<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 26, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
REGISTRATION STATEMENT
ON
FORM S-1
UNDER
THE SECURITIES ACT OF 1933
------------------------
NETSILICON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MASSACHUSETTS 3577 04-2826579
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
</TABLE>
411 WAVERLY OAKS ROAD,
SUITE 227
WALTHAM, MA 02154
(781) 647-1234
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CORNELIUS PETERSON VIII
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NETSILICON, INC.
411 WAVERLY OAKS ROAD, SUITE 227
WALTHAM, MA 02154
(781) 647-1234
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C> <C>
JOHN H. GORMAN W. RAYMOND FELTON, ESQ. GREENBAUM, ROWE, N. JEFFREY KLAUDER, ESQ.
OSICOM TECHNOLOGIES, INC. SMITH, RAVIN, MORGAN, LEWIS & BOCKIUS LLP
2800 28TH STREET DAVIS & HIMMEL, LLP 2000 ONE LOGAN SQUARE
SUITE 100 P.O. BOX 5600 PHILADELPHIA, PENNSYLVANIA 19103-6993
SANTA MONICA, CA 90405 WOODBRIDGE, NEW JERSEY 07095 (215) 963-5694
(310) 581-4030 (732) 549-5600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [x]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share.................. 3,340,750 $ 5.00 $16,703,750.00 $ 4,927.61
Subscription Rights(3).................................. 2,905,000 -- -- --
</TABLE>
(1) Includes 435,750 shares which the Underwriter has the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933.
(3) Evidencing the rights to subscribe for 2,905,000 of the shares of Common
Stock described above.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 26, 1998
PROSPECTUS
2,905,000 SHARES
[LOGO]
COMMON STOCK
(AND RIGHTS TO ACQUIRE UP TO 2,905,000 OF SUCH SHARES)
NETsilicon, Inc. ('NSI' or the 'Company') is granting at no cost to the
holders of shares of the common stock of Osicom Technologies, Inc. ('Osicom'),
holders of Osicom Series A Preferred Stock and holders of warrants and options
to purchase Osicom common stock, transferable rights to purchase shares of NSI's
Common Stock. The Osicom Series A Preferred Stock, and the warrants and options
to purchase Osicom common stock are referred to herein collectively as 'Osicom
Securities.' Holders of Osicom common stock and Osicom Securities will receive
one right for every three shares of Osicom common stock that they own or that
are issuable upon conversion or exercise of their Osicom Securities, as of
, 1998. Each right will entitle the holder to
purchase one share of NSI's Common Stock at an exercise price of $5.00 per
share. Up to 2,905,000 shares of NSI's Common Stock will be offered in the
rights offering. If any shares remain unsubscribed for after the rights
offering, the Underwriter will purchase all such shares pursuant to the Standby
Underwriting Agreement. All of the shares of the NSI Common Stock being sold in
this offering are being sold by the Company.
THE EXERCISE PERIOD FOR THE RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON , 1998. YOU MAY ONLY EXERCISE YOUR RIGHTS IF
YOU PURCHASE AT LEAST 75 SHARES OF OUR COMMON STOCK THROUGH SUCH EXERCISE.
YOU SHOULD CAREFULLY CONSIDER THE INFORMATION REGARDING THE RISKS
ASSOCIATED WITH AN INVESTMENT IN NSI'S COMMON STOCK AND THE RIGHTS TO ACQUIRE
NSI'S COMMON STOCK THAT ARE DISCUSSED UNDER THE CAPTION 'RISK FACTORS' BEGINNING
ON PAGE 8.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
ASSUMED UNDERWRITING
EXERCISE AND DISCOUNT PAID BY PROCEEDS TO
OFFER PRICE THE COMPANY THE COMPANY
<S> <C> <C> <C>
Min. $0.15 Max. $4.85
Per Share................................. $5.00 Max. $0.35 Min. $4.65
Min. $435,750 Max. $14,089,250
Total..................................... $14,525,000 Max. $1,016,750 Min. $13,508,250
Min. $501,113 Max. $16,202,637
Total with Over-Allotment................. $16,703,750 Max. $1,169,263 Min. $15,534,487
</TABLE>
The minimum underwriting discount assumes that all rights granted in the
rights offering are exercised and reflects the payment of a financial advisory
fee to the Underwriter equal to 3% of the exercise price on the 2,905,000 shares
sold in this offering. In such a case, the minimum underwriting discount would
yield the maximum proceeds to the Company. The maximum underwriting discount
assumes that none of the rights granted in the rights offering are exercised and
reflects the payment of an underwriting discount of 4% of the exercise price on
the 2,905,000 shares which would then be purchased by the Underwriter plus an
additional 3% financial advisory fee on all of the 2,905,000 shares offered
hereby. In such a case, the maximum underwriting discount would yield the
minimum proceeds to the Company.
The last row of the table assumes that the Underwriter has exercised its
option granted by the Company to purchase an additional 435,750 shares of NSI's
Common Stock. The exercise of the over-allotment option would yield additional
proceeds to NSI and would require the payment by NSI of both a 4% underwriting
discount and a 3% financial advisory fee on such shares.
TUCKER ANTHONY
INCORPORATED
The date of this Prospectus is , 1998
<PAGE>
<PAGE>
[GRAPHIC]
[The graphic depicts a city or community consisting of residences, office and
institutional buildings, industrial complexes, and transportation terminals (the
'Locales'). Directly adjacent to each Locale is one or more devices, processes
or activities for which, in that Locale, embedded networking has an application.
Superimposed over each device, process or activity is a color-coded graphical
representation (icon) of a silicon chip. A prominently-placed legend provides a
text description of each depicted application or potential application of
embedded networking. The legend further provides an explanation of the coding
scheme for the silicon chip icons: Green for embedded networking applications
for which the Company's products are currently providing a solution, blue for
embedded networking applications for which the Company has entered into
agreements to provide a solution, and red for embedded networking applications
for which the Company has determined that its products may provide a solution
in the future. The specific legend text is:]
'EMBEDDED NETWORKING MAKES POSSIBLE:
1. Real-time monitoring of sales and supplies for product dispensing devices,
such as gasoline pumps and vending machines, as well as the real-time
control of prices for dispensed products.
2. Remote control and monitoring of product flowing through refineries and
chemical processing plants.
3. Up-to-the-moment shift staffing information in manufacturing plants and
other large labor force facilities.
4. Remote control and monitoring of automatic, robotic and computer-assisted
manufacturing operations.
5. Real-time monitoring of substations, power stations and points-of-presence
for distributed communications and utility networks.
6. Sharing of faxes, printers, scanners, copiers and multi-function peripherals
on Local Area Networks.
7. Remote control and monitoring of heating, ventilation and circulation, as
well as security and elevator operation in commercial building environments.
8. Internet and Local Area Network access for residential users via existing
coaxial cable connections.
9. Direct network connectivity for users of digital photographic equipment
seeking to send pictures via the Internet.
<PAGE>
<PAGE>
10. Remote monitoring of patients and the sharing of medical imaging results
across a Local Area Network in hospital and other medical environments.
11. Connection of multiple test devices across the Internet or LAN for
simultaneous data collection in laboratory environments.
12. Centralized price labeling via digital displays for supermarkets, department
stores and other large-scale retail environments.
13. Distributed ticket printing, baggage handling, digital photographic
surveillance and other functions in airports and other public and mass
transportation environments.'
<PAGE>
<PAGE>
[Graphic: Company logo appears at top center of page. Below Company logo is
the following text: 'The Company that connects devices to networks.' Below the
slogan appears a photograph of the NET+ARM chip with the following text along
side the photograph: 'NET+ARM'tm' System-On-Silicon Embedded Networking
Solution.' Below the text appears a side by side depiction of the three
alternative embedded networking approaches.]
<PAGE>
<PAGE>
Once you exercise a right and we accept the exercise, you may not withdraw
the exercise. If shares remain unsubscribed for after the end of the rights
exercise period, the first 300,000 of such shares will be offered by us to
certain other persons (the 'Other Purchasers'). The Other Purchasers may have a
relationship with us, Osicom or one of Osicom's other subsidiaries. All shares
not purchased by the Other Purchasers after this offer and all unsubscribed
shares in excess of 300,000 will be purchased by the Underwriter pursuant to the
Standby Underwriting Agreement.
There is no minimum number of shares that must be subscribed for in the
rights offering for it to be completed. The number of rights that will be
granted to the holders of Osicom common stock and Osicom Securities is based
upon the number of shares of Osicom common stock outstanding and the number of
shares underlying the Osicom Securities as of , 1998.
If there are fewer than 8,715,000 Osicom common shares outstanding or underlying
outstanding Osicom Securities on , 1998, we will grant
fewer than 2,905,000 rights in the rights offering. If fewer than 2,905,000
rights are granted, we will offer the shares subject to the rights which were
not granted to the Other Purchasers selected by us at a purchase price of $5.00
per share. In any event, all of the 2,905,000 shares of our Common Stock offered
in the rights offering will be sold. However, this offering may be cancelled by
the Underwriter if certain conditions are not satisfied. In that event, if you
have made any payments to the rights agent, American Stock Transfer and Trust
Company, the full amount of your payments will be promptly returned to you.
We have filed a Registration Statement with the Securities and Exchange
Commission ('SEC') covering the rights and the shares of Common Stock. Before
this offering, our Common Stock has not been listed on any stock exchange or on
The Nasdaq Stock Market. We have filed an application to have the rights, our
Common Stock and our Common Stock on a when-issued basis approved for quotation
on the Nasdaq National Market under the symbols NSIIR, NSII and NSIIV
respectively.
The Underwriter may engage in transactions involving the rights and the
Common Stock during and after the rights exercise period. As a result, the
Underwriter may realize profit in addition to the underwriting compensation
received for its participation in this offering. We expect that we will deliver
any remaining shares on or about , 1998 at the offices
of Tucker Anthony Incorporated in New York, New York.
After this offering, we intend to send to all of our stockholders annual
reports containing financial statements that have been examined and reported
upon, with an opinion expressed by, the Company's independent auditors.
'NET+ARM'TM' is a trademark of ARM Limited and is licensed to the Company.
All other product names referred to herein are the property of their respective
owners.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE RIGHTS OR
COMMON STOCK OF THE COMPANY, INCLUDING INITIATING BIDS OR EFFECTING PURCHASES ON
THE NASDAQ NATIONAL MARKET FOR THE PURPOSE OF PREVENTING OR REGARDING A DECLINE
IN THE MARKET PRICE OF THE RIGHTS OR COMMON STOCK. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE 'UNDERWRITING.'
2
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements of the Company and the Notes thereto
included elsewhere in this Prospectus. Unless otherwise indicated, the
information in this Prospectus (i) assumes no exercise of the Underwriter's
over-allotment option, (ii) assumes an exercise price of $5.00 per share, (iii)
assumes a 33,233.27-for-one stock split of NSI's common stock which will occur
prior to the closing of this offering, and (iv) assumes the conversion of
options to purchase 127,205 shares of Osicom common stock into options to
purchase 76,347 shares of the Company's Common Stock, which will occur upon
consummation of this offering. Unless the context otherwise requires,
NETsilicon, Inc. is referred to herein as 'NSI' or the 'Company.'
THE COMPANY
NETsilicon, Inc. ('NSI' or the 'Company') is a designer, manufacturer and
supplier of embedded networking systems. The Company's networking silicon chip
products and the accompanying networking software may be incorporated into the
basic design of a wide variety of electrical devices, thereby enabling those
devices to be connected to a Local Area Network ('LAN') and the Internet. Such
network connectivity makes it possible for those devices to be monitored and
controlled from a remote location. The Company believes its family of embedded
networking system products, the NET+ product line, is the first standards-based
networking system to offer a single chip solution that, in conjunction with the
physical interface and memory, encompasses all of the required hardware and
software necessary to network-enable these electrical devices. The Company's
technology is designed to have broad applicability and therefore may be
incorporated into virtually any electrical device. The Company's NET+ products
and predecessor products are currently contained in an array of imaging
products, including printers, scanners, fax machines, copiers and multi-function
peripherals manufactured by OEMs such as Minolta Corporation, NEC Corporation
and Xerox Corporation. The Company's NET+ products are also in various stages of
being incorporated by 21 OEMs into the design of other products in new markets,
such as industrial automation equipment, communication devices, data acquisition
and test equipment, internet devices and utility monitoring equipment.
