
achievement of specified contract milestones. Such funding is recognized as a
reduction of the related development costs and totaled approximately $217,000
and $556,000 in 1997 and 1996, respectively. No such funding was recognized in
1998.
Sales Reserves
The Company provides allowances for accounts receivables deemed uncollectible
and for sales returns and other credits, including credits for retroactive price
adjustments on sales transacted within 90 days prior to the period-end. As of
December 31, 1998 and 1997, the Company's allowances for such potential events
totaled approximately $523,000 and $1,184,000, respectively. As a percentage of
sales transacted within 90 days prior to December 31, 1998 and 1997, the
allowances for sales returns and other credits were 8% and 18%, respectively.
23
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash, cash equivalents, short-term
investments and trade receivables. The Company's cash investment policies limit
investments to those that are short-term and low risk. Concentration of credit
risk with respect to trade receivables is generally limited due to the large
number of customers comprising the Company's customer base, their dispersion
across many different geographies, the Company's on-going evaluation of its
customers' credit worthiness, and the established long-term relationship with
certain customers.
Inventories
Inventories are stated at the lower of cost, using the first-in, first-out
method, or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful life of the asset, typically
three years. Depreciation of the Enterprise Resource Planning systems, the
information systems infrastructure, and certain manufacturing equipment is based
on an estimated useful life of five years.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the
identifiable net assets acquired and is amortized on a straight-line basis over
the expected period of benefit, generally five years. Periodically, the Company
evaluates the goodwill for impairment and estimates the future undiscounted cash
flows of the acquired business to ensure that the carrying value has not been
impaired. As of December 31, 1998 and 1997, goodwill, net of accumulated
amortization, was $133,000 and $173,000, respectively, and was included in other
assets.
Software Development Costs
The Company's software products are integrated into its hardware products and
are typically available for general release to customers within 30 days after
technological feasibility has been achieved. Accordingly, the production costs
incurred after the establishment of technological feasibility and before general
release to customers are immaterial, thus the Company does not capitalize any
software development costs.
Income Taxes
The Company accounts for income taxes under the liability method, which
recognizes deferred tax assets and liabilities for the expected tax consequences
of temporary differences between the tax basis of assets and liabilities and
their financial statement reported amounts.
Foreign Currency Translation
The functional currency of the Company's subsidiaries in Taiwan and the
Netherlands is the U.S. dollar. Accordingly, gains or losses arising from the
translation of foreign currency financial statements and transactions are
included in determining consolidated results of operations.
Employee Benefit Plans
The Company has stock option plans and offers a 401(k) plan covering all of its
U.S. employees. The 401(k) plan provides for matching contributions determined
at the Company's discretion. No such matching contributions were made in 1998,
1997 and 1996. The Company does not have postretirement or postemployment
benefit plans; therefore, Statements of Financial Accounting Standards ("SFAS")
No. 87, 106 and 112 regarding pension, other postretirement and postemployment
benefit plans do not affect the Company's financial statements.
24
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock-based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), as permitted under the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Under APB 25, if the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Net Income Per Share
Basic earnings per share ("EPS") are computed as net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock-based compensation including stock options, restricted stock
awards, warrants, and other convertible securities using the treasury stock
method.
At December 31, 1998, options to purchase 2,798,603 shares of the Company's
common stock were outstanding. During 1998, the Company incurred losses, such
that the inclusion of potential common shares would result in an antidilutive
per share amount. As such, no adjustment is made to the basic EPS to arrive at
the diluted EPS.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for
financial statements issued for periods beginning after December 15, 1997. SFAS
131 establishes standards for public companies to report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. In accordance with
the provisions of SFAS 131, the Company operated in one business segment in 1998
and 1997.
Reclassifications
Certain reclassifications have been made to the prior years' amounts in order to
conform to the current year's presentation.
25
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - BALANCE SHEET COMPONENTS (in thousands)
December 31,
1998 1997
- --------------------------------------------------------------------------------
Cash, cash equivalents, and short-term investments:
Cash and cash equivalents
Cash and money market accounts $ 2,508 $ 2,532
Corporate debt securities 3,029 13,562
--------------------
5,537 16,094
Short-term investments
Corporate debt securities 17,814 14,371
--------------------
$ 23,351 $ 30,465
====================
Inventories:
Raw materials $ 882 $ 158
Work-in-process 572 898
Finished goods 1,670 361
--------------------
$ 3,124 $ 1,417
====================
Property and equipment:
Computer and equipment $ 8,267 $ 6,918
Furniture and fixtures 920 895
Leasehold improvements 306 303
--------------------
9,493 8,116
Accumulated depreciation (4,933) (4,240)
--------------------
$ 4,560 $ 3,876
====================
Accrued liabilities:
Salaries and benefits $ 973 $ 1,750
Warranty 450 513
Co-op advertising and market development funds 386 298
Royalty 250 746
Reserve for contract settlements -- 1,000
Restructuring expense -- 597
Holdback amount from acquisition -- 456
Other 68 179
--------------------
$ 2,127 $ 5,539
====================
26
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - LINE OF CREDIT
The Company currently has a $5 million revolving bank line of credit, which
expires on July 31, 1999. Borrowings under the line of credit bear interest at
the lower of the bank's prime rate or the London Interbank Offered Rate plus
2.5% and are secured by the Company's receivables, inventory, and other tangible
assets. There were no borrowings under the line of credit in 1998 and 1997. As
of December 31, 1998, the Company was in compliance with the financial covenants
required by the line of credit agreement.
NOTE 5 - COMMITMENTS
The Company leases its corporate headquarters under an operating lease that
expires in October 2000. The Company also has research and development
facilities in New York and manufacturing facilities in Taiwan under various
operating leases expiring in August 2002 and May 2001, respectively. Rent
expense for all Company facilities was $764,000, $931,000, and $868,000 in 1998,
1997, and 1996, respectively.
Future minimum lease payments as of December 31, 1998 are as follows (in
thousands):
Years ending December 31,
1999 $ 754
2000 689
2001 250
2002 67
-------
$ 1,760
=======
The Company maintains letter-of-credit facilities of $3 million in total with
two financial institutions. Approximately $60,000 of letters of credit was
issued and outstanding at December 31, 1998.
The Company has entered into licensing agreements with third parties to use
certain technologies in the Company's products. Under the terms of the license
agreements, the Company pays a royalty based upon a percentage of the sales
price or units shipped. Royalty expenses incurred are charged to cost of sales
in the period of the related sales and are payable in quarterly installments.
NOTE 6 - CAPITAL STOCK
Employee Stock Purchase Plan
Effective May 1998, the Company terminated the Employee Stock Purchase Plan (the
"Plan"), which allowed eligible employees to purchase the Company's Common Stock
at a discount through payroll deductions. Prior to the termination of the Plan,
the Company reserved 250,000 shares of Common Stock for issuance under the Plan,
and the Company has issued 223,606 shares of Common Stock for an aggregate
purchase price of $1,434,000.
Stock Option Plans
The Company's 1997 Stock Plan, as amended, (the "1997 Plan") provides for the
granting of incentive and nonstatutory stock options and restricted stock awards
to eligible employees, directors and consultants. The Company has reserved
2,500,000 shares of the Company's Common Stock for issuance under the 1997 Plan.
Pursuant to the 1997 Plan, the exercise price per share of each stock option is
determined by the Company's Board of Directors, provided that (i) the exercise
price for an incentive stock option is not less than the fair market value of a
share of Common Stock on the date of the grant and (ii) the exercise price for a
nonstatutory stock option is not less than 85% of the fair market value of a
share of Common Stock on the date of the grant. Options under the 1997 Plan vest
over a period determined by the Board of Directors, which is generally four
years. As of December 31, 1998, options to purchase 1,795,093 shares of Common
Stock were outstanding; 704,907 shares were available for future grants; and
2,500,000 shares were authorized but unissued.
27
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Upon adoption of the 1997 Plan in April 1997, the Company terminated the 1993
Stock Option Plan (the "1993 Plan") and the 1996 Nonstatutory Stock Option Plan
(the "1996 Plan"). No further stock options were granted under the 1993 Plan and
the 1996 Plan. Outstanding options and shares issued upon the exercise of
options granted continue to be governed by the terms and conditions of the
respective plans. As of December 31, 1998, options to purchase a total of
958,510 shares of Common Stock under the 1993 Plan and the 1996 Plan were
outstanding.
The 1994 Outside Directors Stock Option Plan (the "1994 Plan"), as amended,
which provides for the automatic granting of nonqualified stock options to
directors of the Company ("Outside Director"), has a total of 150,000 shares
reserved for issuance. Pursuant to the 1994 Plan, the Company grants to each new
Outside Director an option to purchase 15,000 shares of Common Stock and to each
Outside Director an option to purchase 5,000 shares of Common Stock on the date
of each annual meeting of stockholders. The exercise price of the stock options
will be the fair market value of the Common Stock on the date of grant, and
options vest over a period of four years. At December 31, 1998, options to
purchase 45,000 shares of Common Stock were outstanding; 105,000 shares were
available for future grants; and 150,000 shares of Common Stock were authorized
but unissued under the 1994 Plan.
The Company has elected to continue to follow APB 25 in accounting for its
employee stock options and adopted the disclosure-only requirements of SFAS 123.
SFAS 123 requires the disclosure of pro forma net income and earnings per share
as if the Company had accounted for its employee stock options under the fair
value method in accordance with SFAS 123. The fair value of these options is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions: zero dividend yield; expected
volatility of 82.35% in 1998, 77.24% in 1997, and 69.36% in 1996; risk-free
interest rate of 4.64% in 1998, 5.36% in 1997 and 5.48% in 1996; and all options
are exercised at vesting.
Had compensation cost for the Company's employee stock-based plans been
determined based on the fair value at the grant date for awards consistent with
the provisions of SFAS 123, the Company's net loss and net loss per share would
have been as follows (in thousands, except per share amount):
1998 1997 1996
- --------------------------------------------------------------------------------
Net loss - as reported $ (7,889) $ (22,442) $ (11,902)
Net loss - pro forma (11,368) (28,003) (14,782)
Net loss per share:
Basic - as reported (0.64) (1.85) (1.01)
Basic - pro forma (0.93) (2.30) (1.26)
Diluted - as reported (0.64) (1.85) (1.01)
Diluted - pro forma (0.93) (2.30) (1.26)
Due to the broad decline in the market price of the Company's Common Stock
during 1997, a substantial amount of stock options granted had exercise prices
above the current market price. On July 25, 1997 and subsequently October 31,
1997, the Company offered stock option plan participants the right to replace
any remaining unexercised stock options with an equal number of options at an
exercise price equal to the closing market price on such dates.
28
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<CAPTION>
Outstanding Exercisable
-------------------------------------------- ------------------------
Weighted Average Weighted Weighted
Range of Remaining Contractual Average Average
Exercise Prices Shares Life (in years) Exercise Price Shares Exercise Price
--------------- -------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
$ 0.30 - $ 3.00 453,950 8.89 $ 2.36 74,900 $ 0.35
3.88 - 4.94 2,121,133 8.48 4.68 775,642 4.85
5.00 - 7.50 149,077 8.97 5.95 36,647 5.86
7.63 - 9.13 48,443 8.86 8.05 10,051 8.17
11.63 - 15.00 26,000 7.51 13.69 16,082 13.51
--------- -------
2,798,603 8.57 4.52 913,322 4.71
========= =======
</TABLE>
Stock options generally expire in 10 years from the date they are granted.
<TABLE>
The following table summarizes stock option activities for all of the Company's
stock option plans:
<CAPTION>
Options Weighted Average
Outstanding Exercise Price
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1995 1,120,126 $ 10.19
Granted 2,905,155 14.72
Exercised (199,698) 1.14
Canceled (995,216) 15.76
----------
Balance at December 31, 1996 (555,417 shares
exercisable at a weighted average price
of $8.47 per share) 2,830,367 13.52
Granted 1,592,700 7.31
Exercised (224,160) 1.89
Canceled (1,602,345) 11.83
----------
Balance at December 31, 1997 (312,413 shares
exercisable at a weighted average price
of $5.31 per share) 2,596,562 5.41
Granted 1,298,150 4.11
Exercised (8,747) 4.23
Canceled (1,087,362) 6.17
----------
Balance at December 31, 1998 (913,322 shares
exercisable at weighted average price
of $4.71 per share) 2,798,603 4.52
==========
</TABLE>
The weighted average estimated grant date fair value, as defined by SFAS 123,
for options granted under the stock option plans during 1998, 1997 and 1996 were
$1.98, $3.29 and $5.66, respectively. The weighted average estimated grant date
fair value, as defined by SFAS 123, for purchase rights granted under the
employee stock purchase plan during 1998, 1997 and 1996 were $1.96, $1.43 and
$2.89, respectively.
29
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - INCOME TAXES
The following is a geographical breakdown of consolidated loss before income
taxes (in thousands):
Years ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
Domestic $ (7,302) $(21,761) $ (1,626)
Foreign (587) (4,207) (9,668)
--------------------------------------------
$ (7,889) $(25,968) $(11,294)
============================================
Provision for (benefit from) income taxes consists of the following (in
thousands):
Years ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
Current:
Federal $ -- $(5,815) $ 174
State -- -- 54
Foreign -- -- 436
-----------------------------------------
-- (5,815) 664
-----------------------------------------
Deferred:
Federal -- 1,993 (46)
State -- 296 (10)
-----------------------------------------
-- 2,289 (56)
-----------------------------------------
$ -- $(3,526) $ 608
=========================================
<TABLE>
The provision for income taxes differs from the amount of income tax determined
by applying the applicable U.S. statutory income tax rate to pre-tax loss as
follows:
<CAPTION>
Years ended December 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate (35.0%) (35.0%) (35.0%)
State tax, net of federal impact -- (6.0) 0.3
Research and development tax credits -- (0.8) (1.1)
Tax-exempt interest income -- (1.0) (4.5)
Provision for valuation allowance on deferred tax assets 35.0 22.1 --
Nondeductible acquisition costs -- 8.6 45.6
Other -- (1.5) 0.1
-------------------------------------
-- (13.6%) 5.4%
=====================================
</TABLE>
Deferred tax assets consist of the following (in thousands):
December 31,
1998 1997
- --------------------------------------------------------------------------------
Net operating loss and credits carryforwards $ 3,920 $ 1,575
Reserves and accruals not currently deductible 1,104 1,947
Inventory 1,437 1,789
Other 275 432
--------------------
Gross deferred tax assets 6,736 5,743
Valuation allowance (6,736) (5,743)
--------------------
Net deferred tax assets $ -- $ --
====================
30
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Management believes that, based on a number of factors, it is not more likely
than not that the deferred tax assets will be utilized, such that a full
valuation allowance has been recorded.
As of December 31, 1998, the Company has Federal net operating loss
carryforwards of approximately $8.5 million which will expire beginning in 2013.
For state tax purposes, the Company has net operating loss carryforwards of
approximately $8.5 million which will expire beginning in 2002.
NOTE 8 - ACQUISITIONS
Effective April 29, 1997, the Company acquired NetVision Corporation
("NetVision"), a privately held company engaged in the development of very high
bandwidth LAN switching and gigabit Ethernet technologies, at a cost of $6.5
million, including payments to NetVision stockholders, the assumption of certain
liabilities, and transaction expenses. Effective March 21, 1996, the Company
completed its acquisition of NuCom Systems, Inc. ("NuCom"), a Taiwan-based
company, by purchasing all the outstanding shares of NuCom in exchange for $11.2
million in cash, 440,748 shares of the Company's Common Stock valued at $5.3
million, plus product integration costs for an aggregate purchase price of $17.1
million. These transactions were accounted for using the purchase method, and
the purchase price was allocated to the assets acquired and liabilities assumed
based on the estimated fair market values at the date of acquisition. In each
transaction, the research and development in process represented the estimated
current fair market value of specified technologies which had not reached
technological feasibility and had no future uses. The results of the operations
acquired were included with those of the Company from the date of acquisition.
The allocation of the purchase price was as follows (in thousands):
Acquisition of NetVision:
Research and development, in process $ 6,462
Goodwill 200
Assets 44
Liabilities assumed (257)
--------
Total $ 6,449
========
Acquisition of NuCom:
Research and development, in process $ 13,032
Other intangible assets 1,716
Cash and cash equivalents 1,357
Current assets 3,138
Non-current assets 613
Property and equipment 479
Current liabilities assumed (3,235)
--------
Total $ 17,100
========
The total purchase price is as follows:
Cash payment $ 11,158
Issuance of common stock 5,342
Other expenses 600
--------
Total $ 17,100
========
31
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The pro forma combined results of operations of the Company, NetVision and NuCom
for the years ended December 31, 1997 and 1996, as if the acquisitions had
occurred at the beginning of the respective years, after giving effect to
certain pro forma adjustments, are as follows (in thousands, except per share
amount):
1997 1996
- --------------------------------------------------------------------------------
Net sales $ 34,798 $ 53,080
============================
Net income (loss) $ (15,214) $ 1,884
============================
Net income (loss) per share:
Basic $ (1.29) $ 0.17
============================
Diluted $ (1.29) $ 0.16
============================
The foregoing pro forma results of operations excluded the amortization of
goodwill and the write-off of acquired research and development in process
resulting from the acquisitions.