The widespread networking of electrical devices is highly dependent upon
the emergence of one, or only a very few, industry standard
languages -- referred to as 'transmission protocols' -- through which these
devices communicate with one another. The market for embedded networking systems
in general, and the Company's products in particular, has developed as a result
of the recent convergence in networking technology on common, or 'standard,'
transmission protocols such as Transmission Control Protocol/Internet Protocol
('TCP/IP') and Ethernet. A similar convergence of technology and standards also
made possible the now-widespread networking of personal computers ('PCs').
The Company began development activities related to its NET+ technology in
1996. The Company announced the introduction of NET+ARM'TM' in January 1998 and
began shipping the product to OEM customers in March 1998. NET+ARM'TM'
represents an evolution of the Company's device connectivity technology. To
date, the Company believes its NET+ products have been well received by OEMs, as
evidenced by (i) the increase in the Company's net sales to $3.2 million for the
fiscal quarter ended July 31, 1998 (of which approximately 34% incorporated
NET+ARM'TM'), an 18.3% increase as compared to the same period for the prior
fiscal year, (ii) the determination of 18 OEMs in the imaging market and 21 OEMs
in other vertical markets to design NET+ products into their future products,
and (iii) the Company's backlog at July 31, 1998 of $4.6 million relative to the
Company's backlog of $1.9 million at January 31, 1998.
The Company's NET+ product line is a networking system-on-silicon developed
by the Company based upon its 14 years of experience in providing networking
connectivity for imaging devices. NET+ products are designed to enable
cost-effective incorporation of networking capability into a wide variety
3
<PAGE>
<PAGE>
of electrical devices. The Company believes that its NET+ product line offers a
superior networking solution to OEMs because it is:
STANDARDS-BASED. NET+ products are based on existing Internet and LAN
networking standards. This makes it possible for electrical devices to
communicate with other standards-based equipment, thus enabling the free
exchange of information, distributed processing and remote maintenance and
processing. Furthermore, this makes it possible for third party software
developers to readily design new products for use in NET+ equipped devices. The
Company believes that end-user demand will be higher for NET+ equipped,
standards-based products than for comparable products containing solutions not
based on standard transmission protocols.
COMPREHENSIVE. NET+ products offer a comprehensive single chip solution
that, in conjunction with the physical interface and memory, consolidates all
required hardware and software necessary to network enable electrical devices.
In addition, the NET+ solution offers OEMs a package of development tools to
facilitate a shorter time-to-market for these network-ready products. OEMs that
adopt the Company's NET+ technology do not need to develop in-house networking
expertise in order to offer state-of-the-art connectivity in their products.
This enables them to focus their engineering resources on developing other
aspects of their products. Furthermore, OEMs incorporating NET+ solutions into
their products do not need to acquire networking hardware or software from
multiple third-party vendors.
NON-PC RELIANT. Electrical devices equipped with NET+ products do not
require connection to a dedicated PC in order to be networked. By eliminating
the expense of a dedicated PC as part of their network solution, NET+ products
provide OEMs and their end-users with a cost structure that is economically
feasible for a broad range of devices for which networking would otherwise not
be cost effective.
PROVEN TECHNOLOGY. The Company's technology contained in its NET+ products
is the result of 14 years of experience in providing networking connectivity for
electrical devices. The Company's technology embodies refinements and
enhancements developed by the Company during those years of service to OEMs in
the imaging market.
From its inception in 1984, the Company has designed, marketed and sold
products enabling the connection of electrical devices to networks. The Company
believes that it is well-positioned to generate sales and capture new market
share in the growing field of device networking. This belief is based upon its
experience and reputation as a high quality supplier of network connectivity for
devices, its strong, ongoing relationships with imaging device OEMs, and its
early investments in product research and development.
The Company's strategy is to (i) capitalize on its existing OEM customer
relationships in the imaging industry; (ii) identify and penetrate new OEM
vertical markets; (iii) influence industry standards for network connectivity in
those new vertical markets; and (iv) develop customized versions of NET+
products to reinforce its position in the vertical markets it has entered. As of
July 31, 1998, in addition to the Company's 18 OEM customers in the imaging
industry, a total of 21 OEMs in five other vertical markets have contracted with
the Company to design NET+ARM'TM' into their products. Each product into which
the Company's NET+ARM'TM' product has been designed is referred to as a 'design
win.' The Company has achieved design wins in the following new vertical
markets:
<TABLE>
<CAPTION>
NET+ARM'TM' DESIGN
NEW VERTICAL MARKET WINS
- - - - - --------------------------------------------------------------- ---------------------
<S> <C>
Industrial Automation Equipment................................ 8
Communications and Other Devices............................... 5
Data Acquisition and Test Equipment............................ 4
Internet Devices............................................... 2
Utility Monitoring Equipment................................... 2
</TABLE>
The Company was incorporated in Massachusetts in 1984. Its executive office
is located at 411 Waverly Oaks Road, Suite 227, Waltham, Massachusetts 02154 and
its telephone number is (781) 647-1234.
4
<PAGE>
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
DESCRIPTION OF THE RIGHTS OFFERING............. If you hold shares of Osicom common stock, or if you hold Osicom
Series A Preferred Stock, warrants to purchase Osicom common stock
or options to purchase Osicom common stock (such Series A Preferred
Stock, warrants and options are collectively referred to as 'Osicom
Securities') on , 1998, you will receive one right to purchase
our Common Stock for every three shares of Osicom common stock you
own and shares of Osicom common stock into which your Osicom
Securities are convertible or exercisable. Fractional rights will
be rounded up to the next whole number in determining the number
of rights to be issued to holders of Osicom common stock and
Osicom Securities. Each right entitles you to purchase one share
of our Common Stock at a purchase price of $5.00. You must own at
least 75 rights to be eligible to exercise your rights. In other
words, if you own or are entitled to fewer than 223 shares of
Osicom common stock, you will receive fewer than 75 rights and
you will not be eligible to exercise your rights unless you
purchase additional rights in the market. We are offering up to
2,905,000 shares of our Common Stock for purchase through the
exercise of rights.
THE EXERCISE PRICE OF THE RIGHTS............... If you wish to exercise your rights to purchase our Common Stock,
the purchase price will be $5.00 per share.
WHEN YOU CAN EXERCISE YOUR RIGHTS.............. The rights will only be exercisable from the period beginning on
, 1998 and ending on , 1998 at 5:00 p.m., New
York City time.
HOW YOUR RIGHTS WILL BE EVIDENCED.............. You will receive certificates that represent your transferable
rights.
OFFER OF UNSUBSCRIBED SHARES TO OTHER
PURCHASERS................................... In the event that not all of the rights are exercised, we will
offer the first 300,000 unsubscribed shares, and any shares of
Common Stock subject to rights that were not distributed, to the
Other Purchasers.
AGREEMENT OF CERTAIN PERSONS TO EXERCISE THEIR
RIGHTS....................................... All officers and directors of Osicom and of the Company and
certain employees of the Company have agreed with the Underwriter
to exercise all of their rights to purchase an aggregate of
shares of Common Stock of the Company pursuant to the
rights offering.
OBLIGATIONS OF THE UNDERWRITER................. The Underwriter will purchase any shares offered in the rights
offering that have not been purchased through the exercise of
rights and have not otherwise been sold by us by ,
1998, at the exercise price, less a 4.0% Underwriter's discount
and a 3.0% financial advisory fee. The Underwriter will then
offer these shares to the public.
NUMBER OF SHARES OF COMMON STOCK OFFERED IN THE
RIGHTS OFFERING.............................. We will be selling 2,905,000 shares in the rights offering.
COMMON STOCK TO BE OUTSTANDING AFTER THE
OFFERING..................................... After this offering, 6,228,327 shares of our Common Stock
</TABLE>
5
<PAGE>
<PAGE>
<TABLE>
<S> <C>
will be outstanding (not including 76,347 shares issuable upon
the exercise of outstanding stock options at a weighted average
exercise price of $5.00 per share, of which options to purchase
27,061 shares of Common Stock were exercisable as of July 31,
1998).
HOW WE INTEND TO USE THE PROCEEDS.............. We will use the money received from the sale of our shares for
the repayment of approximately $6.3 million of outstanding debt,
including approximately $3.8 million owed to Osicom and
approximately $2.5 million of the approximately $3.5 million
outstanding balance under our line of credit, product development
and marketing, capital expenditures, working capital and general
corporate purposes. We intend to maintain a balance of $1.0
million under our line of credit with Coast Business Credit in
order to meet the minimum balance requirements and avoid
additional fees. Proceeds may also be used for acquisitions.
NASDAQ NATIONAL MARKET SYMBOLS................. We anticipate that during the period in which you can exercise
your rights, the rights will trade on the Nasdaq National Market
under the symbol 'NSIIR' and the Common Stock will trade under
the symbol 'NSIIV' on a when-issued basis. After the expiration
of the rights period, the Common Stock will trade under the
symbol 'NSII.'
</TABLE>
6
<PAGE>
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OTHER OPERATING DATA)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED ENDED
YEAR ENDED JANUARY 31, JULY 31, JULY 31,
----------------------------- ----------------- ----------------
1996 1997 1998 1997 1998 1997 1998
------- ------- ------- ------- ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $ 4,598 $ 7,445 $ 7,920 $ 5,174 $5,384 $2,703 $3,199
Operating income (loss) from continuing
operations.................................... (2,970) (942) (1,228) (179) (152) (7) 168
Income (loss) from continuing operations before
income taxes.................................. (3,069) (1,078) (1,346) (233) (289) (41) 91
Net income (loss) from continuing operations.... (2,426) (109) (853) (12) (420) 68 91
Net income (loss) from continuing operations per
share(1):
Basic......................................... $ (1.02) $ (0.04) $ (0.26) -- $(0.13) $ 0.02 $ 0.03
Diluted....................................... $ -- $ -- $ -- $ -- $ -- $ 0.02 $ 0.03
Weighted average number of shares
outstanding(1):
Basic......................................... 2,385 2,753 3,323 3,323 3,323 3,323 3,323
Diluted....................................... -- -- -- -- -- 3,323 3,323
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1997 1997 1997 1998 1998 1998
--------- -------- ----------- ----------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 2,471 $2,703 $ 890 $ 1,856 $ 2,185 $3,199
Operating income (loss) from continuing
operations............................. (172) (7) (817) (231) (320) 168
Income (loss) from continuing operations
before income taxes.................... (192) (41) (864) (249) (380) 91
Net income (loss) from continuing
operations............................. (80) 68 (833) (8) (511) 91
OTHER OPERATING DATA:
Imaging:
Design Wins.............................. 1 4 5 5 9(2) 8(2)
Shipping Customers(3).................... 7 7 7 7 11 14
New Customers............................ 1 1 2 1 3 3
NET+ARM'TM' Design Wins:
Imaging.................................. 0 0 0 0 9 8
New Markets.............................. 0 0 0 0 9 12
Backlog(4)................................... $ 1,989 $ 307 $ 644 $ 1,927 $ 4,785 $4,553
</TABLE>
<TABLE>
<CAPTION>
AS OF JULY 31, 1998
-----------------------
AS
ACTUAL ADJUSTED(5)
-------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................. $ 572 $ 7,021
Working capital....................................................................... (1,098) 11,660
Total assets.......................................................................... 10,046 17,470
Due to Osicom(6)...................................................................... 3,830 --
Total debt (including short-term debt)................................................ 3,490 1,011(7)
Stockholders' equity (deficit)........................................................ (14) 12,744
</TABLE>
- - - - - ------------
(1) See Notes to the Company's Financial Statements for the years ended January
31, 1996, 1997 and 1998 and the Interim Financial Statements for the three
and six months ended July 31, 1997 and 1998 regarding computations of net
income (loss) per share.
(2) Imaging design wins for these periods reflect NET+ARM'TM' design wins.
(3) Represents the number of customers to which product was shipped during the
period indicated.
(4) Data is as of the last day of each period indicated.
(5) The 'As Adjusted' balances reflect the sale by the Company of 2,905,000
shares of Common Stock and the receipt of approximately $12.8 million in
estimated minimum net proceeds from this offering and the application
thereof as set forth in Use of Proceeds. See 'Use of Proceeds' and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
(6) Reflects advances from Osicom to the Company as of July 31, 1998. As of
August 25, 1998 such balance was $4.3 million. The Company anticipates
repayment of all outstanding amounts due to Osicom from the proceeds of the
offering. See Note F to the Notes to the Financial Statements.
(7) The Company intends to maintain a balance of $1.0 million under its line of
credit with Coast Business Credit in order to meet the minimum balance
requirements and avoid additional fees.
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RISK FACTORS
An investment in the rights and the shares of Common Stock offered hereby
involves a high degree of risk. Prospective investors should carefully consider
the following risk factors, as well as all other information in this Prospectus,
before investing in the rights and the shares of Common Stock offered hereby.
This Prospectus contains certain forward-looking statements that involve risks
and uncertainties. Future events and the Company's actual results could differ
materially from the results reflected in these forward-looking statements.
Material factors that might cause such a difference are discussed in the
following risk factors.
HISTORY OF LOSSES AND ACCUMULATED DEFICIT
The Company incurred net losses for the fiscal years ended January 31,
1996, 1997, and 1998 and for the six months ended July 31, 1998. At July 31,
1998, the Company had an accumulated deficit of $2.6 million. The Company
continues to invest significant financial resources in product development,
marketing and sales, and a failure of such expenditures to result in significant
increases in revenue, could have a material adverse effect on the Company's
business, operating results and financial condition. Due to the limited history
and undetermined market acceptance of the Company's new products, the rapidly
evolving nature of the Company's business and markets, potential changes in
voluntary product standards that significantly influence many of the markets for
the Company's products, the high level of competition in the industries in which
the Company operates and the other factors described elsewhere in 'Risk
Factors,' there can be no assurance that the Company's investment in these areas
will result in increases in revenue or that any revenue growth that is achieved
can be sustained. Any revenue growth that the Company has achieved or may
achieve may not be indicative of future operating results. In addition, the
Company's history of losses, together with the factors described under
' -- Potential Fluctuations in Operating Results,' make future operating results
difficult to predict. The Company and its prospects must be considered in light
of the risks, costs and difficulties frequently encountered by emerging
companies. As a result, there can be no assurance that the Company will be
profitable in any future period. Future operating results will depend on many
factors, including the growth of the markets for the Company's products, the
acceptance of the Company's products, the level of competition, the ability of
the Company to develop and market new products and general economic conditions.
In view of the uncertainties identified herein, the Company believes that
period-to-period comparisons of financial results are not necessarily meaningful
and should not be relied upon as an indication of future performance. See the
Company's Financial Statements and the Notes thereto and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations.'
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company's net sales and operating results may fluctuate substantially
from quarter to quarter and from year to year. This may result from any one or a
combination of factors such as the cancellation or postponement of orders, the
timing and amount of significant orders from the Company's largest customers,
the Company's success in developing, introducing and shipping product
enhancements and new products, the product mix sold by the Company, new product
introductions by competitors, pricing actions by the Company or its competitors,
the timing of delivery and availability of components from suppliers, changes in
material costs and general economic conditions. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations.'
The Company's backlog at the beginning of each quarter typically is not
sufficient to achieve expected sales for the quarter. To achieve its sales
objectives, the Company is dependent upon obtaining orders during each quarter
for shipment that quarter. Furthermore, the Company's agreements with its
customers typically provide that they may change delivery schedules and cancel
orders within specified time frames, typically 30 days or more prior to the
scheduled shipment date, without significant penalty. The Company's customers
have in the past built, and may in the future build, significant inventory in
order to facilitate more rapid deployment of anticipated major projects or for
other reasons. Decisions by such customers to reduce their inventory levels have
led and could lead to reductions in purchases from the Company. These
reductions, in turn, have and could cause fluctuations in the Company's
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operating results and could have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations in periods
in which the inventory is reduced. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' and 'Business -- Backlog.'
Delays or lost sales have been and can be caused by other factors beyond
the Company's control, including late deliveries by vendors of components,
changes in implementation priorities and slower than anticipated growth in
embedding networking into devices. Operating results in recent periods have been
adversely affected by delays in receipt of significant purchase orders from
customers. In addition, the Company has in the past experienced delays as a
result of the need to modify its products to comply with unique customer
specifications. These and similar delays or lost sales could have a material
adverse effect on the Company's business, operating results, cash flows and
financial condition.
The Company's industry is characterized by declining prices of existing
products. Therefore, continual improvements of manufacturing efficiencies and
introduction of new products and enhancements to existing products are required
to maintain gross margins. In response to customer demands or competitive
pressures, or to pursue new product or market opportunities, the Company may
take certain pricing or marketing actions, such as price reductions or volume
discounts. These actions could have a material adverse effect on the Company's
business, operating results, cash flows and financial condition. See
'Business -- Manufacturing.'
DEPENDENCE ON OEM CUSTOMERS
The Company's financial performance and future growth is dependent upon its
ability to market its products to OEMs in various vertical markets. Sales of its
products will depend upon the purchasing decisions of OEMs, which may be based
upon numerous factors, many of which are beyond the Company's control.
Furthermore, sales of the Company's products will be dependent upon the ultimate
success of the Company's OEM customers and the success of the products into
which the Company's products are incorporated. There can be no assurance that
the Company will successfully market its products to OEMs, or that even if the
Company is successful in its efforts, the Company's revenues from such sales
will be sustainable. Any decline in the financial condition of the Company's OEM
customers or any failure by the Company's OEM customers to successfully sell
their products may have a material adverse effect on the Company's business,
operating results, cash flows and financial condition. 'Business -- Products and
Services' and 'Business -- OEM Product Cycle.'
DEPENDENCE ON A LIMITED NUMBER OF PRODUCTS
In January 1998, the Company introduced its family of embedded products
known as the NET+ product line. The Company believes that its operating results
will in the future become substantially dependent on the Company's ability to
increase sales of its NET+ products, achieve market acceptance of new NET+
products under development and develop additional NET+ products. The Company's
NET+ products represent new technologies which have not gained widespread
commercial acceptance and, to date, have only been used in limited applications.
There can be no assurance that the Company will be successful in increasing
sales of its NET+ products, achieving market acceptance of its new products
under development or developing additional products. Failure to do so would have
a material adverse effect on the Company's business, operating results, cash
flows and financial condition. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' and 'Business -- Products.'
COMPETITION
The markets for the products and services of the Company are intensely
competitive, highly fragmented and characterized by rapidly changing technology,
evolving industry standards, price competition and frequent new product
introductions. A number of companies offer products that compete with one or
more of the Company's products. The Company's current and prospective
competitors include Echelon Corporation, Integrated Systems, Inc., Motorola
Inc., National SemiConductor Corporation and Wind River Systems, Inc. In
addition, in the imaging market, Hewlett-Packard
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Company and Lexmark International Group, Inc. have developed their own
proprietary solutions. The Company has experienced and expects to continue to
experience increased competition from current and potential competitors, many of
whom have substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and larger customer bases than
the Company. In particular, established companies in the ASICs or networking
industries may seek to expand their product offerings by designing and selling
products using competitive technology that could render the Company's products
obsolete or have a material adverse effect on the Company's sales. The markets
in which the Company competes currently are subject to intense competition and
the Company expects additional price and product competition as other
established and emerging companies enter these markets and new products and
technologies are introduced. Increased competition may result from further price
reductions, reduced gross margins and loss of market share, any of which could
have a material adverse effect on the Company's business, operating results,
cash flows and financial condition. The Company believes that the competitive
factors affecting the market for the Company's products include product
performance, price and quality; product functionality and features; the
availability of products for existing and future platforms; the ease of
integration of the products with other hardware and software components of
document imaging systems; and the quality of support services, product
documentation and training. The relative importance of each of these factors
depends upon the specific customer involved. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors, or that competitive factors faced by the Company will not have a
material adverse effect on the Company's business, operating results, cash flows
and financial condition. See 'Business -- Competition.'
RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON LAN AND INTERNET TECHNOLOGIES
The networking industry is characterized by rapidly changing technologies,
evolving industry standards, frequent new product introductions, short product
life cycles and rapidly changing customer requirements. The introduction of
products embodying new technologies and the emergence of new industry standards
can render existing products obsolete and unmarketable. The Company's future
success will depend on its ability to enhance its existing products, to
introduce new products to meet changing customer requirements and emerging
technologies, and to demonstrate performance and advantages of
cost-effectiveness of its products over competing products. Any failure of the
Company's current and prospective products to achieve widespread customer
acceptance as a result of the adoption of alternative technologies could have a
material adverse effect on the Company's business, operating results, cash flows
and financial condition. The Company has in the past and may in the future
experience delays in developing and marketing product enhancements or new
products that respond to technological change, evolving industry standards and
changing customer requirements. There can be no assurance that the Company will
not experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products or product
enhancements, or that its new products and product enhancements will adequately
meet the requirements of the marketplace and achieve any significant degree of
market acceptance. Failure of the Company, for technological or other reasons,
to develop and introduce new products and product enhancements in a timely and
cost-effective manner would have a material adverse effect on the Company's
business, operating results, cash flows and financial condition. In addition,
the future introductions or even announcements of products by the Company or one
of its competitors embodying new technologies or changes in industry standards
or customer requirements could render the Company's then-existing products
obsolete or unmarketable. There can be no assurance that the introduction or
announcement of new product offerings by the Company or one or more of its
competitors will not cause customers to defer the purchase of existing Company
products. Such deferment of purchases could have a material adverse effect on
the Company's business, operating results, cash flows and financial condition.
See 'Business -- Industry Background.'
The Company has historically derived a substantial majority of its revenues
from the sale of networking products. Any failure of the Company to modify its
products to support new LAN and Internet technologies, or alternative
technologies, could have a material adverse effect on the Company's business,
operating results, cash flows and financial condition.
10
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DEPENDENCE ON NEW AND REDESIGNED PRODUCT INTRODUCTIONS
The Company's future sales will depend upon its ability to market its
products for incorporation into new and redesigned products manufactured by its
OEM customers. The Company competes for business during the development stage of
new products and upon the redesign of existing products by its OEM customers.
New product development usually begins one to two years prior to the
introduction of such products to the OEM's customers. Redesign of existing
products usually begins six months to one year prior to the introduction of the
redesigned products. There can be no assurance that the Company will be
successful in marketing its products for incorporation into new and redesigned
product introductions. Any failure of the Company to obtain business for new
products or to retain or increase business for redesigned existing products
could have a material adverse effect on the Company's business, operating
results, cash flows and financial condition. See 'Business -- OEM Product
Cycle.'
CONTROL BY OSICOM
After the completion of the offering, Osicom will beneficially own
approximately 53% of the Company's outstanding Common Stock. As a result, Osicom
will have the voting power to elect the Board of Directors and approve other
matters presented for consideration by the stockholders. Currently, two of the
members of the Company's Board of Directors are also independent directors of
Osicom. See 'Management,' 'Principal Stockholders,' 'Certain Relationships and
Related Party Transactions' and 'Shares Eligible for Future Sale.'
BENEFITS OF OFFERING TO OSICOM
The offering will provide significant benefits to Osicom, which is
currently the sole stockholder of the Company, including the creation of a
public market for the Company's Common Stock and the payment of the Company's
indebtedness to Osicom in the approximate amount of $3.8 million. As a result,
Osicom will generally have greater liquidity with respect to its investment in
the Company's Common Stock and its holding of the Common Stock will have
potentially greater value. In addition, upon consummation of the offering,
Osicom may be relieved of its obligation as guarantor of the Company's line of
credit. Osicom will beneficially own 3,323,327 shares of the Company's Common
Stock after completion of this offering. Based upon the exercise price of $5.00
per share, such shares owned by Osicom will have an aggregate market value of
approximately $16.6 million. See 'Use of Proceeds,' 'Principal Stockholders' and
'Certain Relationships and Related Party Transactions.'