NOTE 9 - RESTRUCTURING
<TABLE>
In the third quarter of 1997, the Company announced and began to implement a
restructuring plan aimed at reducing costs and restoring profitability to the
Company's operations. The restructuring plan was necessitated by decreased
demand for the Company's products and the Company's adoption of a new strategic
direction. These actions resulted in a net charge of approximately $3.7 million
to the consolidated statement of operations in 1997. The restructuring actions
principally consisted of termination of approximately 70 employees, closure of
certain sales and manufacturing facilities, cancellation of the related leases,
and write-off of excess manufacturing equipment and goodwill. The Company
completed the restructuring in the second quarter of 1998. The following table
lists the restructuring accrual activities from July 1, 1997 to December 31,
1998 (in thousands):
<CAPTION>
Reduction Write-off
Write-off of in Work Closure of Of Excess
Goodwill 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)
Reserve utilized in second quarter -- (221) -- -- -- (221)
----------------------------------------------------------------------------------
Balance at December 31, 1998 $ -- $ (448) $ 70 $ 378 $ -- $ --
==================================================================================
</TABLE>
NOTE 10 - SALES BY GEOGRAPHY
Export sales to customers outside of North America represented 31%, 26%, and 21%
of the Company 's net sales for the years ended December 31, 1998, 1997 and
1996, respectively. As a percentage of net sales, export sales to Europe and
Asia for 1998, 1997 and 1996 were 10% and 21%; 11% and 15%; and 8% and 13%,
respectively. Sales to Taiwan accounted for 17% of the Company's net sales in
1998. No one foreign country accounted for more than 10% of the Company's net
sales in 1997 and 1996.
32
<PAGE>
NETWORK PERIPHERALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - CONCENTRATIONS
In 1998, the Company purchased more than $7 million of its finished good
inventories from a turnkey manufacturer. In the event that this turnkey
manufacturer fails to deliver the required volumes or decides to discontinue its
production for the Company, management believes that other subcontractors or the
Company's manufacturing facility in Taiwan can provide for comparable production
capacities. However, an abrupt change in turnkey manufacturer may cause delay in
production and possibly loss in sales, which could adversely impact the
Company's operating results. The Company's chairman of the Board of Directors is
a director of this turnkey manufacturer.
The following table summarizes the percentage of net sales accounted for by the
Company's significant customers with sales of 10% or more:
Years ended December 31,
1998 1997 1996
---------------------------------------------------------
Customer A 35% 39% 26%
Customer B 11% -- --
Customer C -- -- 15%
Customer D -- -- 12%
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There is no reportable information under this item.
33
<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 1999 Annual
Meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under "Compensation of
Executive Officers" and "Report of the Compensation Committee on Executive
Compensation" in the Company's Proxy Statement for the 1999 Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under "Share Ownership by
Principal Stockholders and Management" and "Election of Directors" in the
Company's Proxy Statement for the 1999 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under "Compensation Committee
Interlocks and Insider Participation Decisions" in the Company's Proxy Statement
for the 1999 Annual Meeting.
34
<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 II of this Annual Report on Form 10-K.
(a) Exhibits
--------
3.1(1) Amended and Restated Certificate of Incorporation.
3.2(1) By-Laws.
4.1(1) Fourth Amended and Restated Investor Rights Agreement
dated July 15, 1993.
10.1(1) Form of Indemnity Agreement for directors and officers.
10.2(1) Amended and Restated 1993 Stock Option Plan and forms of
agreement thereunder.
10.4(1) 1994 Outside Directors Stock Option Plan and form of
agreement thereunder.
10.9(1) Facilities Lease dated August 8, 1991 with John
Arrillaga, Trustee, or his Trustee, or his Successor
Trustee UTA dated 7/20/77, as amended, and Richard T.
Peery, Trustee, or his Successor Trustee UTA dated
7/20/77, as amended.
10.12(1)(2) OEM Purchase Agreement with Network General Corporation
dated March 4, 1991.
10.14(3) Amendment No. 1, dated June 1, 1994, to Facilities Lease
with John Arrillaga, Trustee, or his Successor Trustee
UTA dated 7/20/77, as amended, and Richard T. Peery,
Trustee, or his Successor Trustee UTA dated 7/20/77, as
amended.
10.18(4) Purchase Agreement among Network Peripherals Inc.,
Network Peripherals, Ltd., NuCom Systems, Inc., and the
shareholders of NuCom, dated January 31, 1996.
10.22(5) Line of Credit Agreement with Sumitomo Bank dated
October 2, 1996.
10.23(5) Agreement with Glenn Penisten dated May 15, 1996.
10.26(7) Purchase Agreement among Network Peripherals Inc.,
NetVision Corporation, and the shareholders of
NetVision, dated April 29, 1997.
10.28(6) Amended 1994 Outside Directors Option Plan.
10.29(8) Development and Purchase Agreement with Sun
Microsystems, Inc., dated February 25, 1994.
10.30(8) Corporate Supply Agreement with Sun Microsystems, Inc.,
dated March 31, 1997.
10.31(9) Modification Agreement, dated August 29, 1997, to amend
certain terms of the Line of Credit Agreement with
Sumitomo Bank of California.
10.32(9) Second Modification Agreement, dated November 17, 1997,
to amend certain terms of the Line of Credit Agreement
with Sumitomo Bank of California.
10.33(9) Amended and Restated Salary Continuation Agreement with
Pauline Lo Alker dated October 31, 1997.
10.35(9) Salary Continuation Agreement with Glenn Penisten dated
October 31, 1997.
10.37(9) Salary Continuation Agreement with James Sullivan dated
October 31, 1997.
10.39 Amended 1997 Stock Plan.
10.40 Third Modification Agreement, dated August 18, 1998, to
amend certain terms of the Line of Credit Agreement with
Sumitomo Bank of California.
10.41 Employment Agreement with William Rosenberger dated June
11, 1998, and subsequent amendment dated October 19,
1998.
10.42 Salary Continuation Agreement with Jerry McDowell dated
October 19, 1998.
10.43 Salary Continuation Agreement with Wilson Cheung dated
January 13, 1999.
10.44 Salary Continuation Agreement with Robert Zecha dated
January 13, 1999.
21 Subsidiaries of the Registrant.
23.1(9) Consent of Independent Accountants dated March 27, 1998.
23.2 Consent of Independent Accountants dated March 22, 1999.
27 Financial Data Schedule.
35
<PAGE>
(b) Reports on Form 8-K
None
(1) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 (File No. 33-78350).
(2) Confidential treatment has been granted as to part of this
Exhibit.
(3) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1994 (File
No. 0-23970).
(4) Incorporated by reference to the Registrant's report on Form
8-K filed on March 31, 1996 (File No. 0-23970).
(5) Incorporated by reference to the corresponding exhibit in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 0-23970).
(6) Incorporated by reference to the corresponding exhibit in the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 1997 (File No. 0-23970).
(7) Incorporated by reference to the Registrant's report on Form
8-K filed on May 14, 1997 (File No. 0-23970).
(8) The Registrant has filed portions of these agreements
separately with the Commission and has requested that those
portions be afforded confidential treatment.
(9) Filed with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
36
<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\ WILSON CHEUNG
-----------------------------
Wilson Cheung
Vice President of Finance and
Chief Financial Officer
(Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title
\s\ WILLIAM ROSENBERGER President, Chief Executive Officer
-------------------------- and Director (Principal Executive
William Rosenberger Officer)
\s\ WILSON CHEUNG Vice President of Finance and
-------------------------- Chief Financial Officer
Wilson Cheung (Principal Financial and
Accounting Officer)
\s\ STEVE BELL Director
--------------------------
Steve Bell
\s\ MICHAEL GARDNER Director
--------------------------
Michael Gardner
\s\ CHARLES HART Director
--------------------------
Charles Hart
\s\ GLENN PENISTEN Chairman of the Board
--------------------------
Glenn Penisten
37
<PAGE>
NETWORK PERIPHERALS INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
SCHEDULE II
<CAPTION>
Additions
-------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
of Year Expenses Accounts Deductions of Year
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts $ 200 $-- $ 21 $ (12) $ 209
Allowance for sales returns and other
credits 538 -- 6,743 (6,336) 945
------------------------------------------------------------------
Total allowances for doubtful accounts and
sales returns 738 -- 6,764 (6,348) 1,154
Year ended December 31, 1997
Allowance for doubtful accounts 209 -- 138 (49) 298
Allowance for sales returns and other credits 945 -- 3,593 (3,652) 886
------------------------------------------------------------------
Total allowances for doubtful accounts and
sales returns 1,154 -- 3,731 (3,701) 1,184
Year ended December 31, 1998
Allowance for doubtful accounts 298 -- 49 (264) 83
Allowance for sales returns and other credits 886 -- 187 (633) 440
------------------------------------------------------------------
Total allowances for doubtful accounts and
sales returns $ 1,184 $-- $ 236 $ (897) $ 523
==================================================================
</TABLE>
38
NETWORK PERIPHERALS INC.
1997 STOCK PLAN
(As Amended Through March 24, 1998)
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 Establishment. The Network Peripherals Inc. 1997 Stock Plan (the
"Plan") is hereby established effective as of February 18, 1997 (the "Effective
Date").
1.2 Purpose. The purpose of the Plan is to advance the interests of the
Participating Company Group and its stockholders by providing an incentive to
attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
1.3 Term of Plan. The Plan shall continue in effect until the earlier
of its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued and all restrictions on
such shares under the terms of the Plan and the agreements evidencing Awards
granted under the Plan have lapsed. However, all Incentive Stock Options shall
be granted, if at all, within ten (10) years from the earlier of the date the
Plan is adopted by the Board or the date the Plan is duly approved by the
stockholders of the Company.
2. DEFINITIONS AND CONSTRUCTION.
2.1 Definitions. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "Award" means an Option or Restricted Stock.
(b) "Board" means the Board of Directors of the Company. If
one or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(c) "Code" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(d) "Committee" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(e) "Company" means Network Peripherals Inc., a Delaware
corporation, or any successor corporation thereto.
<PAGE>
(f) "Consultant" means any person, including an advisor,
engaged by a Participating Company to render services other than as an Employee
or a Director.
(g) "Director" means a member of the Board or of the board of
directors of any other Participating Company.
(h) "Disability" means the permanent and total disability of
the Participant within the meaning of Section 22(e)(3) of the Code.
(i) "Employee" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(j) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(k) "Fair Market Value" means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
(i) If, on such date, there is a public market for
the Stock, the Fair Market Value of a share of Stock shall be the closing sale
price of a share of Stock (or the mean of the closing bid and asked prices of a
share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq
National Market, the Nasdaq Small-Cap Market or such other national or regional
securities exchange or market system constituting the primary market for the
Stock, as reported in the Wall Street Journal or such other source as the
Company deems reliable. If the relevant date does not fall on a day on which the
Stock has traded on such securities exchange or market system, the date on which
the Fair Market Value shall be established shall be the last day on which the
Stock was so traded prior to the relevant date, or such other appropriate day as
shall be determined by the Board, in its sole discretion.
(ii) If, on such date, there is no public market for
the Stock, the Fair Market Value of a share of Stock shall be as determined by
the Board without regard to any restriction other than a restriction which, by
its terms, will never lapse.
(l) "Incentive Stock Option" means an Option intended to be
(as set forth in the Option Agreement) and which qualifies as an incentive stock
option within the meaning of Section 422(b) of the Code.
(m) "Insider" means an officer or a Director of the Company or
any other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
(n) "Nonstatutory Stock Option" means an Option not intended
to be (as set forth in the Option Agreement) or which does not qualify as an
Incentive Stock Option.
2
<PAGE>
(o) "Option" means a right granted under Section 6 to purchase
Stock (subject to adjustment as provided in Section 4.2) pursuant to the terms
and conditions of the Plan. An Option may be either an Incentive Stock Option or
a Nonstatutory Stock Option.
(p) "Option Agreement" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee and any shares acquired upon the exercise
thereof.
(q) "Optionee" means a person who has been granted one or more
Options.
(r) "Parent Corporation" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(s) "Participant" means a person who has been granted one or
more Awards.
(t) "Participating Company" means the Company or any Parent
Corporation or Subsidiary Corporation.
(u) "Participating Company Group" means, at any point in time,
all corporations collectively which are then Participating Companies.
(v) "Restricted Stock" means Stock (subject to adjustment as
provided in Section 4.2) granted or sold to a Participant pursuant to Section 7
and the terms and conditions of the Plan.
(w) "Restricted Stock Agreement" means a written agreement
between the Company and a Participant setting forth the terms, conditions and
restrictions applying to the Restricted Stock acquired by the Participant.
(x) "Rule 16b-3" means Rule 16b 3 under the Exchange Act, as
amended from time to time, or any successor rule or regulation.
(y) "Section 162(m)" means Section 162(m) of the Code, as
amended by the Revenue Reconciliation Act of 1993 (P.L. 103-66), and any
regulations promulgated thereunder.
(z) "Securities Act" means the Securities Act of 1933, as
amended.
(aa) "Service" means a Participant's employment or service
with the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. The Participant's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Participant
renders Service to the Participating Company Group or a change in the
Participating Company for which the Participant renders such Service, provided
that there is no interruption or termination of the Participant's Service.
Furthermore, a Participant's Service with the Participating Company Group shall
not be deemed to have
3
<PAGE>
terminated if the Participant takes any military leave, sick leave, or other
bona fide leave of absence approved by the Company; provided, however, that if
any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such
leave the Participant's Service shall be deemed to have terminated unless the
Participant's right to return to Service with the Participating Company Group is
guaranteed by statute or contract. Notwithstanding the foregoing, unless
otherwise designated by the Company or required by law, a leave of absence shall
not be treated as Service for purposes of determining vesting under the
Participant's Option Agreement or Restricted Stock Agreement. The Participant's
Service shall be deemed to have terminated either upon an actual termination of
Service or upon the corporation for which the Participant performs Service
ceasing to be a Participating Company. Subject to the foregoing, the Company, in
its sole discretion, shall determine whether the Participant's Service has
terminated and the effective date of such termination.
(bb) "Stock" means the common stock of the Company, as
adjusted from time to time in accordance with Section 4.2.
(cc) "Subsidiary Corporation" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
(dd) "Ten Percent Stockholder" means a Participant who, at the
time an Award is granted to the Participant, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of Section 422(b)(6) of the Code.
2.2 Construction. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
3.1 Administration by the Board. The Plan shall be administered by the
Board. All questions of interpretation of the Plan or of any Award shall be
determined by the Board, and such determinations shall be final and binding upon
all persons having an interest in the Plan or such Award. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, determination or election which
is the responsibility of or which is allocated to the Company herein, provided
the officer has apparent authority with respect to such matter, right,
obligation, determination or election.
3.2 Administration with Respect to Insiders. With respect to
participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if any,
of Rule 16b 3.
4
<PAGE>
3.3 Powers of the Board. In addition to any other powers set forth in
the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or times at
which, Awards shall be granted and the number of shares of Stock to be subject
to each Award;
(b) to determine whether an Award will be an Incentive Stock
Option, a Nonstatutory Stock Option, or Restricted Stock;
(c) to determine the Fair Market Value of shares of Stock or
other property;
(d) to determine the terms, conditions and restrictions
applicable to each Award (which need not be identical) and any shares acquired
pursuant to the Plan, including, without limitation, (i) the exercise or
purchase price, if any, applicable to each Award, (ii) the method of payment for
shares purchased under the Plan, (iii) the method for satisfaction of any tax
withholding obligation arising in connection with the Award or such shares,
including by the withholding or delivery of shares of stock, (iv) the timing,
terms and conditions of the exercisability of each Option or the vesting of any
shares acquired pursuant to the Plan, (v) the time of the expiration of the
Award, (vi) the effect of the Participant's termination of Service with the
Participating Company Group on any of the foregoing, and (vii) all other terms,
conditions and restrictions applicable to the Award or such shares not
inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement and
Restricted Stock Agreement;
(f) to amend, modify, extend, or renew, or grant a new Award
in substitution for, any Award or to waive any restrictions or conditions
applicable to any Award or any shares acquired under the Plan;
(g) to accelerate, continue, extend or defer the
exercisability of any Option or the vesting of any shares acquired under the
Plan, including with respect to the period following a Participant's termination
of Service with the Participating Company Group;
(h) to delegate to any proper officer of the Company the
authority to grant one or more Awards, without further approval of the Board, to
any person eligible pursuant to Section 5, other than a person who, at the time
of such grant, is an Insider; provided, however, that (i) such Awards shall not
be granted to any one person within any fiscal year of the Company for more than
50,000 shares in the aggregate, (ii) the exercise or purchase price per share of
Stock shall be equal to the Fair Market Value per share of the Stock on the
effective date of grant, and (iii) each such Award shall be subject to the terms
and conditions of the appropriate standard form of Option Agreement or
Restricted Stock Agreement approved by the Board and shall conform to the
provisions of the Plan and such other guidelines as shall be established from
time to time by the Board;
5
<PAGE>
(i) to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted Awards;
and
(j) to correct any defect, supply any omission or reconcile
any inconsistency in the Plan or any Option Agreement or Restricted Stock
Agreement and to make all other determinations and take such other actions with
respect to the Plan or any Award as the Board may deem advisable to the extent
consistent with the Plan and applicable law.
3.4 Committee Complying with Section 162(m). If a Participating Company
is a "publicly held corporation" within the meaning of Section 162(m), the Board
may establish a Committee of "outside directors" within the meaning of Section
162(m) (a "Section 162(m) Committee") to approve the grant of any Award which
might reasonably be anticipated to result in the payment of employee
remuneration that would otherwise exceed the limit on employee remuneration
deductible for income tax purposes pursuant to Section 162(m).