CONTRACTUAL RELATIONSHIPS WITH OSICOM
The Company is a party to agreements with Osicom, consisting of (i) a five
year supply agreement pursuant to which Osicom purchases products, including the
NET+ARM'TM' ASIC, at fixed prices and Osicom provides manufacturing services to
the Company at prices to be agreed upon; (ii) a sublease pursuant to which
Osicom subleases office space at the Company's facility in Waltham,
Massachusetts; and (iii) an intercompany agreement pursuant to which the Company
transferred its stand-alone print server product business and associated assets
to Osicom, and Osicom has the right to manufacture and sell stand-alone product
services to distributors. The intercompany agreement also states that the
Company will provide certain transitional services to Osicom and that the
Company will share certain intellectual property rights with Osicom. After the
completion of this offering, Osicom will beneficially own approximately 53% of
the Company's outstanding Common Stock. In addition, two of the members of the
Osicom board of directors also serve as directors of the Company. There can be
no assurance that the price, terms and conditions of any of these agreements are
as favorable to the Company as could have been obtained from unaffiliated third
parties. In the future, the Company may enter into additional agreements with
Osicom or subsidiaries of Osicom. There can be no assurance that such agreements
will be on terms at least as favorable as if they had been negotiated with
unrelated third parties. See 'Certain Relationships and Related Party
Transactions.'
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POTENTIAL PRODUCT DEFECTS
Complex products such as those offered by the Company may contain
undetected or unresolved defects when first introduced or as new versions are
released. The occurrence of material errors in the future could, and the
inability to correct such errors would, result in the loss of market share, the
delay or loss of market acceptance of the Company's products, material warranty
expense, diversion of engineering and other resources from the Company's product
development efforts, the loss of credibility with the Company's customers or
product recall. Any of such occurrences could have a material adverse effect
upon the Company's business, operating results, cash flows and financial
condition. See 'Business -- Products and Services.'
DEPENDENCE ON CONTRACT MANUFACTURERS AND LIMITED SOURCE SUPPLIERS
The Company relies upon independent contractors to manufacture its
components, subassemblies, systems and products. The Company also relies upon
limited-source suppliers for a number of components used in the Company's
products, including custom ASICs, certain key microprocessors and other
components. There can be no assurance that these independent contractors and
suppliers will be able to meet the Company's future requirements for
manufactured products, components and subassemblies in a timely fashion. The
Company generally purchases limited-source components pursuant to purchase
orders and has no guaranteed supply arrangements with these suppliers. In
addition, the availability of many of these components to the Company is
dependent in part on the Company's ability to provide its suppliers with
accurate forecasts of its future requirements. Any extended interruption in the
supply of any of the key components currently obtained from a limited source
would disrupt its operations and have a material adverse effect on the Company's
business, operating results, cash flows and financial condition. See
'Business -- Manufacturing.'
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
In fiscal 1998 and the first six months of fiscal 1999, international sales
constituted approximately 14.9% and 38.1% respectively, of the Company's net
sales, and the Company believes that its future growth is dependent in part upon
its ability to increase sales in international markets. In addition, an integral
part of the Company's business strategy is to form strategic alliances for the
manufacture and distribution of its products with third parties, including
foreign corporations. Several countries in Asia have recently experienced
currency devaluation and/or reduced access to credit. There can be no assurance
that the effect of this economic condition on the Company's strategic partners
and eight significant customers or the exposure to variations in the respective
value of the currency of all of the Company's international partners or
customers with that of the U.S. dollar, will not have a material adverse effect
on the Company's business, operating results, cash flows and financial
condition. The sale of the Company's products internationally may be regulated
by foreign governmental agencies. The Company does not know the impact of such
regulation, if any, on the Company, and there can be no assurance that foreign
regulation will not have a material adverse effect on the Company's ability to
sell its products in such countries. Additionally, the Company's products are
subject to restrictions on export to foreign countries. These restrictions
require the Company to obtain a validated export license prior to the sale of
its products to purchasers in such countries, thereby making many of the
Company's sales to purchasers in foreign countries subject to the approval of
the U.S. Department of Commerce. There can be no assurance that the U.S.
Department of Commerce will not mandate more restrictions in the future towards
the Company's products or, due to the political or diplomatic climate or for
human rights reasons, impose additional restrictions on exports to one or more
countries where the Company desires to sell its products. Such a change could
adversely affect the Company's ability to sell its products in such countries,
which, in turn, could have a material adverse effect on the Company's business,
operating results, cash flows and financial condition. In addition,
international sales are subject to inherent risks, including changes in
regulatory requirements, tariffs and other barriers, fluctuating exchange rates
associated with international sales by selling its products in United States
currency. There can be no assurance that any of these factors will not have a
material adverse effect on the Company's future international sales and,
consequently, on the Company's business, operating results,
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cash flows and financial condition. See 'Management's Discussion and Analysis of
Financial Conditions and Results of Operations.'
DEPENDENCE ON PROPRIETARY RIGHTS AND TECHNOLOGY
The Company's ability to compete is dependent in part on its propriety
rights and technology. The Company has no patents and relies primarily on a
combination of copyright, trademark laws, trade secrets, confidentiality
procedures and contract provisions to protect its proprietary rights. The
Company generally enters into confidentiality agreements with its employees, and
sometimes with its customers and potential customers and limits access to the
distribution of its software, hardware designs, documentation and other
proprietary information. There can be no assurance that the steps taken by the
Company in this regard will be adequate to prevent the misappropriation of its
technology. While the Company plans to file various patent applications, such
applications may be denied. Any patents, once issued, may be circumvented by
competitors of the Company. Furthermore, there can be no assurance that others
will not develop technologies that are superior to the Company's. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights as fully
as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights in the United States or
abroad will be adequate or that competing companies will not independently
develop similar technology. Failure of the Company to adequately protect its
proprietary rights could have a material adverse effect on the Company's
business, operating results, cash flows and financial condition. See
'Business -- Intellectual Property, Trademarks and Proprietary Rights.'
DEPENDENCE ON KEY PERSONNEL
The Company's business and prospects depend to a significant degree upon
the continuing contributions of its key personnel. The Company does not have
employment contracts with any of its key personnel and does not maintain any key
person life insurance policies. The loss of key management or technical
personnel could have a material adverse effect on the Company's business,
operating results, cash flows and financial condition. The Company believes that
its prospects depend in large part upon its ability to attract and retain
highly-skilled engineering, managerial, sales, marketing and administrative
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. Failure to attract and retain key personnel could have a material
adverse effect on the Company's business, operating results, cash flows and
financial condition. See 'Business -- Employees' and 'Management.'
REGULATORY COMPLIANCE AND EVOLVING INDUSTRY STANDARDS
The market for the Company's products is characterized by the need to meet
a significant number of communications regulations and industry standards, some
of which are evolving as new technologies are deployed. In the United States,
the Company's products must comply with various regulations defined by the
Federal Communications Commission and standards established by Underwriters
Laboratories. Some of the Company's products may not comply with current
industry standards, and this noncompliance must be addressed in the design of
those products. Standards for networking are still evolving. The Company is a
member of several standards committees in order that the Company may participate
in the development of standards for emerging technologies. However, as the
standards evolve, the Company will be required to modify its products or develop
and support new versions of its products. The failure of the Company's products
to comply or delays in compliance, with the various existing and evolving
industry standards could delay introduction of the Company's products, which
could have a material adverse effect on the Company's business, operating
results, cash flows and financial condition.
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MANAGEMENT OF GROWTH
The Company has limited internal infrastructure and any significant growth
would place a substantial strain on the Company's financial and management
personnel and information systems and controls, and the Company must implement
new and enhance existing financial and management information systems and
controls and must add and train personnel to operate such systems effectively.
The Company's intention to continue to pursue its growth strategy through
efforts to increase sales of existing products and new products can be expected
to place even greater pressure on the Company's existing personnel and compound
the need for increased personnel, expanded information systems, and additional
financial and administrative control procedures. There can be no assurance that
the Company will be able to successfully manage expanding operations.
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price will be substantially higher than the
book value per share of the currently outstanding Common Stock. Investors
purchasing shares in this offering will therefore suffer immediate and
substantial dilution of $2.99 per share in the pro forma net tangible book value
of their Common Stock from the assumed exercise price of $5.00 per share.
Moreover, the Company may at any time in the future sell additional securities
and/or rights to purchase such securities, grant additional warrants, stock
options or other forms of equity-based incentive compensation to the Company's
management and/or employees to attract and retain such personnel or in
connection with the obtaining of financing, such as debt or leasing arrangements
accompanied by warrants to purchase equity securities of the Company. Any of
these actions would have a dilutive effect upon the holders of the Common Stock.
See 'Dilution.'
BROAD DISCRETION IN APPLICATION OF PROCEEDS; ACQUISITION RISKS
The Company intends to use the net proceeds from this offering to reduce
the outstanding principal balance under its line of credit and certain other
indebtedness, including approximately $3.8 million of indebtedness to Osicom,
and approximately $2.5 million of the approximately $3.5 million outstanding
balance under the Company's line of credit and for product development and
marketing, capital expenditures, working capital and general corporate purposes.
In addition, a portion of the net proceeds may be used to make acquisitions.
Other than the repayment of debt, the Company has not specifically allocated
approximately $6.5 million of the net proceeds for any particular uses.
Accordingly, the specific uses for a substantial portion of the net proceeds
will be at the complete discretion of the Board of Directors of the Company and
may be allocated from time to time based upon a variety of circumstances. There
can be no assurance that the Company will deploy such funds in a manner that
will enhance the financial condition of the Company. Acquisitions present
numerous risks, including inaccurate assessment of the benefits to be provided
by an acquired business, the assumption of unexpected liabilities, significant
transaction costs and expenses, costs and expenses involved in the integration
of the operations and services of an acquired business, diversion of
management's attention from other business concerns and potential loss of key
employees of the acquired business. The realization of any of these risks could
have a material adverse effect on the Company's business, financial condition,
cash flows and results of operations. See 'Use of Proceeds.'
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock or the rights, and there can be no assurance that an active public market
will develop or be sustained. The exercise price of the rights has been
determined solely by negotiations between the Company and the Underwriter and
does not necessarily reflect the price at which shares of Common Stock may be
sold in the public market during or after this offering. See 'The
Offering -- Why We are Selling Shares Through a Rights Offering' for a
discussion of the factors considered in determining the exercise price. The
public markets, in general, have from time to time experienced extreme price and
volume fluctuations, which have in some cases been unrelated to the operating
performance of particular companies, and the market for the securities of
technology companies may be subject to greater price volatility than the
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stock market in general. In addition, factors such as announcements of new
products by the Company's competitors or third parties; announcements of
fluctuations in the operating results of the Company or its competitors;
strategic alliances involving the Company's competitors; or general market
conditions in the networking systems industry may have a significant impact on
the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
Common Stock by the Company, or the availability of Common Stock for future
sales, will have on the market price of Common Stock prevailing from time to
time. Sales of a substantial number of shares of Common Stock in the public
market could adversely affect the market price for the Company's Common Stock
and reported earnings per share.
Certain restrictions on shares of Common Stock are applicable to (i) any
shares of Common Stock purchased in this offering by affiliates of the Company,
which may generally only be sold in compliance with the limitations of Rule 144
under the Act, except for the holding period requirements thereunder, and (ii)
3,323,327 shares of Common Stock beneficially owned by Osicom and 464,419 shares
of Common Stock purchased pursuant to the exercise of rights by executive
officers and directors of Osicom and the Company and certain employees of the
Company, which will be subject to lock-up agreements (the 'Lock-Up Agreements')
prohibiting the sale or other disposition of such shares until 180 days after
the expiration date of the rights (the 'Lock-Up Expiry Date') without the prior
written consent of Tucker Anthony Incorporated. See 'Shares Eligible For Future
Sale.'
It is anticipated that a registration statement (the 'Form S-8 Registration
Statement') covering the Common Stock that may be issued pursuant to the
exercise of options granted by the Company will be filed and become effective
prior to the Lock-Up Expiry Date, and that shares of Common Stock that are so
acquired or offered thereafter pursuant to the Form S-8 Registration Statement
generally may be resold in the public market without restriction or limitation.
It is also anticipated that, promptly after the Lock-Up Expiry Date, a
registration statement covering the 2.4 million shares of Common Stock which are
'restricted securities' will be filed and become effective, and that these
shares of Common Stock may be sold thereafter in the public market without
restriction or limitation. See 'Management -- Stock Option Plan' and
'Management -- Director Stock Option Plan,' 'Shares Eligible For Future Sale'
and 'Underwriting.'
ANTI-TAKEOVER PROVISIONS
Shares of preferred stock may be issued by the Company in the future
without stockholder approval and upon such terms as the Board of Directors may
determine. The rights of the holders of the Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding stock of the Company and potentially prevent the
payment of a premium to stockholders in an acquisition transaction. There are no
shares of preferred stock outstanding and the Company has no present plans to
issue any shares of preferred stock. See 'Description of Capital Stock.'
REQUIREMENTS FOR LISTING SECURITIES ON THE NASDAQ NATIONAL MARKET; APPLICATION
OF THE PENNY STOCK RULES
The Company has applied with the Nasdaq National Market to have the Common
Stock and rights (the 'Listed Securities') approved for listing (upon completion
of this offering with respect to the Common Stock and from the date of this
Prospectus through the expiration date with respect to the rights). If the
Company is unable to maintain the standards for continued listing, the Listed
Securities could be subject to delisting from the Nasdaq National Market.
Trading, if any, in the Listed Securities would thereafter be conducted on the
Nasdaq Small Cap Market. If, however, the Company did not
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meet the requirements of the Nasdaq Small Cap Market, trading of the Listed
Securities would be conducted on an electronic bulletin board established for
securities that do not meet the Nasdaq listing requirements or in what is
commonly referred to as the 'pink sheets.' As a result, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, the Company's securities.
In addition, if the Company's securities were delisted, they would be
subject to the so-called penny stock rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally defined as an investor
with a net worth in excess of $1.0 million or annual income exceeding $200,000,
or $300,000 together with a spouse). For transactions covered by this rule, the
broker-dealer must make a special suitability determination for the purchaser
and must have received the purchaser's written consent to the transaction prior
to sale. Consequently, delisting, if it occurred, may affect the ability of
broker-dealers to sell the Company's securities and the ability of purchasers in
this offering to sell their securities in the secondary market.
The SEC has adopted regulations that define a 'penny stock' to be any
equity security that has a market price (as defined in the regulations) of less
than $5.00 per share or an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the transaction, of a
disclosure schedule relating to the penny stock market. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks. As a
result, if the Common Stock is determined to be 'penny stock,' an investor may
find it more difficult to dispose of the Company's Common Stock.
NO DIVIDENDS
To date, the Company has not paid any cash dividends on its Common Stock,
and does not expect to declare or pay any cash or other dividends in the
foreseeable future. In addition, the Company's credit agreement contains a
financial covenant that prohibits the payment of cash dividends. See 'Dividend
Policy.'
CANCELLATION OF RIGHTS OFFERING
If the conditions precedent to the sale to the Underwriter set forth in the
standby underwriting agreement are not satisfied, the Underwriter may elect, on
or before the sixth business day after the expiration date of the rights (the
'Closing Date'), to cancel the rights offering and the Company will not have any
obligations with respect to the rights. Under such circumstances, the exercise
price, without interest, will be promptly returned. See 'Underwriting.' The
Company has been advised by the NASD that it is likely that trades in the rights
and the when-issued shares of Common Stock in the market would be cancelled if
the rights offering is not consummated.
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THE COMPANY
The Company commenced its operations in 1984 as Digital Products, Inc. and
has been operated by its current management throughout its history. From its
inception, the Company has designed, marketed and sold products enabling the
connection of electrical devices to networks. In 1994, the Company introduced
the Digital Products Option ('DPO') Interface Specification and Networking Card,
two network connectivity products for printer controller designers and OEMs of
imaging devices. DPO was designed using the same networking technology found in
the Company's previous products. DPO addresses the growing trend among imaging
OEMs to design network connectivity directly into their products.
In 1996, the Company began developing a networking system-on-silicon line
of products designed to network-enable a broad array of electrical devices in a
variety of product markets. The network connectivity technology contained in
that design was based upon the Company's existing technology. In September 1996,
the Company was acquired by Osicom, a Nasdaq-listed designer and manufacturer of
carrier, enterprise and customer premise networking equipment. The Company has
been a wholly-owned subsidiary of Osicom since its acquisition. Supported by
Osicom's capital investments totaling $3.8 million as of July 31, 1998, the
Company completed the development of its first networking system-on-silicon
family of products, the NET+ product line, and began shipping that product in
March 1998.
The Company has decided to focus its resources on the future development of
its NET+ family of products. As a result, effective as of May 1, 1998, the
Company transferred its stand-alone print server product business and associated
assets (the 'Commercial Line') to Osicom. Therefore, with respect to the
Company, the Commercial Line is treated as a discontinued operation. In
connection with the transfer, Osicom will manufacture, sell and support the
stand-alone print server products and other products. See 'Certain Relationships
and Related Party Transactions.' All references herein to the 'Company' refer to
NETsilicon, Inc. and do not include the business and assets of the Commercial
Line unless the context otherwise requires.
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THE OFFERING
WHY WE ARE SELLING SHARES THROUGH A RIGHTS OFFERING
We have agreed with Osicom to make a rights offering to holders of Osicom
common stock and Osicom Securities. This rights offering represents the
Company's initial public offering of its securities, although it is different
than a traditional public offering in that securities are directed first to
holders of Osicom common stock and Osicom Securities, and then to the general
public. We believe that this rights offering will provide several advantages
over a traditional initial public offering. This type of offering gives us the
opportunity to offer our Common Stock to investors who, as holders of Osicom
common stock and Osicom Securities already have some knowledge of our business.
Our securities will also be distributed to a broader, more stable stockholder
base and underwriting discounts and commissions will be less than if we pursued
a traditional initial public offering. In addition, Osicom supports this type of
rights offering because it affords the holders of Osicom common stock and Osicom
Securities the opportunity to purchase shares before the shares are offered to
the general public.
We determined the exercise price through negotiations with the Underwriter.
In making this determination, we considered such factors as our future prospects
and historical financial data, our industry in general and our position in the
industry; market valuations of the securities of companies engaged in activities
similar to ours; the quality of our management team; and the advice of our
Underwriter. We are also obtaining two independent appraisals to further support
the determination of the final exercise and offering price.
YOU CAN EXERCISE OR SELL YOUR RIGHTS
Until , 1998, you may purchase one share of our Common Stock for
each right you receive, or you may sell your rights in the market. However, you
may not exercise rights for fewer than 75 shares of Common Stock in a single
account, unless you have previously exercised rights for at least 75 shares in
the same account and you provide a letter to American Stock Transfer and Trust
Company ('AST') stating that you have already exercised at least 75 rights. If
you hold Osicom common stock and Osicom Securities in multiple accounts, you
must meet the minimum purchase requirement for each account. You may, however,
consolidate your rights into one account. If you receive fewer than 75 rights,
you should consider purchasing enough additional rights to be eligible to
exercise your rights or selling your rights in the market. We anticipate that a
public market will develop in the rights although no assurance can be given (i)
that such market will develop or (ii) as to the quality of such market for the
rights should one develop. You should consult with your regular investment
advisor and carefully consider your alternatives.
IF THE NUMBER OF OSICOM COMMON SHARES YOU OWN OR ARE ENTITLED TO IS NOT
DIVISIBLE BY THREE
If the number of Osicom common shares you own or are entitled to is not
evenly divisible by three, we will round up to the next highest whole number in
calculating the number of rights that you are entitled to receive. For example,
if you hold Osicom common stock and Osicom Securities with 1,000 Osicom common
shares underlying them, you will receive 334 rights. If you are a nominee for
beneficial holders of Osicom common stock and Osicom Securities, we will round
the number of rights that you will receive based upon the amount held by each
beneficial holder individually.
WHEN YOU CAN EXERCISE YOUR RIGHTS
You can exercise your rights at any time during the period beginning on
, 1998 and ending at 5:00 p.m., New York City time, on ,
1998. After that date, you will not be able to exercise or transfer your rights
and they will be worthless. We do not intend to honor any rights received for
exercise by AST after , 1998, regardless of when you sent your rights
to AST for exercise.
HOW YOU CAN TRANSFER YOUR RIGHTS
You may transfer all or a portion of your rights by endorsing and
delivering to AST (at the addresses set forth below) your rights certificate.
You must properly endorse the certificate for transfer, your signature must be
guaranteed by a bank or securities broker and your certificate must be
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accompanied by instructions to reissue the rights you want to transfer in the
name of the person purchasing the rights.
AST will reissue certificates for the transferred rights to the purchaser,
and will reissue a certificate for the balance, if any, to you if it is able to
do so before , 1998. You will be responsible for the payment of any
commissions, fees and other expenses (including brokerage commissions and any
transfer taxes) incurred in connection with the purchase or sale of your rights.
We believe that a market for the rights may develop during the period in which
the rights may be exercised. To facilitate the market, we have applied with the
Nasdaq National Market to have the rights approved for quotation for the period
, 1998 through , 1998. We have reserved 'NSIIR' as the
Nasdaq symbol under which the rights will trade. If you have any questions
regarding the transfer of rights, you should contact Henry Reinhold at AST at 40
Wall Street, New York, New York 10004, telephone number (212) 936-5100.
HOW YOU CAN EXERCISE YOUR RIGHTS
On , 1998, AST will transfer a significant majority of the rights
to The Depository Trust Company, which in turn will credit the rights, in its
normal course of handling this type of transaction, to the accounts of the
participants (including brokers and dealers, banks, trust companies and clearing
corporations) for whom it holds Osicom common stock or Osicom Securities. The
remainder will be transferred as soon as possible thereafter. You may exercise
your rights by completing and signing the election to purchase form that appears
on the back of each rights certificate. You must send the completed and signed
form, along with payment in full of the exercise price for all shares that you
wish to purchase, to AST. AST must receive these documents and the payment by
5:00 p.m., New York City time, on , 1998. We do not intend to honor
any exercise of rights received by AST after that date.
We will, however, accept your exercise if AST has received on or before
, 1998 full payment of the exercise price for shares to be purchased
through the exercise of rights, and has received a letter or telegraphic notice
from a bank, trust company or member firm of the New York Stock Exchange or the
American Stock Exchange setting forth your name, address and taxpayer
identification number, the number of shares you wish to purchase, and
guaranteeing that a properly completed and signed election to purchase form will
be delivered to AST by 5:00 p.m., New York City time, on , 1998. If
the properly executed documents are not received by 5:00 p.m. on ,
1998, we do not intend to accept your subscription.
We suggest, for your protection, that you deliver your rights to AST by
overnight or express mail courier. If you mail your rights, we suggest that you
use registered mail. If you wish to exercise your rights, you should mail or
deliver your rights and payment for the exercise price to AST at:
By mail, by hand or by overnight, express mail courier:
American Stock Transfer
40 Wall Street
New York, New York 10004
Attn: Henry Reinhold
You must pay the exercise price in U.S. dollars by cash, check or money
order payable to the 'NSI Escrow Account.' Until this offering is closed, your
payment will be held in escrow by AST, who will serve as the escrow agent of the
NSI Escrow Account.
AST, which is also the Company's transfer agent, will issue certificates to
you representing the Common Stock purchased through the exercise of rights by
, 1998. Until that date, AST will hold all funds received in payment
of the exercise price in escrow and will not deliver any funds to us until the
shares of Common Stock have been issued.