4. SHARES SUBJECT TO PLAN.
4.1 Maximum Number of Shares Issuable. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be two million five hundred thousand
(2,500,000) and shall consist of authorized but unissued or reacquired shares of
Stock or any combination thereof. If an outstanding Award for any reason expires
or is terminated or canceled or shares of Stock acquired, subject to repurchase
or forfeiture, pursuant to an Award are repurchased by the Company or forfeited,
the shares of Stock allocable to the unexercised portion of such Award, or such
repurchased or forfeited shares of Stock, shall again be available for issuance
under the Plan.
4.2 Adjustments for Changes in Capital Structure. In the event of any
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number and class of shares subject
to the Plan and to any outstanding Awards, in the Section 162(m) Grant Limit set
forth in Section 4.3, and in the exercise or purchase price per share of any
outstanding but unexercised Awards. If a majority of the shares which are of the
same class as the shares that are subject to outstanding Awards are exchanged
for, converted into, or otherwise become (whether or not pursuant to an
Ownership Change Event, as defined in Section 8.1) shares of another corporation
(the "New Shares"), the Board may unilaterally amend the outstanding Awards to
provide that such Awards are for New Shares. In the event of any such amendment,
the number of shares subject to outstanding Awards and the exercise or purchase
price per share of outstanding but unexercised Awards shall be adjusted in a
fair and equitable manner as determined by the Board, in its sole discretion.
Notwithstanding the foregoing, any fractional share resulting from an adjustment
pursuant to this Section 4.2 shall be rounded up or down to the nearest whole
number, as determined by the Board, and in no event may the exercise
6
<PAGE>
or purchase price of any Award be decreased to an amount less than the par
value, if any, of the stock subject to the Award. The adjustments determined by
the Board pursuant to this Section 4.2 shall be final, binding and conclusive.
4.3 Section 162(m) Grant Limit. Subject to adjustment as provided in
Section 4.2, at any such time as a Participating Company is a "publicly held
corporation" within the meaning of Section 162(m), no Employee shall be granted
one or more Awards within any fiscal year of the Company which in the aggregate
are for more than five hundred thousand (500,000) shares; provided, however,
that the Company may make an additional one-time grant to any newly-hired
Employee of an Award for up to two hundred fifty thousand (250,000) shares (the
"Section 162(m) Grant Limit"). An Option which is canceled in the same fiscal
year of the Company in which it was granted shall continue to be counted against
the Section 162(m) Grant Limit for such period.
5. ELIGIBILITY. Awards may be granted only to Employees, Consultants, and
Directors. For purposes of the foregoing sentence, "Employees," "Consultants"
and "Directors" shall include prospective Employees, prospective Consultants and
prospective Directors to whom Awards, other than a Restricted Stock Bonus (as
defined in Section 7 below), may be granted in connection with written offers of
a Service relationship with the Participating Company Group. Eligible persons
may be granted more than one (1) Award.
6. TERMS AND CONDITIONS OF OPTIONS.
Options shall be evidenced by Option Agreements specifying the number
of shares of Stock covered thereby, in such form as the Board shall from time to
time establish. Option Agreements may incorporate all or any of the terms of the
Plan by reference and shall comply with and be subject to the following terms
and conditions:
6.1 Limitations on Options.
(a) Option Grant Restrictions. Any person who is not an
Employee on the effective date of the grant of an Option to such person may be
granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to a
prospective Employee upon the condition that such person become an Employee
shall be deemed granted effective on the date such person commences Service as
an Employee with a Participating Company, with an exercise price determined as
of such date in accordance with Section 6.2.
(b) Fair Market Value Limitation. To the extent that options
designated as Incentive Stock Options (granted under all stock option plans of
the Participating Company Group, including the Plan) become exercisable by an
Optionee for the first time during any calendar year for stock having a Fair
Market Value greater than One Hundred Thousand Dollars ($100,000), the portion
of such options which exceeds such amount shall be treated as Nonstatutory Stock
Options. For purposes of this Section 6.1(b), options designated as Incentive
Stock Options shall be taken into account in the order in which they were
granted, and the Fair Market Value of stock shall be determined as of the time
the option with respect to such stock is granted. If the Code is amended to
provide for a different limitation from that set forth in this
7
<PAGE>
Section 6.1(b), such different limitation shall be deemed incorporated herein
effective as of the date and with respect to such Options as required or
permitted by such amendment to the Code. If an Option is treated as an Incentive
Stock Option in part and as a Nonstatutory Stock Option in part by reason of the
limitation set forth in this Section 6.1(b), the Optionee may designate which
portion of such Option the Optionee is exercising. In the absence of such
designation, the Optionee shall be deemed to have exercised the Incentive Stock
Option portion of the Option first. Separate certificates representing each such
portion shall be issued upon the exercise of the Option.
6.2 Exercise Price. The exercise price for each Option shall be
established in the sole discretion of the Board; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of the
Option, (b) the exercise price per share for a Nonstatutory Stock Option shall
be not less than eighty five percent (85%) of the Fair Market Value of a share
of Stock on the effective date of grant of the Option, and (c) no Incentive
Stock Option granted to a Ten Percent Stockholder shall have an exercise price
per share less than one hundred ten percent (110%) of the Fair Market Value of a
share of Stock on the effective date of grant of the Option. Notwithstanding the
foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock
Option) may be granted with an exercise price lower than the minimum exercise
price set forth above if such Option is granted pursuant to an assumption or
substitution for another option in a manner qualifying under the provisions of
Section 424(a) of the Code.
6.3 Exercise Period. Options shall be exercisable at such time or
times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board and
set forth in the Option Agreement evidencing such Option; provided, however,
that (a) no Incentive Stock Option shall be exercisable after the expiration of
ten (10) years after the effective date of grant of such Option, (b) no
Incentive Stock Option granted to a Ten Percent Stockholder shall be exercisable
after the expiration of five (5) years after the effective date of grant of such
Option, and (c) no Option granted to a prospective Employee, prospective
Consultant or prospective Director may become exercisable prior to the date on
which such person commences Service with a Participating Company. Except as
otherwise provided in this Section or by the Board in the grant of an Option,
any Option granted hereunder shall have a term of ten (10) years from the
effective date of grant of the Option.
6.4 Payment of Exercise Price.
(a) Forms of Consideration Authorized. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value (as determined by the Company without regard
to any restrictions on transferability applicable to such stock by reason of
federal or state securities laws or agreements with an underwriter for the
Company) not less than the exercise price, (iii) by the assignment of the
proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option
8
<PAGE>
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System) (a "Cashless Exercise"), (iv) by the
Optionee's promissory note in a form approved by the Company, (v) by such other
consideration as may be approved by the Board from time to time to the extent
permitted by applicable law, or (vi) by any combination thereof. The Board may
at any time or from time to time, by adoption of or by amendment to the standard
forms of Option Agreement described in Section 6.7, or by other means, grant
Options which do not permit all of the foregoing forms of consideration to be
used in payment of the exercise price or which otherwise restrict one or more
forms of consideration.
(b) Tender of Stock. Notwithstanding the foregoing, an Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(c) Cashless Exercise. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
Options by means of a Cashless Exercise.
(d) Payment by Promissory Note. No promissory note shall be
permitted if the exercise of an Option using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure any promissory
note used to exercise an Option with the shares of Stock acquired upon the
exercise of the Option or with other collateral acceptable to the Company.
Unless otherwise provided by the Board, if the Company at any time is subject to
the regulations promulgated by the Board of Governors of the Federal Reserve
System or any other governmental entity affecting the extension of credit in
connection with the Company's securities, any promissory note shall comply with
such applicable regulations, and the Optionee shall pay the unpaid principal and
accrued interest, if any, to the extent necessary to comply with such applicable
regulations.
6.5 Tax Withholding. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Option or the shares acquired upon the exercise thereof. Alternatively or in
addition, in its sole discretion, the Company shall have the right to require
the Optionee, through payroll withholding, cash payment or otherwise, including
by means of a Cashless Exercise, to make adequate provision for any such tax
withholding obligations of the Participating Company
9
<PAGE>
Group arising in connection with the Option or the shares acquired upon the
exercise thereof. The Company shall have no obligation to deliver shares of
Stock or to release shares of Stock from an escrow established pursuant to the
Option Agreement until the Participating Company Group's tax withholding
obligations have been satisfied by the Optionee.
6.6 Effect of Termination of Service.
(a) Option Exercisability. Subject to earlier termination of
the Option as otherwise provided herein, an Option shall be exercisable after an
Optionee's termination of Service as follows:
(i) Disability. If the Optionee's Service with the
Participating Company Group is terminated because of the Disability of the
Optionee, the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of six (6) months (or such longer period of time as determined by the
Board, in its sole discretion) after the date on which the Optionee's Service
terminated, but in any event no later than the date of expiration of the
Option's term as set forth in the Option Agreement evidencing such Option (the
"Option Expiration Date").
(ii) Death. If the Optionee's Service with the
Participating Company Group is terminated because of the death of the Optionee,
the Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee's legal
representative or other person who acquired the right to exercise the Option by
reason of the Optionee's death at any time prior to the expiration of six (6)
months (or such longer period of time as determined by the Board, in its sole
discretion) after the date on which the Optionee's Service terminated, but in
any event no later than the Option Expiration Date. The Optionee's Service shall
be deemed to have terminated on account of death if the Optionee dies within
three (3) months after the Optionee's termination of Service.
(iii) Other Termination of Service. If the Optionee's
Service with the Participating Company Group terminates for any reason, except
Disability or death, the Option, to the extent unexercised and exercisable by
the Optionee on the date on which the Optionee's Service terminated, may be
exercised by the Optionee within thirty (30) days (or such longer period of time
as determined by the Board, in its sole discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date.
(b) Extension if Exercise Prevented by Law. Notwithstanding
the foregoing, if the exercise of an Option within the applicable time periods
set forth in Section 6.6(a) is prevented by the provisions of Section 10 below,
the Option shall remain exercisable until three (3) months after the date the
Optionee is notified by the Company that the Option is exercisable, but in any
event no later than the Option Expiration Date.
(c) Extension if Optionee Subject to Section 16(b).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 6.6(a) of shares acquired upon the exercise of the Option would
subject the Optionee to suit under Section 16(b)
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of the Exchange Act, the Option shall remain exercisable until the earliest to
occur of (i) the tenth (10th) day following the date on which a sale of such
shares by the Optionee would no longer be subject to such suit, (ii) the one
hundred and ninetieth (190th) day after the Optionee's termination of Service,
or (iii) the Option Expiration Date.
6.7 Standard Forms of Option Agreement. Unless otherwise provided by
the Board at the time the Option is granted, an Option designated as an
"Incentive Stock Option" or a "Nonstatutory Stock Option" shall comply with and
be subject to the terms and conditions set forth in the form of Incentive Stock
Option Agreement or Nonstatutory Stock Option Agreement, respectively, adopted
by the Board concurrently with its adoption of the Plan and as amended from time
to time. The Board shall have the authority from time to time to vary the terms
of any of the standard forms of Option Agreement described in this Section
either in connection with the grant or amendment of an individual Option or in
connection with the authorization of a new standard form or forms; provided,
however, that the terms and conditions of any such new, revised or amended
standard form or forms of Option Agreement are not inconsistent with the terms
of the Plan. Such authority shall include, but not by way of limitation, the
authority to grant Options which are immediately exercisable subject to the
Company's right to repurchase any unvested shares of Stock acquired by an
Optionee upon the exercise of an Option in the event such Optionee's employment
or service with the Participating Company Group is terminated for any reason,
with or without cause.
6.8 Nontransferability of Incentive Stock Options. During the lifetime
of the Optionee, an Option shall be exercisable only by the Optionee or the
Optionee's guardian or legal representative. No Option shall be assignable or
transferable by the Optionee, except by will or by the laws of descent and
distribution. Notwithstanding the foregoing, a Nonstatutory Stock Option shall
be assignable or transferable to the extent permitted by the Board and set forth
in the Option Agreement evidencing such Option.
7. TERMS AND CONDITIONS OF RESTRICTED STOCK.
The Board may from time to time grant Restricted Stock Awards
which may be in the form of a stock bonus (a "Restricted Stock Bonus") or a
stock purchase right (a "Restricted Stock Purchase Right"). Restricted Stock
Awards shall be evidenced by Restricted Stock Agreements, specifying the number
of shares of Stock covered there, in such form as the Board shall from time to
time establish. Restricted Stock Agreements may incorporate all or any of the
terms of the Plan by reference and shall comply with and be subject to the
following terms and conditions:
7.1 Performance-Based Restricted Stock Awards. A Section 162(m)
Committee may, but need not, condition the grant of any Restricted Stock Award
(a "Performance Award") on the attainment, during a performance period
established by such Committee, of one or more performance goals pursuant to
procedures intended to qualify such Award as "performance-based compensation"
for purposes of Section 162(m). Any such performance goals shall be
preestablished in writing by the Section 162(m) Committee within the period
required by Section 162(m) and shall be based on one or more of the following
business
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criteria with respect to the Participating Company Group: revenue, operating
income, pre-tax profit, net income, gross margin, operating margin, earnings per
share, return on stockholder equity, return on capital, return on assets, or the
initial shipment of a new product. Such business criteria shall have the same
meaning as used in the Company's financial statements, or, if not used in the
Company's financial statements, the meaning pursuant to generally accepted
accounting principles or as used generally in the Company's industry. Each
performance goal shall be objectively determinable and may be an absolute
measure or a relative measure determined with reference to an index or other
standard selected by the Section 162(m) Committee. Prior to the issuance of
Stock pursuant to a Performance Award, the Section 162(m) Committee shall
certify in writing the attainment of the relevant performance goals. Neither the
Board nor any Committee thereof shall have the discretion to waive the
attainment of any performance goal or to increase the number of shares issuable
pursuant to a Performance Award in excess of the amount determined in accordance
with the objective formula established by the Section 62(m) Committee. However,
if provided in a Participant's Restricted Stock Agreement, the Section 62(m)
Committee shall have the authority to reduce the number of shares that would
otherwise become issuable to the Participant upon the attainment of the relevant
performance goals if, in the Section 162(m) Committee's sole judgment, such
reduction is appropriate; provided, however, that such reduction shall not
increase the number of shares issuable to another Participant.
7.2 Purchase Price. The purchase price under each Restricted Stock
Purchase Right shall be established by the Board. No monetary payment (other
than applicable tax withholding) shall be required as a condition of receiving a
Restricted Stock Bonus, the consideration for which shall be services actually
rendered to the Participating Company Group or for its benefit.
7.3 Purchase Period. A Restricted Stock Purchase Right shall be
exercisable within a period established by the Board, which shall in no event
exceed thirty (30) days from the effective date of the grant of the Restricted
Stock Purchase Right; provided, however, that no Restricted Stock Purchase Right
granted to a prospective Employee, prospective Consultant or prospective
Director may become exercisable prior to the date on which such person commences
Service with a Participating Company.
7.4 Payment of Purchase Price.
(a) Forms of Consideration Authorized. Except as otherwise
provided below, payment of the purchase price for the number of shares of Stock
being purchased pursuant to any Restricted Stock Purchase Right shall be made
(i) in cash, by check, or cash equivalent, (ii) by the Participant's promissory
note in a form approved by the Company, (iii) by such other consideration as may
be approved by the Board from time to time to the extent permitted by applicable
law, or (iv) by any combination thereof. The Board may at any time or from time
to time, by adoption of or by amendment to the standard form of Restricted Stock
Agreement described in Section 7.9, or by other means, grant Restricted Stock
Purchase Rights which do not permit all of the foregoing forms of consideration
to be used in payment of the purchase price or which otherwise restrict one or
more forms of consideration. Restricted Stock
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Bonuses shall be issued in consideration for services actually rendered to the
Participating Company Group or for its benefit.
(b) Payment by Promissory Note. No promissory note shall be
permitted if the purchase of Restricted Stock using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Restricted Stock Purchase Right is
granted. The Board shall have the authority to permit or require the Participant
to secure any promissory note used to purchase Restricted Stock with such shares
or with other collateral acceptable to the Company. Unless otherwise provided by
the Board, if the Company at any time is subject to the regulations promulgated
by the Board of Governors of the Federal Reserve System or any other
governmental entity affecting the extension of credit in connection with the
Company's securities, any promissory note shall comply with such applicable
regulations, and the Participant shall pay the unpaid principal and accrued
interest, if any, to the extent necessary to comply with such applicable
regulations.
7.5 Tax Withholding. The Company shall have the right to require the
Participant, through payroll withholding, cash payment or otherwise, to make
adequate provision for the federal, state, local and foreign taxes, if any,
required by law to be withheld by the Participating Company Group in connection
with a Restricted Stock Award or the shares acquired pursuant thereto. The
Company shall have no obligation to deliver shares of Stock or to release shares
of Stock from an escrow established pursuant to the Restricted Stock Agreement
until the Participating Company Group's tax withholding obligations have been
satisfied by the Participant.
7.6 Vesting and Restrictions on Transfer. Shares issued pursuant to any
Restricted Stock Award may be made subject to vesting conditioned upon the
satisfaction of such Service requirements, performance goals (which may, but
need not, be established and certified in accordance with the provisions of
Section 7.1), or other restrictions (the "Vesting Restrictions") as shall be
determined by the Board (or a Section 162(m) Committee, as the case may be) and
set forth in the Restricted Stock Agreement evidencing such Award. During such
period (the "Restriction Period") as shares acquired pursuant to a Restricted
Stock Award remain subject to Vesting Restrictions, such shares may not be sold,
exchanged, transferred, pledged, assigned or otherwise disposed of other than
pursuant to an Ownership Change Event or as provided in Section 7.10. Upon
request by the Company, each Participant shall execute any agreement evidencing
such transfer restrictions prior to the receipt of shares of Stock hereunder and
shall promptly present to the Company any and all certificates representing
shares of Stock acquired hereunder for the placement on such certificates of
appropriate legends evidencing any such transfer restrictions.
7.7 Voting Rights; Dividends. Except as provided in this Section and
Section 7.6, during the Restriction Period applicable to shares of Restricted
Stock held by a Participant, the Participant shall have all of the rights of a
stockholder of the Company holding shares of Stock, including the right to vote
the shares of Restricted Stock and to receive all dividends and other
distributions paid with respect to such shares; provided, however, that if any
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<PAGE>
such dividends or distributions are paid in shares of Stock, such shares shall
be subject to the same Vesting Restrictions as the shares of Restricted Stock
with respect to which they were paid.
7.8 Effect of Termination of Service. If a Participant's Service with
the Participating Company Group terminates for any reason, whether voluntary or
involuntary (including the Participant's death or disability), (a) the Company
shall have the option to repurchase at the original purchase price paid by the
Participant shares of Restricted Stock acquired by the Participant pursuant to a
Restricted Stock Purchase Right and (b) the Participant shall forfeit to the
Company shares of Restricted Stock acquired by the Participant pursuant to a
Restricted Stock Bonus which, in either case, remain subject to Vesting
Restrictions as of the date of the Participant's termination of Service. The
Company shall have the right to assign at any time any repurchase right it may
have, whether or not such right is then exercisable, to one or more persons as
may be selected by the Company.
7.9 Standard Forms of Restricted Stock Agreement. The Board shall have
the authority from time to time to approve one or more standard forms of
Restricted Stock Agreement and to vary the terms of any such standard forms
either in connection with the grant or amendment of an individual Restricted
Stock Award or in connection with the authorization of a new standard form or
forms; provided, however, that the terms and conditions of any such new, revised
or amended standard form or forms of Restricted Stock Agreement are not
inconsistent with the terms of the Plan.
7.10 Nontransferability of Restricted Stock Award Rights. Rights to
acquire shares of Stock pursuant to a Restricted Stock Award may not be assigned
or transferred in any manner except by will or the laws of descent and
distribution, and, during the lifetime of the Participant, shall be exercisable
only by the Participant.
8. TRANSFER OF CONTROL.
8.1 Definitions.
(a) An "Ownership Change Event" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a
single or series of related transactions by the stockholders of the Company of
more than fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company
is a party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
14
<PAGE>
(b) A "Transfer of Control" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"Transaction") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "Transferee
Corporation(s)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 Effect of Transfer of Control on Awards. In the event of a Transfer
of Control, the Board, in its sole discretion, may provide that any
unexercisable or unvested portion of the outstanding Awards shall be immediately
exercisable and vested in full as of a date determined by the Board and/or may
arrange with the surviving, continuing, successor, or purchasing corporation or
parent corporation thereof, as the case may be (the "Acquiring Corporation"),
for the Acquiring Corporation to either assume the Company's rights and
obligations under outstanding Awards or substitute for outstanding Awards
substantially equivalent awards for the Acquiring Corporation's stock. For
purposes of this Section 8.2, an Award shall be deemed assumed if, following the
Transfer of Control, the Award confers the right to acquire in accordance with
its terms and conditions, for each share of Stock subject to the Award
immediately prior to the Transfer of Control, the consideration (whether stock,
cash or other securities or property) to which a holder of a share of Stock on
the effective date of the Transfer of Control was entitled. Any Awards which are
neither assumed or substituted for by the Acquiring Corporation in connection
with the Transfer of Control nor exercised as of the date of the Transfer of
Control shall terminate and cease to be outstanding effective as of the date of
the Transfer of Control. Notwithstanding the foregoing, shares acquired upon
exercise of an Award prior to the Transfer of Control and any consideration
received pursuant to the Transfer of Control with respect to such shares shall
continue to be subject to all applicable provisions of the Award Agreement
evidencing such Award except as otherwise provided in such Award Agreement or by
the Board.
9. PROVISION OF INFORMATION. Each Participant shall be given access to
information concerning the Company equivalent to that information generally made
available to the Company's common stockholders.
10. COMPLIANCE WITH SECURITIES LAW. The grant of Awards and the issuance of
shares of Stock pursuant to Awards shall be subject to compliance with all
applicable requirements of federal, state or foreign law with respect to such
securities. No shares may be issued pursuant an Award if such issuance would
constitute a violation of any applicable federal,
15
<PAGE>
state or foreign securities laws or other law or regulations or the requirements
of any stock exchange or market system upon which the Stock may then be listed.
In addition, no Award may be exercised or shares issued pursuant to an Award
unless (a) a registration statement under the Securities Act shall at the time
of such exercise or issuance be in effect with respect to the shares issuable
pursuant to the Award or (b) in the opinion of legal counsel to the Company, the
shares issuable pursuant to the Award may be issued in accordance with the terms
of an applicable exemption from the registration requirements of the Securities
Act. The inability of the Company to obtain from any regulatory body having
jurisdiction the authority, if any, deemed by the Company's legal counsel to be
necessary to the lawful issuance and sale of any shares hereunder shall relieve
the Company of any liability in respect of the failure to issue or sell such
shares as to which such requisite authority shall not have been obtained. As a
condition to the issuance of shares pursuant to any Award, the Company may
require the Participant to satisfy any qualifications that may be necessary or
appropriate, to evidence compliance with any applicable law or regulation and to
make any representation or warranty with respect thereto as may be requested by
the Company.
11. INDEMNIFICATION. In addition to such other rights of indemnification as
they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board or the
Company is delegated shall be indemnified by the Company against all reasonable
expenses, including attorneys' fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan, or
any right granted hereunder, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding, except in relation to matters as to which it
shall be adjudged in such action, suit or proceeding that such person is liable
for gross negligence, bad faith or intentional misconduct in duties; provided,
however, that within sixty (60) days after the institution of such action, suit
or proceeding, such person shall offer to the Company, in writing, the
opportunity at its own expense to handle and defend the same.
12. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the
Plan at any time. However, subject to changes in applicable law, regulations or
rules that would permit otherwise, without the approval of the Company's
stockholders, there shall be (a) no increase in the maximum aggregate number of
shares of Stock that may be issued under the Plan (except by operation of the
provisions of Section 4.2), (b) no change in the class of persons eligible to
receive Incentive Stock Options, and (c) no other amendment of the Plan that
would require approval of the Company's stockholders under any applicable law,
regulation or rule. In any event, no termination or amendment of the Plan may
adversely affect any then outstanding Award or any unexercised portion thereof,
without the consent of the Participant, unless such termination or amendment is
required to enable an Option designated as an Incentive Stock Option to qualify
as an Incentive Stock Option or is necessary to comply with any applicable law,
regulation or rule.
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IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing sets forth the Network Peripherals Inc. 1997 Stock Plan, as
amended by the Board through March 24, 1998.
________________________________
Secretary
17
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PLAN HISTORY
February 18, 1997 Board adopts Plan, with an initial reserve of
1,500,000 shares.
April 24, 1997 Stockholders approve Plan, with an initial reserve
of 1,500,000 shares.
March 24, 1998 Board approves 1,000,000 share reserve increase
(from 1,500,000 to 2,500,000).
May 26, 1998 Stockholders approve 1,000,000 share reserve
increase (approved by Board on March 24, 1998).
18
Exhibit 10.40
Third Modification Agreement, Dated August 18, 1998,
With Sumitomo Bank of California
THIRD MODIFICATION AGREERMENT
This Third Modification Agreement ("Third Modification") is made as of
August 18, 1998, by and among NETWORK PERIPHERALS INC. a Delaware corporation
("Borrower"), having its chief executive office at 1371 McCarthy Boulevard,
Milpitas, California 95035, SUMITOMO BANK OF CALIFORNIA, a California banking
corporation ("Sumitomo"), having its head office at 320 California Street, San
Francisco, California, and each other lender which may hereafter execute and
deliver an instrument of assignment with respect to the Agreement (defined
below) (individually, the "Bank," and collectively, the "Banks") and Sumitomo,
as Agent.
RECITALS
A. Pursuant to a Credit Agreement, dated October 2, 1996, executed by
Borrower and Sumitomo ("Agreement") , Sumitomo extended a revolving line of
credit to Borrower of up to $10,000,000.00 ("Line of Credit") with a
$5,000,000.00 letter of credit subline. Borrower's obligation to repay advances
on the Line of Credit was evidenced by a Promissory Note, dated the same date as
the Agreement, executed by Borrower, in the principal amount of $10,000,000.00
("Note"). To secure the indebtedness of Borrower under the Credit Agreement and
Note, Borrower executed a Security Agreement, dated as of October 2, 1996
("Security Agreement").
B. Pursuant to a Modification Agreement ("Modification") dated August
29, 1997, by and among Borrower and Sumitomo, on behalf of itself and as Agent
for the Banks, the Agreement was modified on the terms contained therein.
C. Pursuant to a Second Modification Agreement ("Second Modification")
dated November 17, 1997, by and among Borrower and Sumitomo, on behalf of itself
and as Agent for the Banks, the Agreement was further modified on the terms
contained therein.
D. As used herein, the term "Loan Documents" means all documents
described in these Recitals and those documents executed pursuant thereto or in
conjunction therewith.
E. Borrower seeks a further modification of the Agreement and Loan
Documents and Sumitomo is agreeable on the terms set forth below.
<PAGE>
TERMS
NOW, THEREFORE, Borrower and Sumitomo agree as follows:
1. Capitalized Terms. Unless otherwise defined herein, capitalized
terms shall have the meanings set forth in the Agreement.
2. Adoption of Recitals. Borrower hereby represents and warrants that
each of the Recitals set forth above are true, accurate and complete.
3. Acknowledgement of Debt. Borrower acknowledges that there are no
claims, demands, offsets or defenses at law or in equity that would defeat or
diminish Sumitomo's right to collect the indebtedness evidenced by the Note and
Agreement and to proceed to enforce the rights and remedies available to
Sumitomo as provided in the Loan Documents or by law.
4. Modification of Loan Documents. The Loan Documents are hereby
supplemented, amended and modified as follows, which terms shall supersede and
prevail over any existing and conflicting provisions thereof:
(a) The terms "Commitment Amount", "Letter of Credit Maturity
Date", "Letter of Credit Sublimit" and "Maturity Date" in Section 1.1 of the
Agreement are hereby deleted and replaced with the following:
Commitment Amount. $5,000,000 in the aggregate, or
any lesser amount, including zero, resulting from a
termination or reduction of such amount in accordance with
Section 2.5 or Section 7.2.
Letter of Credit Maturity Date. Means November 30,
1998.
Letter of Credit Sublimit. $2,500,000 in the
aggregate, or any lesser amount, including zero, resulting
from a termination or reduction of such amount in accordance
with Section 2.5 or Section 7.2.
Maturity Date. Means July 31, 1999.
(b) Section 3.2(f) of the Agreement, as modified by the Second
Modification, is deleted and replaced with the following:
(f) Borrower shall deposit with Sumitomo cash
collateral, acceptable to Sumitomo in its sole discretion,
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<PAGE>
equal to or greater than the amount of the Loan or Letter of
Credit requested by Borrower. Such cash collateral shall
remain on deposit with Sumitomo until such time as the Loan or
Letter of Credit is repaid in full by Borrower.
(c) Section 5.7 (b) of the Agreement is deleted and replaced
with the following:
(b) Profitability. Borrower shall be profitable on an
annual basis and shall not have a net loss on a consolidated
basis in any fiscal quarter as measured quarterly for that
fiscal quarter; provided, however, that for the fiscal quarter
ending September 30, 1998, Borrower may have a net loss on a
consolidated basis of not more than $1,500,000.00; and that
for the fiscal quarter ending December 31, 1998, Borrower may
have a net loss on a consolidated basis of not more than
$1,000,000.00.
(d) Section 5.7(d) of the Agreement is deleted and replaced
with the following:
(d) Consolidated Tangible Net Worth. Borrower shall
maintain Consolidated Tangible Net Worth of at least
$30,000,000.00.
(e) The following new Section 5.7(f) is added to the
Agreement:
(f) Cash Position. Borrower shall maintain a
consolidated cash position on its balance sheet of at least
$20,000,000.00.
(f) The Loan Documents which recite they are security
instruments shall secure, in addition to any other obligations secured thereby,
the payment and performance by Borrower of all obligations under the Agreement,
the Note and the other Loan Documents, as amended by this Third Modification,
and any amendments, modifications, extensions or renewals of the same which are
hereafter agreed to in writing by the parties.
5. Conditions Precedent. Sumitomo's obligation to extend credit to
Borrower pursuant to this Third Modification is subject to the condition
precedent that Borrower strictly complies with the requirement that Borrower
deliver to Sumitomo, in form and substance satisfactory to Sumitomo, the
following documents and other things by Borrower or as specified below:
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(a) This Agreement.
(b) Such other evidence as Sumitomo may require, to establish
the consummation of the transactions contemplated hereby, the taking of all
proceedings in connection therewith and compliance with the conditions set forth
in this Third Modification.
6. Representations and Warranties. Except as previously disclosed to
Sumitomo, Borrower hereby represents and warrants that no default, Event of
Default, breach or failure of condition has occurred or exists, or would exist
with notice or lapse of time, or both, under any of the Loan Documents. Borrower
agrees that all representations and warranties of Borrower in the Agreement and
the other Loan Documents are true and correct as of the date of this Third
Modification, and shall survive the execution of this Third Modification.
7. Governing of Law. This Third Modification shall be construed,
governed and enforced in accordance with the laws of the State of California.
8. Interpretation. No provision of this Third Modification is to be
interpreted for or against either Borrower or Sumitomo because that party, or
that party's representative, drafted such provision.
9. Full Force and Effect. Except as set forth herein, all other terms
and conditions of the Loan Documents shall remain in full force and effect,
including provisions on prepayment, late charges, default interest and
attorneys' fees.
10. Reaffirmation. Borrower hereby acknowledges, reaffirms and confirms
its obligations under the Loan Documents, as amended and modified by this Third
Modification.
11. Entire Agreement. This Third Modification (and all documents herein
mentioned) and the Loan Documents constitute the entire, complete and exclusive
understanding between the parties regarding the Line of Credit and the
Collateral and may not be modified, amended, or terminated except by a written
agreement signed by the party against whom enforcement is sought. No
modification, change or supplement of the Loan Documents, this Third
Modification or related agreements shall be binding on Sumitomo unless in
writing signed by a Corporate Officer and Manager of Sumitomo. No waiver or any
event of default shall be construed to be a waiver, acquiescence, or consent to
any preceding or subsequent event of default.
12. Documentation. In addition to the instruments and documents
mentioned or referred to herein, Borrower will, at its own cost and expense,
supply Sumitomo with such other instruments, documents, information and data as
are
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<PAGE>
reasonably necessary for the purposes hereof, all of which shall be in form and
content as reasonably required by Sumitomo.
13. Counterparts This Third Modification may be executed in multiple
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Third Modification
as of the day and year first above written.
SUMITOMO:
SUMITOMO BANK OF CALIFORNIA,
a California banking corporation
By: \s\ Arne F. Olson
-----------------------------
ARNE F. OLSON,
Vice President
AGENT:
SUMITOMO BANK OF CALIFORNA,
a California banking corporation
By: \s\ Arne F. Olson
-----------------------------
ARNE F. OLSON,
Vice President
BORROWER:
NETWORK PERIPHERALS INC.,
a Delaware corporation
By: \s\ Robert Hersh
-----------------------------
ROBERT HERSH,
Vice President and Chief Financial Officer
5
Exhibit 10.41
Employment Agreement with William Rosenberger
and subsequent amendment
EMPLOYMENT AGREEMENT
This Employment Agreement is made and entered into by and between
Network Peripherals Inc., a Delaware Corporation (the "Company"), and William F.
Rosenberger ("Rosenberger") as of June 11, 1998 (the "Effective Date").
1. Position and Duties. Rosenberger shall be employed by the Company as
its President and Chief Executive Officer, reporting to the Company's Board of
Directors (the "Board"). As its President and Chief Executive Officer,
Rosenberger agrees to devote his full business time, energy and skill to his
duties at the Company. These duties shall include all those duties customarily
performed by the President and Chief Executive Officer, as well as any other
reasonable duties that may be assigned from time to time by the Board. In
addition, Rosenberger has been elected to the Board for a term expiring at the
annual meeting of the stockholders of the Company to be held in 1999.
2. Term of Employment. Rosenberger's employment with the Company will
be for no specified term, and may be terminated by Rosenberger or the Company at
any time, with or without cause. Upon the termination of Rosenberger's
employment with the Company for any reason, neither Rosenberger nor the Company
shall have any further obligation or liability under this Employment Agreement
to the other, except as set forth in paragraphs 5, 6, 9, 10 and 11 below.
3. Compensation. Rosenberger shall be compensated by the Company for
his services as follows:
(a) Base Salary. Rosenberger shall be paid a monthly base
salary of $20,833.33 per month ($250,000 on an annualized basis), subject to
applicable withholding, in accordance with the Company's normal payroll
procedures.