If you are a broker or depository who holds Osicom common stock or Osicom
Securities for the account of others and you receive rights certificates for the
account of more than one beneficial owner,
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you should provide copies of this Prospectus to the beneficial owners. You
should also carry out their intentions as to the exercise or transfer of their
rights.
NSI will decide all questions as to the validity, form and eligibility
(including times of receipt, beneficial ownership and compliance with minimum
exercise provisions). The acceptance of subscription forms and the exercise
price also will be determined by NSI. Alternative, conditional or contingent
subscriptions will not be accepted. NSI reserves the absolute right to reject
any subscriptions not properly submitted. In addition, NSI may reject any
subscription if the acceptance of the subscription would be unlawful. NSI also
may waive any irregularities (or conditions) in the subscription of shares of
Common Stock, and its interpretation of the terms (and conditions) of the rights
offering shall be final and binding.
If you are given notice of a defect in your subscription, you will have
five business days after the giving of notice to correct it. You will not,
however, be allowed to cure any defect later than , 1998. We are not
obligated to give you notification of defects in your subscription. We will not
consider an exercise to be made until all defects have been cured or waived. If
your exercise is rejected, your payment of the exercise price will be promptly
returned by AST.
HOW YOU CAN OBTAIN ADDITIONAL INFORMATION
If you wish to receive additional copies of this Prospectus or additional
information concerning this offering, you should contact Mr. Charles Wahle at
Tucker Anthony Incorporated, telephone number (617) 725-1722.
WHAT HAPPENS TO THE UNSUBSCRIBED SHARES
The first 300,000 shares of Common Stock that are not subscribed for at the
end of the rights exercise period will be offered at a price of $5.00 per share
to the Other Purchasers. These persons may have a relationship with us, Osicom
or one of Osicom's subsidiaries. We expect to enter into agreements with these
persons to purchase the unsubscribed shares before the end of the rights
exercise period. If there are less than 300,000 unsubscribed shares at the end
of the rights exercise period, the number of unsubscribed shares offered to each
of these persons will be adjusted accordingly.
To the extent that any unsubscribed shares remain unsold after the offer to
these persons, the Underwriter will purchase these shares pursuant to the
Standby Underwriting Agreement. The Underwriter must purchase these shares not
later than , 1998.
In connection with this offering, the Underwriter will receive a financial
advisory fee of 3% of the exercise price for each share of Common Stock being
offered in this offering, regardless of whether it purchases any shares in this
offering. In addition, if the Underwriter purchases any shares in this offering
or through the exercise of rights that are purchased in the open market, it may
purchase the shares at the exercise price less an underwriting discount of 4% of
the exercise price, subject to certain limitations. The Underwriter will offer
shares of Common Stock purchased by it to the public at prices which may vary
from the exercise price. We have granted to the Underwriter an option to
purchase an additional 435,750 shares of Common Stock to cover over-allotments,
if any, during the 30-day period beginning on , 1998. The Underwriter
will be entitled to purchase these over-allotment shares at the exercise price
less the 3% financial advisory fee and the 4% underwriting discount. See
'Underwriting.'
We intend to supplement this Prospectus after the rights exercise period is
over to set forth the results of the rights offering, the transactions by the
Underwriter during the exercise period, the number of unsubscribed shares
purchased, if any, and any resale transactions.
WHAT HAPPENS IF THE RIGHTS OFFERING IS CANCELLED
The Underwriter has the right to cancel the rights offering if certain
conditions are not satisfied or if certain circumstances exist prior to the
closing date of this offering. If you exercise rights and the rights offering is
cancelled, AST will promptly return to you, without interest, any payment
received in respect of the exercise price and you will not receive any shares of
our Common Stock. We have established an escrow account with AST to hold funds
received prior to the closing date of this offering.
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The NASD has advised us that trades in the rights and the when-issued shares of
Common Stock in the market would be cancelled if this offering is not
consummated.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
affecting holders of Osicom common stock and Osicom Securities receiving rights
in this offering. In the opinion of Greenbaum, Rowe, Smith, Ravin, Davis &
Himmel, LLP, the distribution of the rights by the Company to holders of Osicom
common stock and Osicom Securities more likely than not will constitute a
taxable transaction under the Internal Revenue Code of 1986, as amended (the
'Code'), and may also be subject to state or local income taxes. Because of the
complexity of the provisions of the Code referred to below and because tax
consequences may vary depending upon the particular facts relating to each
holder of Osicom common stock and Osicom Securities, such holders should consult
their own tax advisors concerning their individual tax situations and the tax
consequences of this offering under the Code and under any applicable state,
local or foreign tax laws.
NSI has been advised by Greenbaum, Rowe, Smith, Ravin, Davis & Himmel, LLP
that, under current interpretations of case law, the Code, and applicable
regulations thereunder, the federal income tax consequences applicable to
holders of Osicom common stock and Osicom Securities receiving rights in this
offering generally are as follows:
DISTRIBUTION OF RIGHTS TO HOLDERS OF OSICOM COMMON STOCK AND OSICOM SECURITIES
The rights, representing the right to acquire shares of Common Stock from
the Company, can be considered as constituting 'property' within the meaning of
Section 317(a) of the Code. The federal income tax consequences of a
distribution of the rights by the Company to holders of Osicom common stock and
Osicom Securities, as determined under the Code and the regulations thereunder,
are as follows: (i) each noncorporate holder of Osicom common stock and Osicom
Securities will be deemed to have received a distribution from Osicom, generally
taxable as ordinary dividend income, in an amount equal to the fair market value
(if any) of the rights, as of the date of distribution, (ii) each corporate
holder of Osicom common stock and Osicom Securities (other than foreign
corporations and S corporations) will be deemed to have received a distribution
from Osicom (generally taxable as a dividend subject to the dividends received
deduction for corporations (generally 70%, but 80% under certain circumstances))
in an amount equal to the fair market value (if any) of the rights, as of the
date of distribution, (iii) the tax basis of the rights in the hands of each
holder (whether corporate or noncorporate) of Osicom common stock and Osicom
Securities will be equal to the fair market value (if any) of the rights as of
the date of distribution, and (iv) for purposes of (i)-(iii) above, the date of
distribution should be . Because of the predominantly factual nature
of determining the fair market value, if any, of the rights, Greenbaum, Rowe,
Smith, Ravin, Davis & Himmel, LLP has expressed no opinion with respect to the
fair market value of the rights.
Since the fair market value of the rights will determine the amount of
taxable income deemed received by the holders of Osicom common stock and Osicom
Securities, the determination of the fair market value of each right as of the
date of distribution is critical. The exercise price was determined through
arm's-length negotiations between the Company and the Underwriter. Based on
these negotiations and the two independent appraisals which are being obtained,
NSI's Board of Directors believes that the per share value of Common Stock
represented by the rights at the date of the commencement of this offering
approximates the exercise price, and that the rights should have no value for
federal income tax purposes. However, the Internal Revenue Service is not bound
by this determination. See 'The Offering -- Why We Are Selling Shares Through a
Rights Offering.'
EXERCISE OF RIGHTS
Holders of rights, whether corporate or noncorporate, will recognize
neither gain nor loss upon the exercise of the rights. A holder of rights who
receives shares of Common Stock upon the exercise of the rights will acquire a
tax basis in such shares equal to the sum of the exercise price paid under this
offering and the tax basis (if any) of the holder of rights in the rights.
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TRANSFER OF RIGHTS
The transferable nature of the rights will permit a holder of rights to
sell rights prior to exercise. Pursuant to Section 1234 of the Code, a rights
holder who sells rights prior to exercise will be entitled to treat the
difference between the amount received for the rights and the adjusted tax basis
(if any) of the holder of rights in the rights as a short-term capital gain or
capital loss, provided that Common Stock subject to the rights would have been a
capital asset in the hands of the holder had it been acquired by him. The gain
or loss so recognized will be short-term since the rights will have been held
for less than twelve months.
NON-EXERCISE OF RIGHTS
The income tax treatment applicable to holders of rights who fail to
exercise or transfer their rights prior to the expiration date also is set forth
in Section 1234 of the Code. Holders of rights who allow their rights to lapse
are deemed under the Code to have sold their rights on the date on which the
rights expire. Since upon such lapse no consideration will be received by a
holder of rights, and since the rights will have been held for less than twelve
months, a short-term capital loss equal to the tax basis (if any) in the rights
will be sustained by the holder on such lapse, provided that Common Stock
subject to the rights would have been a capital asset in the hands of the holder
had it been acquired by him.
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USE OF PROCEEDS
The minimum net proceeds to the Company from the sale of the 2,905,000
shares of Common Stock offered by the Company hereby are estimated to be
approximately $12.8 million after deducting estimated offering expenses payable
by the Company and assuming that none of the rights granted in the rights
offering are exercised and the sale of all shares is made pursuant to the
Standby Underwriting Agreement. Estimated offering expenses include the
non-accountable expense allowance to the Underwriter, a financial advisory fee
of 3% of the exercise price and an underwriting discount of 4% of the exercise
price. In the event more of the shares of Common Stock offered hereby are sold
pursuant to the exercise of rights, the Company will not be obligated to pay the
underwriting discount with respect to such shares and will, therefore, realize
an amount of net proceeds greater than approximately $12.8 million. See 'The
Offering -- What Happens to the Unsubscribed Shares' and 'Underwriting.'
The Company expects to repay its indebtedness to Osicom in the approximate
amount of $3.8 million. This indebtedness bears interest at 11 1/2% per annum
and is payable upon demand by Osicom. The proceeds of the Company's borrowings
from Osicom were used primarily for research and development. In addition, the
Company intends to use a portion of the net proceeds from this offering to repay
approximately $2.5 million of the amounts due to Coast Business Credit under its
line of credit. As of July 31, 1998, the Company had $3.5 million outstanding
under its line of credit. The $5.0 million line of credit, which was incurred to
finance working capital borrowings by the Company, bears interest at the
lender's prime rate plus 2 1/2% per annum, not to be less than 8% per annum. The
Company intends to maintain a balance of $1.0 million under its line of credit
in order to meet the minimum balance requirements and avoid additional fees
under the terms of its agreement with Coast Business Credit. The Company's line
of credit expires in February 1999. The remainder of the net proceeds will be
used for product development and marketing, capital expenditures, working
capital, and general corporate purposes. The Company may also use a portion of
the net proceeds from this offering to expand its business through acquisitions.
Although the Company continues to explore prospective acquisition opportunities,
the Company does not currently have any acquisition commitments. Other than the
repayment of outstanding indebtedness, the Company has not made any
determination regarding the amounts or timing of the use of any proceeds from
this offering. See 'Risk Factors -- Broad Discretion in Application of Proceeds;
Acquisition Risks.' The amounts and the timing of any such use may vary
significantly depending upon a number of factors, including the Company's
revenue growth, asset growth, cash flows and acquisition activities. Pending
such uses, the net proceeds of this offering will be invested in short-term,
investment-grade, interest-bearing securities. The Company currently anticipates
that the net proceeds to be received by the Company from this offering, together
with amounts available under its existing line of credit, cash generated from
operations and existing cash balances will be sufficient to satisfy its
operating cash needs for at least 12 months following the consummation of this
offering. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources.'
DIVIDEND POLICY
To date, the Company has not paid or declared any cash dividends on its
Common Stock. The Company currently intends to retain future earnings for use in
its business and, therefore, does not anticipate paying or declaring any cash or
other dividends in the foreseeable future. The payment of future dividends, if
any, will depend among other things, on the Company's results of operations,
cash flows and financial condition and on such other factors as the Company's
Board of Directors may, in its discretion, consider relevant. In addition, the
Company's credit agreement with Coast Business Credit contains a financial
covenant that prohibits the payment of any dividends without their consent.
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CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of July 31, 1998, and (ii) the capitalization as adjusted to reflect the sale
by the Company of 2,905,000 shares of Common Stock in this offering and the
receipt and application of approximately $12.8 million in estimated minimum net
proceeds from this offering. This table should be read in conjunction with the
Financial Statements of the Company and the Notes thereto and other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JULY 31, 1998
-------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Due to Osicom(2)............................................................. $ 3,830 $ --
Short-term debt and current maturities of long-term debt..................... 3,490 1,011
Stockholders' equity (deficit):
Common Stock, par value $.01 per share; 35,000,000 shares authorized and
3,323,327 shares issued and outstanding actual; 6,228,327 issued and
outstanding as adjusted(3).............................................. 33 62
Preferred Stock, par value $.01 per share; 5,000,000 shares authorized and
no shares issued actual and as adjusted................................. -- --
Additional paid-in capital(3).............................................. 2,530 15,259
Accumulated deficit........................................................ (2,577) (2,577)
------- --------------
Total stockholders' equity (deficit).................................... (14) 12,744
------- --------------
Total capitalization............................................... $ 7,306 $ 13,755
------- --------------
------- --------------
</TABLE>
- - - - - ------------
(1) Adjusted to give effect to the sale by the Company of 2,905,000 shares of
Common Stock and the receipt and application of approximately $12.8 million
in net proceeds from this offering, after deducting the maximum total
underwriting discount with respect to such shares of approximately $1.0
million and estimated offering expenses of $750,000 (including $150,000
representing the maximum applicable non-accountable expense allowance to the
Underwriter).
(2) Reflects advances from Osicom to the Company as of July 31, 1998. As of
August 25, 1998 such balance was $4.3 million. The Company anticipates
repayment of all outstanding amounts due to Osicom from the proceeds of this
offering. See Note F to the Notes to the Financial Statements.
(3) Excludes as of July 31, 1998, 76,347 shares of Common Stock issuable upon
the exercise of outstanding options, 27,061 of which were exercisable at a
weighted average exercise price of $5.00 per share.
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DILUTION
As of July 31, 1998, the Company had a net tangible deficit of
approximately $259,000 or $0.08 per share of Common Stock. Net tangible book
value per share of Common Stock represents the amount of the Company's tangible
assets less its total liabilities, divided by the total number of shares of
Common Stock outstanding. After giving effect to such increase, net tangible
book value would have been $12.5 million, or $2.01 per share, as of July 31,
1998. This represents an immediate increase in such net tangible book value of
$2.09 per share to existing stockholders and an immediate dilution of $2.99 per
share to investors purchasing Common Stock at the exercise price in this
offering. New stockholders that acquire Common Stock from the Underwriter at a
price greater than the exercise price will experience greater dilution. The
following table illustrates this per share dilution in net tangible book value:
<TABLE>
<S> <C> <C>
Exercise Price................................................................................. $5.00
Net tangible book value per share as of July 31, 1998............................ $(0.08)
Increase per share attributable to new stockholders(1)........................... 2.09
------
Pro forma net tangible book value per share as of July 31, 1998........................... 2.01
-----
Dilution per share to new stockholders......................................................... $2.99
-----
-----
</TABLE>
- - - - - ------------
(1) Reflects the sale by the Company of 2,905,000 shares of Common Stock and the
receipt of approximately $12.8 million in net proceeds from this offering,
after deducting the maximum total underwriting discount with respect to such
shares of approximately $1.0 million and estimated offering expenses of
$750,000 (including $150,000 respresenting the maximum applicable non-
accountable expense allowance to the Underwriter).
------------------------
The following table sets forth, on an adjusted basis as of July 31, 1998,
the number of shares of Common Stock issued by the Company, the total
consideration paid and the average price per share paid upon original issuance
to stockholders prior to this offering and by new investors before deducting the
Underwriter's discount, financial advisory fees and estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
--------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................... 3,323,327 53.4% $ 5,000,000(1) 25.6% $1.50
New investors................................... 2,905,000 46.6% $14,525,000 74.4% $5.00
--------- ---------- ----------- ----------
Total...................................... 6,228,327 100.0% $19,525,000 100.0%
--------- ---------- ----------- ----------
--------- ---------- ----------- ----------
</TABLE>
- - - - - ------------
(1) Represents gross consideration paid by Osicom to the former stockholders of
the Company, in connection with the acquisition of the Company in September
1996.
------------------------
The foregoing tables assume no exercise of outstanding options and
warrants. As of July 31, 1998, there were outstanding options and warrants to
purchase an aggregate of 76,347 shares of Common Stock (of which 27,061 were
exercisable) at a weighted average exercise price of $5.00 per share, and the
Company had an additional 2,400,000 shares of Common Stock available for future
grants and other issuances under its Stock Option Plans. See 'Management' and
Note K to the Notes to the Financial Statements appearing elsewhere in this
Prospectus.
25
<PAGE>
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data set forth below should be read in conjunction
with 'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and the Financial Statements of the Company and the Notes thereto
included elsewhere in this Prospectus. The statement of operations and balance
sheet data for the years ended January 31, 1997 and 1998 have been derived from
the financial statements of the Company which have been audited by BDO Seidman,
LLP, independent accountants. The statement of operations and balance sheet data
for the year ended January 31, 1996 have been derived from the financial
statements of the Company which have been audited by Weinbaum & Yalamanchi,
independent accountants. The statement of operations data for the years ended
January 31, 1994 and 1995 and for the six months ended July 31, 1998 and 1997
and the balance sheet data as of January 31, 1994 and 1995 and July 31, 1998
have been derived from the Company's unaudited financial statements which, in
the opinion of management, include all significant, normal and recurring
adjustments necessary for a fair presentation of the financial position and
results of operations for such unaudited period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS
ENDED
YEAR ENDED JANUARY 31, JULY 31, JULY 31,
--------------------------------------------- ---------------- ---------------
1994 1995 1996 1997 1998 1997 1998 1997 1998
------ ------ ------- ------- ------- ------- ------ ------ ------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ 750 $5,363 $ 4,598 $ 7,445 $ 7,920 $ 5,174 $5,384 $2,703 $3,199
Operating income (loss) from
continuing operations............... (314) (208) (2,970) (942) (1,228) (179) (152) (7) 168
Income (loss) from continuing
operations before income taxes...... (325) (274) (3,069) (1,078) (1,346) (233) (289) (41) 91
Net income (loss) from continuing
operations.......................... (105) 172 (2,426) (109) (853) (12) (420) 68 91
Net income (loss) from continuing
operations
per share:
Basic............................ $(0.05) $ 0.07 $ (1.02) $ (0.04) $ (0.26) $ 0.00 $(0.13) $ 0.02 $ 0.03
Diluted.......................... $ -- $ 0.05 $ -- $ -- $ -- $ -- $ -- $ 0.02 $ 0.03
Weighted average number of shares
outstanding:
Basic............................ 2,308 2,380 2,385 2,753 3,323 3,323 3,323 3,323 3,323
Diluted.......................... -- 3,323 -- -- -- -- -- 3,323 3,323
</TABLE>
<TABLE>
<CAPTION>
AS OF JANUARY 31,
----------------------------------------------- AS OF JULY 31,
1994 1995 1996 1997 1998 1998
------ ------ ------- ------ ------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 12 $ -- $ 19 $ 394 $ 185 $ 572
Working capital........................................ (313) (852) (1,261) (241) (787) (1,098)
Total assets........................................... 8,179 7,318 7,033 7,615 7,933 10,046
Due to Osicom(1)....................................... 0 0 0 948 1,812 3,830
Total debt (including short-term debt)................. 2,792 6,190 2,863 3,338 3,005 3,490
Stockholders' equity (deficit)......................... 723 1,076 (458) 763 586 (14)
</TABLE>
- - - - - ------------
(1) Reflects advances from Osicom to the Company as of July 31, 1998. As of
August 25, 1998 such balance was $4.3 million. The Company anticipates
repayment of all outstanding amounts due to Osicom with the proceeds of the
offering. See Note F to the Notes to the Financial Statements.
26
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain information contained herein may include 'forward-looking
statements' within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts included in this
Prospectus, are forward-looking statements. Such statements are subject to
certain risks and uncertainties, which include but are not limited to those
discussed in the section entitled 'Risk Factors'. Should one or more of these
risks or uncertainties, among others as set forth in this Prospectus,
materialize, actual results may vary materially from those estimated,
anticipated or projected. Although the Company believes that the expectations
reflected by such forward-looking statements are reasonable based on information
currently available to the Company, no assurance can be given that such
expectations will prove to have been correct. Cautionary statements identifying
important factors that could cause actual results to differ materially from the
Company's expectations are set forth in this Prospectus. All forward-looking
statements included in this Prospectus and all subsequent oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by these cautionary statements.
OVERVIEW
The Company is a designer, manufacturer and supplier of embedded networking
systems. The Company's networking silicon chip products and the accompanying
networking software may be incorporated into the basic design of a wide variety
of electrical devices, thereby enabling those devices to be connected to a Local
Area Network ('LAN') and the Internet. Such network connectivity makes it
possible for those devices to be monitored and controlled from a remote
location. The Company's NET+ products and predecessor products are currently
contained in an array of imaging products, including printers, scanners, fax
machines, copiers or multi-function peripherals manufactured by OEMs such as
Minolta Corporation, NEC Technologies and Xerox Corporation. The Company's NET+
products are also in various stages of being incorporated by 21 OEMs into the
design of other products in new markets, such as industrial automation,
communication devices, data and test equipment, internet devices and utility
monitoring equipment.
The Company commenced its operations in 1984 as Digital Products, Inc. and
has been operated by its current management throughout its history. From its
inception, the Company has designed, marketed and sold products enabling the
connection of electrical devices to networks. In 1994, the Company introduced
the DPO Interface Specification and Networking Card, two network connectivity
products for printer controller designers and OEMs of imaging devices. DPO was
designed using the same networking technology found in the Company's previous
products. DPO addresses the growing trend among imaging OEMs to design network
connectivity directly into their products.
In 1996, the Company began developing a networking system-on-silicon line
of products designed to network-enable a broad array of electrical devices in a
variety of product markets. The network connectivity technology contained in
that design was based upon the Company's existing technology. In September 1996,
the Company was acquired by Osicom. The Company has been a wholly-owned
subsidiary of Osicom since its acquisition.
The Company decided to focus its resources on the future development of its
NET+ family of products. As a result, effective as of May 1, 1998, the Company
transferred its Commercial Line to Osicom. Therefore, with respect to the
Company, the Commercial Line is treated as a discontinued operation. In
connection with the transfer, Osicom will manufacture, sell and support the
stand-alone print server and other products. See 'Certain Relationships and
Related Party Transactions.' The financial data discussed below does not
include the operations of the Commercial Line.
27
<PAGE>
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
Statements of Operations Data.
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
JANUARY 31, JULY 31, JULY 31,
----------------------------- ---------------- ----------------
1996 1997 1998 1997 1998 1997 1998
------- ------- ------- ------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................................. $ 4,598 $ 7,445 $ 7,920 $5,174 $5,384 $2,703 $3,199
Cost of sales............................. 2,662 4,294 4,060 2,745 2,534 1,376 1,497
------- ------- ------- ------ ------ ------ ------
Gross profit.............................. 1,936 3,151 3,860 2,429 2,850 1,327 1,702
Operating expenses:
Selling and marketing................ 914 1,563 1,810 904 1,254 478 627
Engineering, research and
development........................ 1,698 1,028 1,482 800 950 402 502
General and administrative........... 2,294 1,502 1,795 906 798 454 405
------- ------- ------- ------ ------ ------ ------
Total operating expenses.................. 4,906 4,093 5,087 2,610 3,002 1,334 1,534
------- ------- ------- ------ ------ ------ ------
Operating income (loss) from continuing
operations.............................. (2,970) (942) (1,228) (179) (152) (7) 168
Interest expense.......................... (99) (136) (119) (54) (137) (34) (77)
------- ------- ------- ------ ------ ------ ------
Income (loss) from continuing operations
before income taxes..................... (3,069) (1,078) (1,346) (233) (289) (41) 91
Provision for income taxes................ 643 969 493 221 (131) 109 --
------- ------- ------- ------ ------ ------ ------
Net income (loss) from continuing
operations......................... $(2,426) $ (109) $ (853) $ (12) $ (420) $ 68 $ 91
------- ------- ------- ------ ------ ------ ------
------- ------- ------- ------ ------ ------ ------
</TABLE>
THREE MONTHS ENDED JULY 31, 1998 COMPARED TO THREE MONTHS ENDED JULY 31, 1997
Net sales. Net sales increased by $496,000, or 18.3%, to $3.2 million for
the quarter ended July 31, 1998 from $2.7 million for the quarter ended July 31,
1997. This increase in net sales resulted from an increased number of OEM
customers and moderately increased volume in units sold, offset, in part, by
declining sales prices and reductions in sales to customers in Asia and the
Pacific Rim. The Company anticipates that sales in Asia will remain weak or
decline in the foreseeable future. Sales in these markets have generally been
impacted by a variety of factors including weaker economic conditions, a
stronger dollar versus local currencies, and slower adoption of networking
technologies. For the three months ended July 31, 1998, a majority of the
Company's net sales represented product programs which were in the early stages
of their product cycles. Accordingly, at July 31, 1998, backlog for the
Company's products and services was approximately $4.6 million, substantially
all of which was scheduled to be shipped within four months. In contrast, a
majority of the Company's net sales during the three months ended July 31, 1997
represented product programs which were in the latter stages of their product
cycles, and therefore, at July 31, 1997, backlog for the Company's products and
services was only $307,000. See 'Business -- OEM Product Cycle.'