(b) Benefits. Rosenberger shall have the right, on the same
basis as other members of senior management of the Company, to participate in
and to receive benefits under any of the Company's employee benefit plans, as
such plans may be modified from time to time. In addition, Rosenberger shall be
entitled to the benefits afforded to other members of senior management under
the Company's vacation, holiday and business expense reimbursement policies.
(c) Performance Bonuses. Rosenberger shall be eligible to earn
either one, but not both, of the following performance bonuses:
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(i) Provided that Rosenberger's employment with the
Company has not terminated prior to the date of the consummation of a Change in
Control (as defined in paragraph 7 below), Rosenberger shall earn a bonus of
$200,000 in the event of a Change in Control consummated on or before June 30,
1999 in which the aggregate fair market value, as determined by the Board, of
the consideration paid or to be paid by the Acquiring Corporation (as defined in
paragraph 7 below) in connection with the Change in Control exceeds one hundred
fifty million dollars ($150,000,000). Such bonus, if any, less applicable
withholding, shall be paid as soon as practicable following the consummation of
the Change in Control.
(ii) Provided that Rosenberger has not earned the
bonus described in subparagraph (i) above, Rosenberger shall earn a bonus of
$100,000 provided that (A) the Company has achieved at least two consecutive
fiscal quarters ending on or before June 30, 1999 for each of which the Company
has earned positive net income and (B) on June 30, 1999 Rosenberger remains
employed by the Company as its Chief Executive Officer. Such bonus, if any, less
applicable withholding, shall be paid as soon as practicable after June 30,
1999, or if later, as soon as practicable after the determination of the net
income for the second such fiscal quarter. For purposes of this subparagraph,
"net income" shall mean the Company's net income for any fiscal quarter as
determined for purposes of computing the Company's publicly reported earnings
per share and as set forth in the Company's consolidated income statement
prepared in accordance with generally accepted accounting principles and as
reviewed or audited by the Company's independent auditors.
(d) Signing Bonus. As soon as practicable following the
execution of this Employment Agreement, the Company shall pay to Rosenberger a
one-time signing bonus in the amount of $50,000 (the "Signing Bonus"), less
applicable withholding. If Rosenberger voluntarily terminates his employment
with the Company within six months of the Effective Date, Rosenberger shall be
required to repay the Signing Bonus to the Company upon the date of the such
termination.
4. Stock Option. Rosenberger shall be granted the option to purchase up
to 500,000 shares of the Common Stock of the Company (the "Option"). Subject to
Rosenberger's continued employment with the Company, the shares subject to the
Option (the "Optioned Shares") shall become vested and exercisable at the rate
of 50,000 Optioned Shares on December 31, 1998 and an additional 8,333 Optioned
Shares for each full month of Rosenberger's employment with the Company
thereafter. Provided that Rosenberger's employment with the Company has not
terminated prior to the date of the consummation of a Change in Control (as
defined in paragraph 7 below), the vesting and exercisability of the Optioned
Shares shall be accelerated effective as of the date ten (10) days prior to the
date of the Change in Control as to:
(a) 50% of the Optioned Shares that would otherwise remain
unvested as of the date of the Change in Control, provided that the Change in
Control is consummated on or before March 11, 1999; or
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(b) 75% of the Optioned Shares that would otherwise remain
unvested as of the date of the Change in Control, provided that the Change in
Control is consummated after March 11, 1999 and on or before June 11, 1999; or
(c) 100% of the Optioned Shares that would otherwise remain
unvested as of the date of the Change in Control, provided that the Change in
Control is consummated after June 11, 1999.
Except as otherwise provided herein, the Option shall be subject to the terms of
the Company's 1997 Stock Plan and the appropriate standard form Company stock
option agreement, which Rosenberger shall be required to sign as a condition of
the issuance of the Option.
5. Benefits Upon Voluntary Termination, Permanent Disability or Death.
In the event that Rosenberger voluntarily terminates his employment relationship
with the Company at any time and such termination is not deemed a Constructive
Termination Following a Change in Control (as defined in paragraph 7 below), or
in the event that Rosenberger's employment terminates as a result of his death
or Permanent Disability (as defined in paragraph 7 below) other that within one
(1) year after a Change in Control, Rosenberger shall be entitled to no
compensation or benefits from the Company other than those earned under
paragraphs 3 and 4 above through the date of his termination of employment. In
the event that Rosenberger voluntarily resigns from his employment with the
Company, he shall simultaneously resign from his membership on the Board.
6. Benefits Upon Other Termination. Rosenberger agrees that his
employment may be terminated by the Company at any time, with or without cause.
In the event of the termination of Rosenberger's employment by the Company for
the reasons set forth below, he shall be entitled to the following:
(a) Termination for Cause. If Rosenberger's employment is
terminated by the Company for Cause (as defined in paragraph 7 below),
Rosenberger shall be entitled to no compensation or benefits from the Company
other than those earned under paragraphs 3 and 4 above through the date of his
termination of employment. In the event that Rosenberger's employment is
terminated by the Company for Cause, Rosenberger shall immediately resign from
his membership on the Board.
(b) Termination Without Cause; Resignation Upon Constructive
Termination Following a Change in Control; Death or Permanent Disability
Following a Change in Control.
(i) If Rosenberger's employment is terminated by the
Company for any reason other than for Cause (as defined in paragraph 7 below),
or if Rosenberger resigns from all capacities in which he is then rendering
service to the Company (including service as a member of the Board) within a
reasonable period of time following an event constituting Constructive
Termination Following a Change in Control (as defined in paragraph 7 below), or
if Rosenberger's employment terminates within one (1) year after the occurrence
of any Change in Control (as defined in paragraph 7 below) as a result of his
death or Permanent Disability
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following such Change in Control, Rosenberger shall be entitled to the following
separation benefits:
(A) Compensation and benefits earned under
paragraphs 3 and 4 through the date of Rosenberger's termination;
(B) Rosenberger's employment as an officer
of the Company shall terminate immediately; however, the Company shall continue
Rosenberger's employment as a non-officer employee of the Company for a period
of one(1) year following the date of his termination (the "Severance Period").
During the Severance Period, Rosenberger shall be entitled to the greater of (1)
his then current base salary or (2) or his base salary as provided in paragraph
3 of this Employment Agreement, less applicable withholding, payable in
accordance with the Company's normal payroll practices;
(C) Within ten (10) days of submission of
proper expense reports by Rosenberger, the Company shall reimburse the
Rosenberger for all expenses he has reasonably and necessarily incurred by in
connection with the business of the Company prior to his termination of
employment;
(D) Continued provision of the Company's
standard employee medical insurance coverages through the end of the Severance
Period; thereafter, Rosenberger shall be entitled to elect continued medical
insurance coverage in accordance with the applicable provisions of federal law
(COBRA); provided, however, that in the event Rosenberger becomes covered under
another employer's group health plan during the period provided for herein, the
Company shall cease provision of continued group health insurance for
Rosenberger; and
(E) Notwithstanding any provisions to the
contrary contained in any stock option agreement between the Company and
Rosenberger, if termination of Rosenberger's employment with the Company as
contemplated by this paragraph 6(b) occurs within one (1) year following a
Change in Control, then
(1) All stock options granted by
the Company to Rosenberger prior to the Change in Control, which are not
accelerated pursuant to the provisions of paragraph 4, shall become immediately
exercisable and vested in full as of the time of such termination; and
(2) All such stock options shall
remain exercisable for a period of at least one (1) year following Rosenberger's
termination of employment, subject to any longer periods for exercise of such
options set forth in the particular option agreements.
This paragraph 6(b)(i)(E) shall apply to all stock option agreements entered
into between the Company and Rosenberger, whether heretofore or hereafter
entered into.
(ii) Rosenberger's entitlement to any benefits under
paragraph 6(b) is conditioned upon Rosenberger's execution and delivery to the
Company of (A) a general release
4
<PAGE>
of claims in a form satisfactory to the Company and (B) Rosenberger's
resignation from all of his positions with the Company (with the exception of
any continued employment for the purposes set forth in paragraph 6(b)),
including from the Board, in a form satisfactory to the Company.
(iii) In the event that Rosenberger accepts
employment with, or provides any services to (whether as a partner, consultant,
joint venturer or otherwise), any person or entity which offers products or
services that are competitive with any products or services offered by the
Company or with any products or services that Rosenberger is aware the Company
intends to offer, Rosenberger shall be deemed to have resigned from his
employment with the Company effective immediately upon such acceptance of
employment or provision of services. Upon such resignation, Rosenberger shall
not be entitled to any further payments or benefits as provided under paragraph
6(b).
(iv) In the event that Rosenberger accepts employment
with, or provides any services to (whether as a partner, consultant, joint
venturer or otherwise), any person or entity while Rosenberger continues to
receive any separation benefits pursuant to this paragraph 6(b), Rosenberger
shall immediately notify the Company of such acceptance and provide to the
Company information with respect to such person or entity as the Company may
reasonably request in order to determine if that person's or entity's products
or services are competitive with the Company's.
7. Definitions. As used in this Employment Agreement, the following
terms shall have the meanings set forth below:
(a) "Acquiring Corporation" means, in connection with a Change
in Control, the surviving, continuing, successor, or purchasing corporation or
parent corporation thereof, as the case may be.
(b) "Cause" means Rosenberger's:
(i) theft, material act of dishonesty, fraud,
falsification of any employment or Company records or the commission of any
criminal act which impairs his ability to perform his duties under this
Employment Agreement;
(ii) improper disclosure of the Company's
confidential, business or proprietary information;
(iii) material breach of the Company's policies, work
rules or lawful directions from the Board of Directors; or
(iv) persistent failure to perform the lawful duties
and responsibilities assigned by the Company to him which is not cured within a
reasonable time following his receipt of written notice of such failure from the
Company.
5
<PAGE>
(c) "Change in Control" means an Ownership Change Event (as
defined below) or a series of related Ownership Change Events (collectively, the
"Transaction") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "Transferee
Corporation(s)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
For purposes of this Agreement, "Ownership Change Event" means the occurrence of
any of the following with respect to the Company: (i) the direct or indirect
sale or exchange in a single or series of related transactions by the
stockholders of the Company of more than fifty percent (50%) of the voting stock
of the Company; (ii) a merger or consolidation in which the Company is a party;
(iii) the sale, exchange, or transfer of all or substantially all of the assets
of the Company; or (iv) a liquidation or dissolution of the Company.
(d) "Constructive Termination Following a Change in Control"
means one or more of the following events that occurs within one (1) year after
the occurrence of any Change in Control:
(i) without Rosenberger's express written consent,
the assignment to Rosenberger of any duties, or any limitation of Rosenberger's
responsibilities, substantially inconsistent with his positions, duties,
responsibilities and status with the Company immediately prior to the date of
the Change in Control;
(ii) without Rosenberger's express written consent,
the removal of Rosenberger from his position with the Company as held by him
immediately prior to the Change in Control, except in connection with the
termination of Rosenberger's employment with the Company for Cause;
(iii) without Rosenberger's express written consent,
the relocation of the principal place of Rosenberger's employment to a location
that is more than fifty (50) miles from his principal place of employment
immediately prior to the date of the Change in Control, or the imposition of
travel requirements on Rosenberger substantially inconsistent with such travel
requirements existing immediately prior to the date of the Change in Control;
(iv) any failure by the Company to pay, or any
reduction by the Company of (A) Rosenberger's base salary in effect immediately
prior to the date of the Change
6
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in Control (unless reductions comparable in amount and duration are concurrently
made for all other employees of the Company with responsibilities,
organizational level and title comparable to Rosenberger), or (B) Rosenberger's
bonus compensation in effect immediately prior to the date of the Change in
Control (subject to applicable performance requirements with respect to the
actual amount of bonus compensation earned by Rosenberger and all other
participants in the bonus program);
(v) any failure by the Company to (A) continue to
provide Rosenberger with the opportunity to participate, on terms no less
favorable than those in effect for the benefit of any executive, management or
administrative group which customarily includes a person holding the employment
position or a comparable position with the Company then held by Rosenberger, any
benefit or compensation plans and programs, including, but not limited to, the
Company's life, disability, health, dental, medical, savings, profit sharing,
stock purchase and retirement plans in which Rosenberger was participating
immediately prior to the date of the Change in Control, or their equivalent
(provided, that any changes or terminations of such existing benefit or
compensation plans or programs shall not be a Constructive Termination within
the meaning of this paragraph if the changed plan or program or a replacement
plan or program provides equivalent or more favorable benefits or compensation
to Rosenberger), or (2) provide Rosenberger with all other fringe benefits (or
their equivalent) from time to time in effect for the benefit of any executive,
management or administrative group which customarily includes a person holding
the employment position or a comparable position with the Company then held by
Rosenberger; or
(vi) any failure or refusal of a successor company to
assume the Company's obligations under this Employment Agreement as required by
paragraph 15;
provided, however, that Rosenberger's resignation as a result of any of the
foregoing events shall be a voluntary resignation, and not a resignation
following Constructive Termination Following a Change in Control, unless
Rosenberger gives written notice of any such event(s) to the Board and allows
the Company at least ten (10) days thereafter to correct such condition(s).
(e) "Permanent Disability" means that:
(i) Rosenberger has been incapacitated by bodily
injury or disease so as to be prevented thereby from engaging in the performance
of his duties following reasonable accommodations on behalf of the Company;
(ii) such total incapacity shall have continued for a
period of six (6) consecutive months; and
(iii) such incapacity will, in the opinion of a
qualified physician, be permanent and continuous during the remainder of
Rosenberger's life.
8. Parachute Payments. In the event that any payment or benefit
received or to be received by Rosenberger pursuant to this Employment Agreement
or otherwise (collectively, the
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<PAGE>
"Payments") would result in a "parachute payment" as described in section 280G
of the Internal Revenue Code of 1986, as amended, notwithstanding the other
provisions of this Employment Agreement, the amount of such Payments will not
exceed the amount which produces the greatest after-tax benefit to Rosenberger.
For purposes of the foregoing, the greatest after-tax benefit will be determined
within thirty (30) days of the occurrence of such payment to Rosenberger, in his
sole and absolute discretion. If no such determination is made by Rosenberger
within thirty (30) days of the occurrence of such payment, the Company will
promptly make such determination in a fair and equitable manner.
9. Confidential and Proprietary Information. Rosenberger agrees to
abide by the terms and conditions of the Company's standard form of employee
confidentiality and assignment of inventions agreement as executed by
Rosenberger and attached hereto as Exhibit A.
10. Agreement Not To Compete Unfairly. Employee agrees that in the
event of his termination at any time and for any reason, he shall not compete
with the Company in any unfair manner, including, without limitation, using any
confidential or proprietary information of the Company to compete with the
Company in any way.
11. Non-Solicitation. Employee agrees that for a period of one year
after the date of the termination of his employment for any reason, he shall
not, either directly or indirectly, solicit the services, or attempt to solicit
the services, of any employee of the Company to any other person or entity.
12. Dispute Resolution. In the event of any dispute or claim relating
to or arising out of this Employment Agreement (including, but not limited to,
any claims of breach of contract, wrongful termination or age, sex, race or
other discrimination), Rosenberger and the Company agree that all such disputes
shall be fully and finally resolved by binding arbitration conducted by the
American Arbitration Association in Santa Clara County, California in accordance
with its National Employment Dispute Resolution rules, as those rules are
currently in effect (and not as they may be modified in the future). Employee
acknowledges that by accepting this arbitration provision he is waiving any
right to a jury trial in the event of such dispute. Provided, however, that this
arbitration provision shall not apply to any disputes or claims relating to or
arising out of the misuse or misappropriation of trade secrets or proprietary
information.
13. Attorneys' Fees. The prevailing party shall be entitled to recover
from the losing party its attorneys' fees and costs incurred in any action
brought to enforce any right arising out of this Employment Agreement.
14. Interpretation. Rosenberger and the Company agree that this
Employment Agreement shall be interpreted in accordance with and governed by the
laws of the State of California.
15. Successors and Assigns.
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(a) Successors of the Company. The Company will require any
successor or assign (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, expressly, absolutely and unconditionally to assume and
agree to perform this Employment Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession or
assignment had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such succession transaction shall be a breach
of this Employment Agreement and shall entitle the Employee to terminate his
employment with the Company within three (3) months thereafter and to receive
the benefits provided under Section 6(b) of this Employment Agreement in the
event of Constructive Termination Following a Change in Control. As used in this
Employment Agreement, "Company" shall mean the Company as defined above and any
successor or assign to its business and/or assets as aforesaid which executes
and delivers the agreement provided for in this paragraph 15 or which otherwise
becomes bound by all the terms and provisions of this Employment Agreement by
operation of law.
(b) Heirs of Employee. In view of the personal nature of the
services to be performed under this Employment Agreement by Rosenberger, he
shall not have the right to assign or transfer any of his rights, obligations or
benefits under this Employment Agreement, except as otherwise noted herein. This
Employment Agreement shall inure to the benefit of and be enforceable by
Rosenberger's personal and legal representatives, executors, administrators,
successors, heirs, distributees, devises and legatees. If Rosenberger should die
after the conditions to payment of benefits set forth herein have been met and
any amounts are still payable to him hereunder, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Employment Agreement to Rosenberger's beneficiary, successor, devisee, legatee
or other designee or, if there be no such designee, to Rosenberger's estate.
Until a contrary designation is made to the Company, Rosenberger hereby
designates as his beneficiary under this Employment Agreement the person whose
name appears below his signature on this Employment Agreement.
16. Entire Agreement. This Employment Agreement constitutes the entire
employment agreement between Rosenberger and the Company regarding the terms and
conditions of his employment, with the exception of (a) the agreement described
in paragraph 9 and (b) any stock option agreements between Rosenberger and the
Company. This Employment Agreement (including the documents described in clauses
(a) and (b) above) supersedes all prior negotiations, representations or
agreements between Rosenberger and the Company, whether written or oral,
concerning Rosenberger's employment by the Company.
17. Notices. For purposes of this Employment Agreement, notices and all
other communications provided for in the Employment Agreement shall be in
writing and shall be deemed to have been duly given when delivered or mailed by
United States certified mail, return receipt requested, postage prepaid, as
follows:
if to the Company: Network Peripherals Inc.
1371 McCarthy Boulevard
Milpitas, CA 95035
Attn: Corporate Secretary
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and if to Rosenberger, at the address specified at the end of this Employment
Agreement. Notice may also be given at such other address as either party may
have furnished to the other in writing in accordance herewith, except that
notices of change of address shall be effective only upon receipt.
18. Validity: If any one or more of the provisions (or any part
thereof) of this Employment Agreement shall be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions (or any part thereof) shall not in any way be affected or
impaired thereby.
19. Modification: This Employment Agreement may only be modified or
amended by a supplemental written agreement signed by Rosenberger and the
Company.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement
as of the date and year written below.
NETWORK PERIPHERALS INC.
Date: June 11, 1998 By: \s\ Robert Hersh
-------------- -----------------
Its: Vice President, Finance
------------------------
Date: June 11, 1998 \s\ William Rosenberger
-------------- ------------------------
William F. Rosenberger
Address for Notice to Rosenberger:
----------------------------------
----------------------------------
Name of Designated Beneficiary: Address of Designated Beneficiary:
- -------------------------------- ----------------------------------
----------------------------------
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AMENDED EMPLOYMENT AGREEMENT
This Amended Employment Agreement (the "Agreement") is made and entered
into as of October 19, 1998 (the "Effective Date"), by and between Network
Peripherals Inc., a Delaware corporation (the "Company"), and William F.
Rosenberger ("Rosenberger"). The Agreement supersedes, in its entirety, Section
4 of the Employment Agreement between the Company and Rosenberger dated June 11,
1998.
4. Stock Option. Rosenberger shall be granted the option to purchase up to
500,000 shares of Common stock of the Company (the "Option"). Subject
to Rosenberger's continued employment with the Company, the shares
subject to the Option (the "Optioned Shares") shall become vested and
exercisable at the rate of 50,000 Optioned Shares on December 21, 1998
and an additional 8,333 Optioned Shares for each full month of
Rosenberger's employment with the Company thereafter. Provided that
Rosenberger's employment with the company has not terminated prior to
the date of the consummation of a Change in Control (as defined in
paragraph 7 below), the vesting and exercisability of the Optioned
Shares shall be accelerated effective as of the date ten (10) days
prior to the date of the Change in control as to 100% of the Optioned
Shares that would otherwise remain unvested as of the date of the
Change in Control.
Except as otherwise provided herein, the Option shall be subject to the
terms of the Company's 1997 Stock Plan and the appropriate standard
form Company stock option agreement, which Rosenberger shall be
required to sign as a condition of the issuance of the Option.
NETWORK PERIPHERALS INC.
Date: October 19, 1998 By: \s\ Robert Hersh
---------------------- -----------------------------
Its: Vice President, Finance
----------------------------
Date: October 19, 1998 \s\ William Rosenberger
---------------------- --------------------------------
William F. Rosenberger
11
Exhibit 10.42
Salary Continuation Agreement with Jerry McDowell
SALARY CONTINUATION AGREEMENT
This Salary Continuation Agreement (the "Agreement") is made and
entered into as of October 19, 1998 (the "Effective Date"), by and between
Network Peripherals Inc., a Delaware corporation (the "Company"), and Jerry
McDowell ("Employee").
Recitals
The Company recognizes that the possibility of a Change in Control or
other event may occur which may change the nature and structure of the Company
and that uncertainty regarding the consequences of such events may adversely
affect the Company's ability to retain its key employees. The Company also
recognizes that the Employee possesses an intimate and essential knowledge of
the Company upon which the Company may need to draw for objective advice and
continued services in connection with any acquisition of the Company or other
Change in Control that is potentially advantageous to the Company's
stockholders. The Company believes that the existence of this Agreement will
serve as an incentive to Employee to remain in the employ of the Company and
will enhance its ability to call on and rely upon the Employee in connection
with a Change in Control.
The Company and the Employee desire to enter into this Agreement in
order to provide additional compensation and benefits to the Employee in
recognition of past services and to encourage Employee to continue to devote his
full attention and dedication to the Company and to continue his employment with
the Company.
1. Definitions. As used in this Agreement, unless the context requires
a different meaning, the following terms shall have the meanings set forth
herein:
(a) "Cause" means:
(i) theft, a material act of dishonesty, fraud, the
falsification of any employment or Company records or the commission of any
criminal act which impairs Employee's ability to perform his duties under this
Agreement;
(ii) improper disclosure of the Company's
confidential, business or proprietary information by the Employee;
(iii) any action by Employee which the Company's
Board of Directors (the "Board") reasonably believes has had or will have a
material detrimental effect on the Company's reputation or business; or
1
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(iv) persistent failure of the Employee to perform
the lawful duties and responsibilities assigned by the Company which is not
cured within a reasonable time following the Employee's receipt of written
notice of such failure from the Company.
(b) "Change in Control " means an Ownership Change Event (as
defined below) or a series of related Ownership Change Events (collectively, the
"Transaction") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "Transferee
Corporation(s)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
For purposes of this Agreement, "Ownership Change Event" means the
occurrence of any of the following with respect to the Company: (i) the direct
or indirect sale or exchange in a single or series of related transactions by
the stockholders of the Company of more than fifty percent (50%) of the voting
stock of the Company; (ii) a merger or consolidation in which the Company is a
party; (iii) the sale, exchange, or transfer of all or substantially all of the
assets of the Company; or (iv) a liquidation or dissolution of the Company.
(c) "Constructive Termination" means one or more of the
following events that occurs within one (1) year after the occurrence of any
Change in Control:
(i) without the Employee's express written consent,
the assignment to the Employee of any duties, or any limitation of the
Employee's responsibilities, substantially inconsistent with the Employee's
positions, duties, responsibilities and status with the Company immediately
prior to the date of the Change in Control;
(ii) without the Employee's express written consent,
the removal of the Employee from the Employee's position with the Company as
held by the Employee immediately prior to the Change in Control (including a
termination of employment as a result of the death or Permanent Disability of
the Employee), except in connection with the termination of the employment of
the Employee by the Company for Cause;
(iii) without the Employee's express written consent,
the relocation of the principal place of the Employee's employment to a location
that is more than fifty (50) miles from the Employee's principal place of
employment immediately prior to the date of the Change in Control, or the
imposition of travel requirements on the Employee substantially inconsistent
with such travel requirements existing immediately prior to the date of the
Change in Control;
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(iv) any failure by the Company to pay, or any
reduction by the Company of (1) the Employee's base salary in effect immediately
prior to the date of the Change in Control (unless reductions comparable in
amount and duration are concurrently made for all other employees of the Company
with responsibilities, organizational level and title comparable to the
Employee), or (2) the Employee's bonus compensation in effect immediately prior
to the date of the Change in Control (subject to applicable performance
requirements with respect to the actual amount of bonus compensation earned by
the Employee and all other participants in the bonus program);
(v) any failure by the Company to (1) continue to
provide the Employee with the opportunity to participate, on terms no less
favorable than those in effect for the benefit of any executive, management or
administrative group which customarily includes a person holding the employment
position or a comparable position with the Company then held by the Employee,
any benefit or compensation plans and programs, including, but not limited to,
the Company's life, disability, health, dental, medical, savings, profit
sharing, stock purchase and retirement plans in which the Employee was
participating immediately prior to the date of the Change in Control, or their
equivalent (provided, that any changes or terminations of such existing benefit
or compensation plans or programs shall not be a Constructive Termination if the
changed plan or program or a replacement plan or program provides equivalent or
more favorable benefits or compensation to the Employee), or (2) provide the
Employee with all other fringe benefits (or their equivalent) from time to time
in effect for the benefit of any executive, management or administrative group
which customarily includes a person holding the employment position or a
comparable position with the Company then held by the Employee; or
(vi) any failure or refusal of a successor company to
assume the Company's obligations under this Agreement as required by Section 13;
provided, however, that the Employee's resignation as a result of any of the
foregoing events shall be a voluntary resignation, and not a resignation
following Constructive Termination, unless the Employee gives written notice of
any such event(s) to the Board and allows the Company at least ten (10) days
thereafter to correct such condition(s).
(d) "Effective Date" means the day and year first set forth
above.
(e) "Permanent Disability" means that:
(i) the Employee has been incapacitated by bodily
injury or disease so as to be prevented thereby from engaging in the performance
of the Employee's duties following reasonable accommodations on behalf of the
Company;
(ii) such total incapacity shall have continued for a
period of six (6) consecutive months; and
(iii) such incapacity will, in the opinion of a
qualified physician, be permanent and continuous during the remainder of the
Employee's life.
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(f) "Termination Upon Change in Control" means any one of the
following:
(i) any termination of the employment of the Employee
by the Company without Cause within one (1) year after the occurrence of any
Change in Control;
(ii) any termination of the employment of the
Employee by the Company without Cause during the period commencing thirty (30)
days prior to the date of the Company's first public announcement that the
Company has entered into a definitive agreement to effect a Change in Control
(even though still subject to approval by the Company's stockholders and other
conditions and contingencies) and ending on the date of the Change in Control;
or
(iii) any resignation by the Employee from all
capacities in which the Employee is then rendering service to the Company within
a reasonable period of time following the event constituting Constructive
Termination (with the termination of employment following death or Permanent
Disability being deemed a resignation);
provided, however, that "Termination Upon Change in Control" shall not include
any termination of the employment of the Employee (1) by the Company for Cause;
or (2) as a result of the voluntary termination of employment by the Employee
that is not deemed a Constructive Termination under Subsection 1(c) above.
2. Position and Duties. Until a Change in Control, Employee shall
continue to be an at-will employee of the Company employed in his current
position at his then current salary rate, subject to revision from time to time
by the Board of Directors or a committee thereof. Employee shall also be
entitled to continue to participate in and to receive benefits on the same basis
as other executive or senior staff members under any of the Company's employee
benefit plans as in effect from time to time. In addition, Employee shall be
entitled to the benefits afforded to other employees similarly situated under
the Company's vacation, holiday and business expense reimbursement policies, as
amended from time to time. Employee agrees to devote his full business time,
energy and skill to his duties at the Company. These duties shall include, but
not be limited to, any duties consistent with his position which may be assigned
to Employee from time to time.
3. Benefits Upon Voluntary Termination, Permanent Disability or Death.
In the event that Employee voluntarily terminates his employment relationship
with the Company at any time and such termination is not deemed a Constructive
Termination as described in Subsection 1(c) above, or in the event that
Employee's employment terminates as a result of his death or Permanent
Disability prior to a Change in Control, Employee shall be entitled to no
compensation or benefits from the Company other than those earned under Section
2 above through the date of his termination of employment.
4. Termination Upon Change in Control.
(a) In the event of the Employee's Termination Upon Change in
Control, Employee shall be entitled to the following separation benefits:
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(i) those benefits earned under Section 2 (other than
any unpaid incentive bonus) through the date of Employee's termination;
(ii) Employee's employment as an officer of the
Company shall terminate immediately; however, the Company shall continue
Employee's employment as a non-officer employee of the Company for a period of
six (6) months following the date of the Employee's termination (the "Severance
Period"). During such period, Employee shall be entitled to the greater of (1)
Employee's then current salary at the time of the Change in Control, or (2)
Employee's salary and bonus over the preceding six (6) months, in either case
less applicable withholding, payable in accordance with the Company's normal
payroll practices;
(iii) within ten (10) days of submission of proper
expense reports by the Employee, the Company shall reimburse the Employee for
all expenses reasonably and necessarily incurred by the Employee in connection
with the business of the Company prior to his termination of employment;
(iv) continued provision of the Company's standard
employee medical insurance coverages through the end of the Severance Period;
thereafter, Employee shall be entitled to elect continued medical insurance
coverage in accordance with the applicable provisions of federal law (COBRA);
provided, however, that in the event Employee becomes covered under another
employer's group health plan during the period provided for herein, the Company
shall cease provision of continued group health insurance for Employee; and
(v) notwithstanding any provisions to the contrary
contained in any stock option agreement between the Company and the Employee,
upon a Termination Upon Change in Control,
(1) all stock options granted by the Company
to the Employee prior to the Change in Control, which are not accelerated
pursuant to the provisions of Section 5, shall become immediately exercisable
and vested in full as of the time of such Termination Upon Change in Control;
and
(2) all such stock options shall remain
exercisable for a period of at least one (1) year, subject to any longer periods
for exercise of such options set forth in the particular option agreements.
This Subsection 4(a)(v) shall apply to all such stock option agreements, whether
heretofore or hereafter entered into between the Company and the Employee.
(b) The Employee's entitlement to any benefits under Section 4
is conditioned upon the Employee's execution and delivery to the Company of (i)
a general release of claims in a form satisfactory to the Company and (ii) a
resignation from all of Employee's positions with the Company (with the
exception of any continued employment for the purposes set forth in Section
4(a)) in a form satisfactory to the Company.
(c) In the event that Employee accepts employment with, or
provides any services to (whether as a partner, consultant, joint venturer or
otherwise), any person or entity
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which offers products or services that are competitive with any products or
services offered by the Company or with any products or services that Employee
is aware the Company intends to offer, Employee shall be deemed to have resigned
from his employment with the Company effective immediately upon such acceptance
of employment or provision of services. Upon such resignation, Employee shall
not be entitled to any further payments or benefits as provided under this
Section 4.
(d) In the event that Employee accepts employment with, or
provides any services to (whether as a partner, consultant, joint venturer or
otherwise), any person or entity while Employee continues to receive any
separation benefits pursuant to this Section 4, Employee shall immediately
notify the Company of such acceptance and provide to the Company information
with respect to such person or entity as the Company may reasonably request in
order to determine if that person's or entity's products or services are
competitive with the Company's.
5. Acceleration of Exercisability and Vesting of Stock Options Upon
Change in Control. In the event of a Change in Control, all stock options
granted to the Employee prior to the Change in Control (whether heretofore or
hereafter granted) shall become immediately exercisable and vested in full
effective as of the date thirty (30) days before the consummation of the
transaction constituting such Change in Control.
6. Parachute Payments. In the event that any payment or benefit
received or to be received by Employee pursuant to this Agreement or otherwise
(collectively, the "Payments") would result in a "parachute payment" as
described in section 280G of the Internal Revenue Code of 1986, as amended,
notwithstanding the other provisions of this Agreement, the amount of such
Payments will not exceed the amount which produces the greatest after-tax
benefit to Employee. For purposes of the foregoing, the greatest after-tax
benefit will be determined within thirty (30) days of the occurrence of such
payment to Employee, in Employee's sole and absolute discretion. If no such
determination is made by Employee within thirty (30) days of the occurrence of
such payment, the Company will promptly make such determination in a fair and
equitable manner.
7. Exclusive Remedy. Under any claim for breach of this Agreement or
wrongful termination, the payments and benefits provided for in Section 4 shall
constitute the Employee's sole and exclusive remedy for any alleged injury or
other damages arising out of the cessation of the employment relationship
between the Employee and the Company in the event of Employee's termination.
Except as expressly set forth herein, the Employee shall be entitled to no other
compensation, benefits, or other payments from the Company as a result of any
termination of employment with respect to which the payments and/or benefits
described in Section 4 have been provided to the Employee.
8. Proprietary and Confidential Information. The Employee agrees to
continue to abide by the terms and conditions of the Company's confidentiality
and/or proprietary rights agreement between the Employee and the Company.
9. Conflict of Interest. Employee agrees that for a period of one (1)
year after termination of his employment with the Company, he will not, directly
or indirectly, solicit the
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services of or in any other manner persuade employees or customers of the
Company to discontinue that person's or entity's relationship with or to the
Company as an employee or customer, as the case may be.
10. Arbitration. Any claim, dispute or controversy arising out of this
Agreement, the interpretation, validity or enforceability of this Agreement or
the alleged breach thereof shall be submitted by the parties to binding
arbitration by the American Arbitration Association in Santa Clara County,
California; provided, however, that this arbitration provision shall not
preclude the Company from seeking injunctive relief from any court having
jurisdiction with respect to any disputes or claims relating to or arising out
of the misuse or misappropriation of the Company's trade secrets or confidential
and proprietary information. All costs and expenses of arbitration or
litigation, including but not limited to attorneys fees and other costs
reasonably incurred by the prevailing party, as determined by such arbitration
or litigation, shall be paid by the other party. Judgment may be entered on the
award of the arbitration in any court having jurisdiction.
11. Interpretation. Employee and the Company agree that this Agreement
shall be interpreted in accordance with and governed by the laws of the State of
California.
12. Conflict in Benefits. This Agreement shall supersede all prior
arrangements, whether written or oral, and understandings regarding the subject
matter of this Agreement; provided, however, that this Agreement is not intended
to and shall not affect, limit or terminate (i) any plans, programs, or
arrangements of the Company that are either in writing or regularly made
available to a significant number of employees of the Company, (ii) any
agreement or arrangement with the Employee that has been reduced to writing and
which does not relate to the subject matter hereof, or (iii) any agreements or
arrangements hereafter entered into by the parties in writing, except as
otherwise expressly provided herein.
13. Successors and Assigns.
(a) Successors of the Company. The Company will require any
successor or assign (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, expressly, absolutely and unconditionally to assume and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession or assignment
had taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession transaction shall be a breach of this
Agreement and shall entitle the Employee to terminate his employment with the
Company within three (3) months thereafter and to receive the benefits provided
under Section 4 of this Agreement in the event of Termination Upon Change in
Control. As used in this Agreement, "Company" shall mean the Company as defined
above and any successor or assign to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Section 13 or
which otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law.
(b) Heirs of Employee. This Agreement shall inure to the
benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devises and legatees. If the Employee should die after the conditions to payment
of benefits set forth herein have been met and any amounts are still
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<PAGE>
payable to his hereunder, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to the Employee's
beneficiary, successor, devisee, legatee or other designee or, if there be no
such designee, to the Employee's estate. Until a contrary designation is made to
the Company, the Employee hereby designates as his beneficiary under this
Agreement the person whose name appears below his signature on this Agreement.
14. Notices. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
if to the Company: Network Peripherals Inc.
1371 McCarthy Boulevard
Milpitas, CA 95035
Attn: President
and if to the Employee at the address specified at the end of this Agreement.
Notice may also be given at such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
15. No Representations. Employee acknowledges that he is not relying
and has not relied on any promise, representation or statement made by or on
behalf of the Company which is not set forth in this Agreement.
16. Validity. If any one or more of the provisions (or any part
thereof) of this Agreement shall be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.
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17. Modification. This Agreement may only be modified or amended by a
supplemental written agreement signed by Employee and the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year written below.
Network Peripherals Inc.
Date: October 19, 1998 By: ______________________________
Signature
Title: Vice President, Finance
Date: October 19, 1998 __________________________________
Employee's Signature
Address for Notice to Employee:
Name of Designated Beneficiary: Address of Designated Beneficiary:
9
Exhibit 10.43
Salary Continuation Agreement with Wilson Cheung
AMENDED AND RESTATED
SALARY CONTINUATION AGREEMENT
This Amended and Restated Salary Continuation Agreement (the
"Agreement") is made and entered into as of January 13, 1999 (the "Effective
Date"), by and between Network Peripherals Inc., a Delaware corporation (the
"Company"), and Wilson Cheung ("Employee").
Recitals
The Company recognizes that the possibility of a Change in Control or
other event may occur which may change the nature and structure of the Company
and that uncertainty regarding the consequences of such events may adversely
affect the Company's ability to retain its key employees. The Company also
recognizes that the Employee possesses an intimate and essential knowledge of
the Company upon which the Company may need to draw for objective advice and
continued services in connection with any acquisition of the Company or other
Change in Control that is potentially advantageous to the Company's
stockholders. The Company believes that the existence of this Agreement will
serve as an incentive to Employee to remain in the employ of the Company and
will enhance its ability to call on and rely upon the Employee in connection
with a Change in Control.
The Company and the Employee desire to enter into this Agreement in
order to provide additional compensation and benefits to the Employee in
recognition of past services and to encourage Employee to continue to devote his
full attention and dedication to the Company and to continue his employment with
the Company.
1. Definitions. As used in this Agreement, unless the context requires
a different meaning, the following terms shall have the meanings set forth
herein:
(a) "Cause" means:
(i) theft, a material act of dishonesty, fraud, the
falsification of any employment or Company records or the commission of any
criminal act which impairs Employee's ability to perform his duties under this
Agreement;
(ii) improper disclosure of the Company's
confidential, business or proprietary information by the Employee;
(iii) any action by Employee which the Company's
Board of Directors (the "Board") reasonably believes has had or will have a
material detrimental effect on the Company's reputation or business; or
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(iv) persistent failure of the Employee to perform
the lawful duties and responsibilities assigned by the Company which is not
cured within a reasonable time following the Employee's receipt of written
notice of such failure from the Company.
(b) "Change in Control " means an Ownership Change Event (as
defined below) or a series of related Ownership Change Events (collectively, the
"Transaction") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "Transferee
Corporation(s)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
For purposes of this Agreement, "Ownership Change Event" means the
occurrence of any of the following with respect to the Company: (i) the direct
or indirect sale or exchange in a single or series of related transactions by
the stockholders of the Company of more than fifty percent (50%) of the voting
stock of the Company; (ii) a merger or consolidation in which the Company is a
party; (iii) the sale, exchange, or transfer of all or substantially all of the
assets of the Company; or (iv) a liquidation or dissolution of the Company.
(c) "Constructive Termination" means one or more of the
following events that occurs within one (1) year after the occurrence of any
Change in Control:
(i) without the Employee's express written consent,
the assignment to the Employee of any duties, or any limitation of the
Employee's responsibilities, substantially inconsistent with the Employee's
positions, duties, responsibilities and status with the Company immediately
prior to the date of the Change in Control;
(ii) without the Employee's express written consent,
the removal of the Employee from the Employee's position with the Company as
held by the Employee immediately prior to the Change in Control (including a
termination of employment as a result of the death or Permanent Disability of
the Employee), except in connection with the termination of the employment of
the Employee by the Company for Cause;
(iii) without the Employee's express written consent,
the relocation of the principal place of the Employee's employment to a location
that is more than fifty (50) miles from the Employee's principal place of
employment immediately prior to the date of the Change in Control, or the
imposition of travel requirements on the Employee substantially inconsistent
with such travel requirements existing immediately prior to the date of the
Change in Control;
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(iv) any failure by the Company to pay, or any
reduction by the Company of (1) the Employee's base salary in effect immediately
prior to the date of the Change in Control (unless reductions comparable in
amount and duration are concurrently made for all other employees of the Company
with responsibilities, organizational level and title comparable to the
Employee), or (2) the Employee's bonus compensation in effect immediately prior
to the date of the Change in Control (subject to applicable performance
requirements with respect to the actual amount of bonus compensation earned by
the Employee and all other participants in the bonus program);
(v) any failure by the Company to (1) continue to
provide the Employee with the opportunity to participate, on terms no less
favorable than those in effect for the benefit of any executive, management or
administrative group which customarily includes a person holding the employment
position or a comparable position with the Company then held by the Employee,
any benefit or compensation plans and programs, including, but not limited to,
the Company's life, disability, health, dental, medical, savings, profit
sharing, stock purchase and retirement plans in which the Employee was
participating immediately prior to the date of the Change in Control, or their
equivalent (provided, that any changes or terminations of such existing benefit
or compensation plans or programs shall not be a Constructive Termination if the
changed plan or program or a replacement plan or program provides equivalent or
more favorable benefits or compensation to the Employee), or (2) provide the
Employee with all other fringe benefits (or their equivalent) from time to time
in effect for the benefit of any executive, management or administrative group
which customarily includes a person holding the employment position or a
comparable position with the Company then held by the Employee; or
(vi) any failure or refusal of a successor company to
assume the Company's obligations under this Agreement as required by Section 13;
provided, however, that the Employee's resignation as a result of any of the
foregoing events shall be a voluntary resignation, and not a resignation
following Constructive Termination, unless the Employee gives written notice of
any such event(s) to the Board and allows the Company at least ten (10) days
thereafter to correct such condition(s).
(d) "Effective Date" means the day and year first set forth
above.
(e) "Permanent Disability" means that:
(i) the Employee has been incapacitated by bodily
injury or disease so as to be prevented thereby from engaging in the performance
of the Employee's duties following reasonable accommodations on behalf of the
Company;
(ii) such total incapacity shall have continued for a
period of six (6) consecutive months; and
(iii) such incapacity will, in the opinion of a
qualified physician, be permanent and continuous during the remainder of the
Employee's life.
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(f) "Termination Upon Change in Control" means any one of the
following:
(i) any termination of the employment of the Employee
by the Company without Cause within one (1) year after the occurrence of any
Change in Control;
(ii) any termination of the employment of the
Employee by the Company without Cause during the period commencing thirty (30)
days prior to the date of the Company's first public announcement that the
Company has entered into a definitive agreement to effect a Change in Control
(even though still subject to approval by the Company's stockholders and other
conditions and contingencies) and ending on the date of the Change in Control;
or
(iii) any resignation by the Employee from all
capacities in which the Employee is then rendering service to the Company within
a reasonable period of time following the event constituting Constructive
Termination (with the termination of employment following death or Permanent
Disability being deemed a resignation);
provided, however, that "Termination Upon Change in Control" shall not include
any termination of the employment of the Employee (1) by the Company for Cause;
or (2) as a result of the voluntary termination of employment by the Employee
that is not deemed a Constructive Termination under Subsection 1(c) above.
2. Position and Duties. Until a Change in Control, Employee shall
continue to be an at-will employee of the Company employed in his current
position at his then current salary rate, subject to revision from time to time
by the Board of Directors or a committee thereof. Employee shall also be
entitled to continue to participate in and to receive benefits on the same basis
as other executive or senior staff members under any of the Company's employee
benefit plans as in effect from time to time. In addition, Employee shall be
entitled to the benefits afforded to other employees similarly situated under
the Company's vacation, holiday and business expense reimbursement policies, as
amended from time to time. Employee agrees to devote his full business time,
energy and skill to his duties at the Company. These duties shall include, but
not be limited to, any duties consistent with his position which may be assigned
to Employee from time to time.
3. Benefits Upon Voluntary Termination, Permanent Disability or Death.
In the event that Employee voluntarily terminates his employment relationship
with the Company at any time and such termination is not deemed a Constructive
Termination as described in Subsection 1(c) above, or in the event that
Employee's employment terminates as a result of his death or Permanent
Disability prior to a Change in Control, Employee shall be entitled to no
compensation or benefits from the Company other than those earned under Section
2 above through the date of his termination of employment.
4. Termination Upon Change in Control.
(a) In the event of the Employee's Termination Upon Change in
Control, Employee shall be entitled to the following separation benefits:
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<PAGE>
(i) those benefits earned under Section 2 (other than
any unpaid incentive bonus) through the date of Employee's termination;
(ii) Employee's employment as an officer of the
Company shall terminate immediately; however, the Company shall continue
Employee's employment as a non-officer employee of the Company for a period of
one (1) year following the date of the Employee's termination (the "Severance
Period"). During such period, Employee shall be entitled to the greater of (1)
Employee's then current salary at the time of the Change in Control, or (2)
Employee's salary and bonus over the preceding twelve (12) months, in either
case less applicable withholding, payable in accordance with the Company's
normal payroll practices;
(iii) within ten (10) days of submission of proper
expense reports by the Employee, the Company shall reimburse the Employee for
all expenses reasonably and necessarily incurred by the Employee in connection
with the business of the Company prior to his termination of employment;
(iv) continued provision of the Company's standard
employee medical insurance coverages through the end of the Severance Period;
thereafter, Employee shall be entitled to elect continued medical insurance
coverage in accordance with the applicable provisions of federal law (COBRA);
provided, however, that in the event Employee becomes covered under another
employer's group health plan during the period provided for herein, the Company
shall cease provision of continued group health insurance for Employee; and
(v) notwithstanding any provisions to the contrary
contained in any stock option agreement between the Company and the Employee,
upon a Termination Upon Change in Control,
(1) all stock options granted by the Company
to the Employee prior to the Change in Control, which are not accelerated
pursuant to the provisions of Section 5, shall become immediately exercisable
and vested in full as of the time of such Termination Upon Change in Control;
and
(2) all such stock options shall remain
exercisable for a period of at least one (1) year, subject to any longer periods
for exercise of such options set forth in the particular option agreements.
This Subsection 4(a)(v) shall apply to all such stock option agreements, whether
heretofore or hereafter entered into between the Company and the Employee.
(b) The Employee's entitlement to any benefits under Section 4
is conditioned upon the Employee's execution and delivery to the Company of (i)
a general release of claims in a form satisfactory to the Company and (ii) a
resignation from all of Employee's positions with the Company (with the
exception of any continued employment for the purposes set forth in Section
4(a)) in a form satisfactory to the Company.
(c) In the event that Employee accepts employment with, or
provides any services to (whether as a partner, consultant, joint venturer or
otherwise), any person or entity
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which offers products or services that are competitive with any products or
services offered by the Company or with any products or services that Employee
is aware the Company intends to offer, Employee shall be deemed to have resigned
from his employment with the Company effective immediately upon such acceptance
of employment or provision of services. Upon such resignation, Employee shall
not be entitled to any further payments or benefits as provided under this
Section 4.
(d) In the event that Employee accepts employment with, or
provides any services to (whether as a partner, consultant, joint venturer or
otherwise), any person or entity while Employee continues to receive any
separation benefits pursuant to this Section 4, Employee shall immediately
notify the Company of such acceptance and provide to the Company information
with respect to such person or entity as the Company may reasonably request in
order to determine if that person's or entity's products or services are
competitive with the Company's.
5. Acceleration of Exercisability and Vesting of Stock Options Upon
Change in Control. In the event of a Change in Control, all stock options
granted to the Employee prior to the Change in Control (whether heretofore or
hereafter granted) shall become immediately exercisable and vested in full
effective as of the date thirty (30) days before the consummation of the
transaction constituting such Change in Control.
6. Parachute Payments. In the event that any payment or benefit
received or to be received by Employee pursuant to this Agreement or otherwise
(collectively, the "Payments") would result in a "parachute payment" as
described in section 280G of the Internal Revenue Code of 1986, as amended,
notwithstanding the other provisions of this Agreement, the amount of such
Payments will not exceed the amount which produces the greatest after-tax
benefit to Employee. For purposes of the foregoing, the greatest after-tax
benefit will be determined within thirty (30) days of the occurrence of such
payment to Employee, in Employee's sole and absolute discretion. If no such
determination is made by Employee within thirty (30) days of the occurrence of
such payment, the Company will promptly make such determination in a fair and
equitable manner.
7. Exclusive Remedy. Under any claim for breach of this Agreement or
wrongful termination, the payments and benefits provided for in Section 4 shall
constitute the Employee's sole and exclusive remedy for any alleged injury or
other damages arising out of the cessation of the employment relationship
between the Employee and the Company in the event of Employee's termination.
Except as expressly set forth herein, the Employee shall be entitled to no other
compensation, benefits, or other payments from the Company as a result of any
termination of employment with respect to which the payments and/or benefits
described in Section 4 have been provided to the Employee.
8. Proprietary and Confidential Information. The Employee agrees to
continue to abide by the terms and conditions of the Company's confidentiality
and/or proprietary rights agreement between the Employee and the Company.
9. Conflict of Interest. Employee agrees that for a period of one (1)
year after termination of his employment with the Company, he will not, directly
or indirectly, solicit the
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services of or in any other manner persuade employees or customers of the
Company to discontinue that person's or entity's relationship with or to the
Company as an employee or customer, as the case may be.
10. Arbitration. Any claim, dispute or controversy arising out of this
Agreement, the interpretation, validity or enforceability of this Agreement or
the alleged breach thereof shall be submitted by the parties to binding
arbitration by the American Arbitration Association in Santa Clara County,
California; provided, however, that this arbitration provision shall not
preclude the Company from seeking injunctive relief from any court having
jurisdiction with respect to any disputes or claims relating to or arising out
of the misuse or misappropriation of the Company's trade secrets or confidential
and proprietary information. All costs and expenses of arbitration or
litigation, including but not limited to attorneys fees and other costs
reasonably incurred by the prevailing party, as determined by such arbitration
or litigation, shall be paid by the other party. Judgment may be entered on the
award of the arbitration in any court having jurisdiction.
11. Interpretation. Employee and the Company agree that this Agreement
shall be interpreted in accordance with and governed by the laws of the State of
California.
12. Conflict in Benefits. This Agreement shall supersede all prior
arrangements, whether written or oral, and understandings regarding the subject
matter of this Agreement; provided, however, that this Agreement is not intended
to and shall not affect, limit or terminate (i) any plans, programs, or
arrangements of the Company that are either in writing or regularly made
available to a significant number of employees of the Company, (ii) any
agreement or arrangement with the Employee that has been reduced to writing and
which does not relate to the subject matter hereof, or (iii) any agreements or
arrangements hereafter entered into by the parties in writing, except as
otherwise expressly provided herein.
13. Successors and Assigns.
(a) Successors of the Company. The Company will require any
successor or assign (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, expressly, absolutely and unconditionally to assume and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession or assignment
had taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession transaction shall be a breach of this
Agreement and shall entitle the Employee to terminate his employment with the
Company within three (3) months thereafter and to receive the benefits provided
under Section 4 of this Agreement in the event of Termination Upon Change in
Control. As used in this Agreement, "Company" shall mean the Company as defined
above and any successor or assign to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Section 13 or
which otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law.
(b) Heirs of Employee. This Agreement shall inure to the
benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devises and legatees. If the Employee should die after the conditions to payment
of benefits set forth herein have been met and any amounts are still
7
<PAGE>
payable to his hereunder, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to the Employee's
beneficiary, successor, devisee, legatee or other designee or, if there be no
such designee, to the Employee's estate. Until a contrary designation is made to
the Company, the Employee hereby designates as his beneficiary under this
Agreement the person whose name appears below his signature on this Agreement.
14. Notices. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
if to the Company: Network Peripherals Inc.
1371 McCarthy Boulevard
Milpitas, CA 95035
Attn: President
and if to the Employee at the address specified at the end of this Agreement.
Notice may also be given at such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
15. No Representations. Employee acknowledges that he is not relying
and has not relied on any promise, representation or statement made by or on
behalf of the Company which is not set forth in this Agreement.
16. Validity. If any one or more of the provisions (or any part
thereof) of this Agreement shall be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.
8
<PAGE>
17. Modification. This Agreement may only be modified or amended by a
supplemental written agreement signed by Employee and the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year written below.
Network Peripherals Inc.
Date: January 13, 1999 By: ______________________________
Signature
Title: President and CEO
Date: January 13, 1999 __________________________________
Employee's Signature
Address for Notice to Employee:
Name of Designated Beneficiary: Address of Designated Beneficiary:
9
Exhibit 10.44
Salary Continuation Agreement with Robert Zecha
AMENDED AND RESTATED
SALARY CONTINUATION AGREEMENT
This Amended and Restated Salary Continuation Agreement (the
"Agreement") is made and entered into as of January 13, 1999 (the "Effective
Date"), by and between Network Peripherals Inc., a Delaware corporation (the
"Company"), and Rob Zecha ("Employee").
Recitals
The Company recognizes that the possibility of a Change in Control or
other event may occur which may change the nature and structure of the Company
and that uncertainty regarding the consequences of such events may adversely
affect the Company's ability to retain its key employees. The Company also
recognizes that the Employee possesses an intimate and essential knowledge of
the Company upon which the Company may need to draw for objective advice and
continued services in connection with any acquisition of the Company or other
Change in Control that is potentially advantageous to the Company's
stockholders. The Company believes that the existence of this Agreement will
serve as an incentive to Employee to remain in the employ of the Company and
will enhance its ability to call on and rely upon the Employee in connection
with a Change in Control.
The Company and the Employee desire to enter into this Agreement in
order to provide additional compensation and benefits to the Employee in
recognition of past services and to encourage Employee to continue to devote his
full attention and dedication to the Company and to continue his employment with
the Company.
1. Definitions. As used in this Agreement, unless the context requires
a different meaning, the following terms shall have the meanings set forth
herein:
(a) "Cause" means:
(i) theft, a material act of dishonesty, fraud, the
falsification of any employment or Company records or the commission of any
criminal act which impairs Employee's ability to perform his duties under this
Agreement;
(ii) improper disclosure of the Company's
confidential, business or proprietary information by the Employee;
(iii) any action by Employee which the Company's
Board of Directors (the "Board") reasonably believes has had or will have a
material detrimental effect on the Company's reputation or business; or
1
<PAGE>
(iv) persistent failure of the Employee to perform
the lawful duties and responsibilities assigned by the Company which is not
cured within a reasonable time following the Employee's receipt of written
notice of such failure from the Company.
(b) "Change in Control " means an Ownership Change Event (as
defined below) or a series of related Ownership Change Events (collectively, the
"Transaction") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "Transferee
Corporation(s)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
For purposes of this Agreement, "Ownership Change Event" means the
occurrence of any of the following with respect to the Company: (i) the direct
or indirect sale or exchange in a single or series of related transactions by
the stockholders of the Company of more than fifty percent (50%) of the voting
stock of the Company; (ii) a merger or consolidation in which the Company is a
party; (iii) the sale, exchange, or transfer of all or substantially all of the
assets of the Company; or (iv) a liquidation or dissolution of the Company.
(c) "Constructive Termination" means one or more of the
following events that occurs within one (1) year after the occurrence of any
Change in Control:
(i) without the Employee's express written consent,
the assignment to the Employee of any duties, or any limitation of the
Employee's responsibilities, substantially inconsistent with the Employee's
positions, duties, responsibilities and status with the Company immediately
prior to the date of the Change in Control;
(ii) without the Employee's express written consent,
the removal of the Employee from the Employee's position with the Company as
held by the Employee immediately prior to the Change in Control (including a
termination of employment as a result of the death or Permanent Disability of
the Employee), except in connection with the termination of the employment of
the Employee by the Company for Cause;
(iii) without the Employee's express written consent,
the relocation of the principal place of the Employee's employment to a location
that is more than fifty (50) miles from the Employee's principal place of
employment immediately prior to the date of the Change in Control, or the
imposition of travel requirements on the Employee substantially inconsistent
with such travel requirements existing immediately prior to the date of the
Change in Control;
2
<PAGE>
(iv) any failure by the Company to pay, or any
reduction by the Company of (1) the Employee's base salary in effect immediately
prior to the date of the Change in Control (unless reductions comparable in
amount and duration are concurrently made for all other employees of the Company
with responsibilities, organizational level and title comparable to the
Employee), or (2) the Employee's bonus compensation in effect immediately prior
to the date of the Change in Control (subject to applicable performance
requirements with respect to the actual amount of bonus compensation earned by
the Employee and all other participants in the bonus program);
(v) any failure by the Company to (1) continue to
provide the Employee with the opportunity to participate, on terms no less
favorable than those in effect for the benefit of any executive, management or
administrative group which customarily includes a person holding the employment
position or a comparable position with the Company then held by the Employee,
any benefit or compensation plans and programs, including, but not limited to,
the Company's life, disability, health, dental, medical, savings, profit
sharing, stock purchase and retirement plans in which the Employee was
participating immediately prior to the date of the Change in Control, or their
equivalent (provided, that any changes or terminations of such existing benefit
or compensation plans or programs shall not be a Constructive Termination if the
changed plan or program or a replacement plan or program provides equivalent or
more favorable benefits or compensation to the Employee), or (2) provide the
Employee with all other fringe benefits (or their equivalent) from time to time
in effect for the benefit of any executive, management or administrative group
which customarily includes a person holding the employment position or a
comparable position with the Company then held by the Employee; or
(vi) any failure or refusal of a successor company to
assume the Company's obligations under this Agreement as required by Section 13;
provided, however, that the Employee's resignation as a result of any of the
foregoing events shall be a voluntary resignation, and not a resignation
following Constructive Termination, unless the Employee gives written notice of
any such event(s) to the Board and allows the Company at least ten (10) days
thereafter to correct such condition(s).
(d) "Effective Date" means the day and year first set forth
above.
(e) "Permanent Disability" means that:
(i) the Employee has been incapacitated by bodily
injury or disease so as to be prevented thereby from engaging in the performance
of the Employee's duties following reasonable accommodations on behalf of the
Company;
(ii) such total incapacity shall have continued for a
period of six (6) consecutive months; and
(iii) such incapacity will, in the opinion of a
qualified physician, be permanent and continuous during the remainder of the
Employee's life.
3
<PAGE>
(f) "Termination Upon Change in Control" means any one of the
following:
(i) any termination of the employment of the Employee
by the Company without Cause within one (1) year after the occurrence of any
Change in Control;
(ii) any termination of the employment of the
Employee by the Company without Cause during the period commencing thirty (30)
days prior to the date of the Company's first public announcement that the
Company has entered into a definitive agreement to effect a Change in Control
(even though still subject to approval by the Company's stockholders and other
conditions and contingencies) and ending on the date of the Change in Control;
or
(iii) any resignation by the Employee from all
capacities in which the Employee is then rendering service to the Company within
a reasonable period of time following the event constituting Constructive
Termination (with the termination of employment following death or Permanent
Disability being deemed a resignation);
provided, however, that "Termination Upon Change in Control" shall not include
any termination of the employment of the Employee (1) by the Company for Cause;
or (2) as a result of the voluntary termination of employment by the Employee
that is not deemed a Constructive Termination under Subsection 1(c) above.
2. Position and Duties. Until a Change in Control, Employee shall
continue to be an at-will employee of the Company employed in his current
position at his then current salary rate, subject to revision from time to time
by the Board of Directors or a committee thereof. Employee shall also be
entitled to continue to participate in and to receive benefits on the same basis
as other executive or senior staff members under any of the Company's employee
benefit plans as in effect from time to time. In addition, Employee shall be
entitled to the benefits afforded to other employees similarly situated under
the Company's vacation, holiday and business expense reimbursement policies, as
amended from time to time. Employee agrees to devote his full business time,
energy and skill to his duties at the Company. These duties shall include, but
not be limited to, any duties consistent with his position which may be assigned
to Employee from time to time.
3. Benefits Upon Voluntary Termination, Permanent Disability or Death.
In the event that Employee voluntarily terminates his employment relationship
with the Company at any time and such termination is not deemed a Constructive
Termination as described in Subsection 1(c) above, or in the event that
Employee's employment terminates as a result of his death or Permanent
Disability prior to a Change in Control, Employee shall be entitled to no
compensation or benefits from the Company other than those earned under Section
2 above through the date of his termination of employment.
4. Termination Upon Change in Control.
(a) In the event of the Employee's Termination Upon Change in
Control, Employee shall be entitled to the following separation benefits:
4
<PAGE>
(i) those benefits earned under Section 2 (other than
any unpaid incentive bonus) through the date of Employee's termination;
(ii) Employee's employment as an officer of the
Company shall terminate immediately; however, the Company shall continue
Employee's employment as a non-officer employee of the Company for a period of
one (1) year following the date of the Employee's termination (the "Severance
Period"). During such period, Employee shall be entitled to the greater of (1)
Employee's then current salary at the time of the Change in Control, or (2)
Employee's salary and bonus over the preceding twelve (12) months, in either
case less applicable withholding, payable in accordance with the Company's
normal payroll practices;
(iii) within ten (10) days of submission of proper
expense reports by the Employee, the Company shall reimburse the Employee for
all expenses reasonably and necessarily incurred by the Employee in connection
with the business of the Company prior to his termination of employment;
(iv) continued provision of the Company's standard
employee medical insurance coverages through the end of the Severance Period;
thereafter, Employee shall be entitled to elect continued medical insurance
coverage in accordance with the applicable provisions of federal law (COBRA);
provided, however, that in the event Employee becomes covered under another
employer's group health plan during the period provided for herein, the Company
shall cease provision of continued group health insurance for Employee; and
(v) notwithstanding any provisions to the contrary
contained in any stock option agreement between the Company and the Employee,
upon a Termination Upon Change in Control,
(1) all stock options granted by the Company
to the Employee prior to the Change in Control, which are not accelerated
pursuant to the provisions of Section 5, shall become immediately exercisable
and vested in full as of the time of such Termination Upon Change in Control;
and
(2) all such stock options shall remain
exercisable for a period of at least one (1) year, subject to any longer periods
for exercise of such options set forth in the particular option agreements.
This Subsection 4(a)(v) shall apply to all such stock option agreements, whether
heretofore or hereafter entered into between the Company and the Employee.
(b) The Employee's entitlement to any benefits under Section 4
is conditioned upon the Employee's execution and delivery to the Company of (i)
a general release of claims in a form satisfactory to the Company and (ii) a
resignation from all of Employee's positions with the Company (with the
exception of any continued employment for the purposes set forth in Section
4(a)) in a form satisfactory to the Company.
(c) In the event that Employee accepts employment with, or
provides any services to (whether as a partner, consultant, joint venturer or
otherwise), any person or entity
5
<PAGE>
which offers products or services that are competitive with any products or
services offered by the Company or with any products or services that Employee
is aware the Company intends to offer, Employee shall be deemed to have resigned
from his employment with the Company effective immediately upon such acceptance
of employment or provision of services. Upon such resignation, Employee shall
not be entitled to any further payments or benefits as provided under this
Section 4.
(d) In the event that Employee accepts employment with, or
provides any services to (whether as a partner, consultant, joint venturer or
otherwise), any person or entity while Employee continues to receive any
separation benefits pursuant to this Section 4, Employee shall immediately
notify the Company of such acceptance and provide to the Company information
with respect to such person or entity as the Company may reasonably request in
order to determine if that person's or entity's products or services are
competitive with the Company's.
5. Acceleration of Exercisability and Vesting of Stock Options Upon
Change in Control. In the event of a Change in Control, all stock options
granted to the Employee prior to the Change in Control (whether heretofore or
hereafter granted) shall become immediately exercisable and vested in full
effective as of the date thirty (30) days before the consummation of the
transaction constituting such Change in Control.
6. Parachute Payments. In the event that any payment or benefit
received or to be received by Employee pursuant to this Agreement or otherwise
(collectively, the "Payments") would result in a "parachute payment" as
described in section 280G of the Internal Revenue Code of 1986, as amended,
notwithstanding the other provisions of this Agreement, the amount of such
Payments will not exceed the amount which produces the greatest after-tax
benefit to Employee. For purposes of the foregoing, the greatest after-tax
benefit will be determined within thirty (30) days of the occurrence of such
payment to Employee, in Employee's sole and absolute discretion. If no such
determination is made by Employee within thirty (30) days of the occurrence of
such payment, the Company will promptly make such determination in a fair and
equitable manner.
7. Exclusive Remedy. Under any claim for breach of this Agreement or
wrongful termination, the payments and benefits provided for in Section 4 shall
constitute the Employee's sole and exclusive remedy for any alleged injury or
other damages arising out of the cessation of the employment relationship
between the Employee and the Company in the event of Employee's termination.
Except as expressly set forth herein, the Employee shall be entitled to no other
compensation, benefits, or other payments from the Company as a result of any
termination of employment with respect to which the payments and/or benefits
described in Section 4 have been provided to the Employee.
8. Proprietary and Confidential Information. The Employee agrees to
continue to abide by the terms and conditions of the Company's confidentiality
and/or proprietary rights agreement between the Employee and the Company.
9. Conflict of Interest. Employee agrees that for a period of one (1)
year after termination of his employment with the Company, he will not, directly
or indirectly, solicit the
6
<PAGE>
services of or in any other manner persuade employees or customers of the
Company to discontinue that person's or entity's relationship with or to the
Company as an employee or customer, as the case may be.
10. Arbitration. Any claim, dispute or controversy arising out of this
Agreement, the interpretation, validity or enforceability of this Agreement or
the alleged breach thereof shall be submitted by the parties to binding
arbitration by the American Arbitration Association in Santa Clara County,
California; provided, however, that this arbitration provision shall not
preclude the Company from seeking injunctive relief from any court having
jurisdiction with respect to any disputes or claims relating to or arising out
of the misuse or misappropriation of the Company's trade secrets or confidential
and proprietary information. All costs and expenses of arbitration or
litigation, including but not limited to attorneys fees and other costs
reasonably incurred by the prevailing party, as determined by such arbitration
or litigation, shall be paid by the other party. Judgment may be entered on the
award of the arbitration in any court having jurisdiction.
11. Interpretation. Employee and the Company agree that this Agreement
shall be interpreted in accordance with and governed by the laws of the State of
California.
12. Conflict in Benefits. This Agreement shall supersede all prior
arrangements, whether written or oral, and understandings regarding the subject
matter of this Agreement; provided, however, that this Agreement is not intended
to and shall not affect, limit or terminate (i) any plans, programs, or
arrangements of the Company that are either in writing or regularly made
available to a significant number of employees of the Company, (ii) any
agreement or arrangement with the Employee that has been reduced to writing and
which does not relate to the subject matter hereof, or (iii) any agreements or
arrangements hereafter entered into by the parties in writing, except as
otherwise expressly provided herein.
13. Successors and Assigns.
(a) Successors of the Company. The Company will require any
successor or assign (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, expressly, absolutely and unconditionally to assume and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession or assignment
had taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession transaction shall be a breach of this
Agreement and shall entitle the Employee to terminate his employment with the
Company within three (3) months thereafter and to receive the benefits provided
under Section 4 of this Agreement in the event of Termination Upon Change in
Control. As used in this Agreement, "Company" shall mean the Company as defined
above and any successor or assign to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Section 13 or
which otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law.
(b) Heirs of Employee. This Agreement shall inure to the
benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devises and legatees. If the Employee should die after the conditions to payment
of benefits set forth herein have been met and any amounts are still
7
<PAGE>
payable to his hereunder, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to the Employee's
beneficiary, successor, devisee, legatee or other designee or, if there be no
such designee, to the Employee's estate. Until a contrary designation is made to
the Company, the Employee hereby designates as his beneficiary under this
Agreement the person whose name appears below his signature on this Agreement.
14. Notices. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
if to the Company: Network Peripherals Inc.
1371 McCarthy Boulevard
Milpitas, CA 95035
Attn: President
and if to the Employee at the address specified at the end of this Agreement.
Notice may also be given at such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
15. No Representations. Employee acknowledges that he is not relying
and has not relied on any promise, representation or statement made by or on
behalf of the Company which is not set forth in this Agreement.
16. Validity. If any one or more of the provisions (or any part
thereof) of this Agreement shall be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.
8
<PAGE>
17. Modification. This Agreement may only be modified or amended by a
supplemental written agreement signed by Employee and the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year written below.
Network Peripherals Inc.
Date: January 13, 1999 By: ______________________________
Signature
Title: President and CEO
Date: January 13, 1999 __________________________________
Employee's Signature
Address for Notice to Employee:
Name of Designated Beneficiary: Address of Designated Beneficiary:
9
Exhibit 21
Subsidiaries of the Registrant
Subsidiaries of Network Peripherals Inc. and their respective states or
countries of incorporation are listed as follows:
1. Network Peripherals International Ltd., incorporated in Delaware
2. NetVision Corporation, incorporated in New York
3. Network Peripherals Asia Inc., incorporated in Taiwan
4. Network Peripherals Europe B.V., incorporated in the Netherlands.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-60359) of Network Peripherals Inc. of our
report dated January 25, 1999 appearing on page 18 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
PricewaterhouseCoopers LLP
San Jose, California
March 22, 1999
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