Gross profit. Gross profit increased by $375,000, or 28.3%, to $1.7 million
for the quarter ended July 31, 1998 from $1.3 million for the comparable prior
year period. Gross margin improved to 53.2% for the quarter ended July 31, 1998
from 49.1% for the quarter ended July 31, 1997 reflecting reductions in the
costs of raw materials partially offset by higher cost personnel and increased
overhead costs. The use of the Company's NET+ARM'TM' chip in its products, which
replaced a more costly group of components, contributed to the reduction in
materials costs.
Selling and marketing. Selling and marketing expenses increased by
$149,000, or 31.2%, to $627,000 or 19.6% of net sales for the quarter ended July
31, 1998 from $478,000 or 17.7% of net sales for the comparable prior year
period. This increase resulted from the marketing efforts related to the NET+
family of products subsequent to its introduction in January 1998, as well as
expanded efforts to increase the number of OEM customers.
28
<PAGE>
<PAGE>
Engineering, research and development. Engineering, research and
development expenses increased by $100,000, or 24.9%, to $502,000 or 15.7% of
net sales for the quarter ended July 31, 1998 from $402,000 or 14.9% of net
sales for the comparable prior year period. This increase was due to the
increased expenditures associated with the development of the Company's NET+
family of products. Incremental engineering costs of $29,000 and $46,000 during
the quarters ended July 31, 1998 and 1997, respectively, associated with the
development of software that is an integral part of the Company's OEM products
have been deferred. These costs are being amortized over the products' useful
life. Amortization expense on capitalized OEM software development costs for
these periods were $21,000 and $10,000, respectively.
General and administrative. General and administrative expenses decreased
by $49,000, or 10.8%, to $405,000 for the quarter ended July 31, 1998 from
$454,000 for the comparable prior-year period. This decrease was due to an
overhead reduction program implemented during the current fiscal year after the
increase experienced during the prior fiscal year.
Interest expense. Interest expense increased to $77,000 for the quarter
ended July 31, 1998 from $34,000 for the comparable prior year period. During
the quarter ended July 31, 1998, approximately $50,000 is attributable to
interest charges on advances to the Company from Osicom. During the comparable
prior year period Osicom did not charge any interest on advances to the Company.
Interest rate on the Company's short-term bank debt has remained constant at 11%
since February 1997.
Provision for income taxes. There was no net provision for income taxes for
the quarters ended July 31, 1998 and 1997 rather the tax provision attributable
to discontinued operations created the tax benefit attributable to continuing
operations. At January 31, 1998 the Company had federal net operating losses of
approximately $1.5 million and research and development credits of $210,000
which may be available to reduce future taxable income, and which expire at
various dates through 2013. The Internal Revenue Code of 1986, as amended
('Code'), reduces the extent to which net operating loss and tax credit
carryforwards may be utilized in a single taxable year in the event there has
been an 'ownership change' of a company as defined by applicable Code
provisions. The acquisition of the Company by Osicom in September 1996 resulted
in such an ownership change. Further ownership changes in the future, as defined
by the Code, may reduce the extent to which any net operating losses and credits
may be utilized.
SIX MONTHS ENDED JULY 31, 1998 COMPARED TO SIX MONTHS ENDED JULY 31, 1997
Net sales. Net sales increased by $210,000, or 4.1%, to $5.4 million for
the six months ended July 31, 1998 from $5.2 million for the six months ended
July 31, 1997. This increase in net sales resulted from an increased number of
OEM customers and moderately increased volume in units sold, offset, in part, by
declining sales prices and reductions in sales to customers in Asia and the
Pacific Rim. For the six months ended July 31, 1998, a majority of the Company's
net sales represented product programs which were in the early stages of their
product cycles. Accordingly, at July 31, 1998, backlog for the Company's
products and services was approximately $4.6 million, substantially all of which
was scheduled to be shipped within four months. In contrast, a majority of the
Company's net sales during the six months ended July 31, 1997 represented
product programs which were in the latter stages of their product cycles, and
therefore at July 31, 1997, backlog for the Company's products and services was
only $307,000. See 'Business -- OEM Product Cycle.'
Gross profit. Gross profit increased by $421,000, or 17.3%, to $2.9 million
for the six months ended July 31, 1998 from $2.4 million for the comparable
prior year period. Gross margin improved to 52.9% for the six months ended July
31, 1998 from 46.9% for the six months ended July 31, 1997 reflecting reductions
in the costs of raw materials partially offset by higher cost personnel and
increased overhead costs. The use of the Company's NET+ARM'TM' chip in its
products contributed to this reduction in materials costs.
Selling and marketing. Selling and marketing expenses increased by
$350,000, or 38.7%, to $1.3 million or 23.3% for the six months ended July 31,
1998 from $904,000 or 17.5% of net sales for the comparable prior year period.
This increase resulted from the marketing efforts related to the NET+
29
<PAGE>
<PAGE>
family of products subsequent to its introduction in January 1998, as well as
expanded efforts to increase the number of OEM customers.
Engineering, research and development. Engineering, research and
development expenses increased by $150,000, or 18.8%, to $950,000 or 17.6% of
net sales for the six months ended July 31, 1998 from $800,000 or 15.5% of net
sales for the comparable prior year period. This increase was due to the
increased expenditures associated with the development of the Company's NET+
family of products. Incremental engineering costs of $66,000 and $89,000 for the
respective periods associated with the development of software that is an
integral part of the Company's OEM products have been deferred. These costs are
being amortized over the products' useful life. Amortization expense on
capitalized OEM software development costs for these periods were $42,000 and
$20,000, respectively.
General and administrative. General and administrative expenses decreased
by $108,000, or 11.9%, to $798,000 for the six months ended July 31, 1998 from
$906,000 for the comparable prior-year period. This decrease was due to an
overhead reduction program implemented during the current fiscal year after the
increase experienced during the prior fiscal year.
Interest expense. Interest expense increased to $137,000 for the six months
ended July 31, 1998 from $54,000 for the comparable prior year period. During
the six months ended July 31, 1998, approximately $113,000 is attributable to
interest charges on advances to the Company from Osicom. During the comparable
prior year period Osicom did not charge any interest on advances to the Company.
Interest rate on the Company's short-term bank debt has remained constant at 11%
since February 1997.
Provisions for income taxes. There was no net provision for income taxes
for the six months ended July 31, 1998 and 1997 rather the tax provision
attributable to discontinued operations created the tax benefit attributable to
continuing operations.
YEAR ENDED JANUARY 31, 1998 COMPARED TO YEAR ENDED JANUARY 31, 1997
Net sales. Net sales increased by $475,000, or 6.4%, to $7.9 million for
the year ended January 31, 1998 from $7.4 million for the year ended January 31,
1997. This increase in net sales resulted from an increased number of OEM
customers and moderately increased volume in units sold, offset, in party, by
declining sales prices. Backlog for the Company's products and services was
approximately $1.9 million and $1.8 million at January 31, 1998 and 1997,
respectively substantially all of which was scheduled to be shipped within six
months.
Gross profit. Gross profit increased by $709,000, or 22.5%, to $3.9 million
for the year ended January 31, 1998 from $3.2 million for the comparable prior
year period. Gross margin improved to 48.7% for the year ended January 31, 1998
from 42.3% for the year ended January 31, 1997, reflecting reductions in the
costs of raw materials and a higher margin product mix.
Selling and marketing. Selling and marketing expenses increased by
$247,000, or 15.8%, to $1.8 million or 22.9% of net sales for the year ended
January 31, 1998 from $1.6 million or 21.0% of net sales for the comparable
prior year period. This increase resulted from the marketing efforts related to
expanded efforts to increase the number of OEM customers.
Engineering, research and development. Engineering, research and
development expenses increased by $454,000 or 44.2%, to $1.5 million or 18.7% of
net sales for the year ended January 31, 1998 from $1.0 million or 13.8% of net
sales for the comparable prior year. The increase in the dollar amount of these
expenses resulted from the cash constraints of the Company during fiscal 1997
and the increased expenditures associated with the development of the Company's
NET+ family of products. Incremental engineering costs of $162,000 and $139,000
associated with the development of software that is an integral part of the
Company's OEM products have been deferred. These costs are being amortized over
the products' useful life. Amortization expense on capitalized OEM software
development costs for these periods were $50,000 and $11,000, respectively.
General and administrative. General and administrative expenses increased
by $293,000, or 19.5%, to $1.8 million for the year ended January 31, 1998 from
$1.5 million for the comparable prior year. The increase in the dollar amount of
these expenses resulted from an expansion of the Company's infrastructure to
facilitate growth.
30
<PAGE>
<PAGE>
Interest expense. Interest expense decreased to $119,000 for the year ended
January 31, 1998 from $136,000 for the comparable prior year. This decrease was
the result of the reduced interest rate on the Company's new line of credit
obtained in October, 1996 (2.5% over the bank's prime rate as compared with 4%
over the prior lender's prime rate) partially offset by increased borrowings.
Provision for income taxes. There was no net provision for income taxes for
the years ended January 31, 1998 and 1997 rather the tax provision attributable
to discontinued operations created the tax benefit attributable to continuing
operations. At January 31, 1998 the Company has federal net operating losses of
approximately $1.5 million and research and development credits of $210,000
which expire at various dates through 2013 which may be available to reduce
future taxable income. Among potential adjustments which may reduce available
loss carryforwards the Code reduces the extent to which net operating loss
carryforwards may be utilized in a single taxable year in the event there has
been an 'ownership change' of a company as defined by applicable Code
provisions. The acquisition of the Company by Osicom in September 1996 resulted
in such an ownership change. Further ownership changes in the future, as defined
by the Code, may reduce the extent to which any net operating losses and credits
may be utilized.
YEAR ENDED JANUARY 31, 1997 COMPARED TO YEAR ENDED JANUARY 31, 1996
Net sales. Net sales increased by $2.8 million or 61.9%, to $7.4 million
for the year ended January 31, 1997 from $4.6 million for the quarter ended
January 31, 1996. This increase in net sales resulted from an increased number
of OEM customers and moderately increased volume in units sold, offset, in part,
by declining sales prices. Significant customers added during fiscal 1997
included Kyocera, Xerox and NEC. Backlog for the Company's products and services
was approximately $1.8 million at January 31, 1997, substantially all of which
was scheduled to be shipped within six months.
Gross profit. Gross profit increased by $1.2 million, or 62.8%, to $3.2
million for the year ended January 31, 1997 from $1.9 million for the comparable
prior year. Gross margin remained relatively constant at 42.3% for the year
ended January 31, 1997 from 42.1% for the year ended January 31, 1996.
Selling and marketing. Selling and marketing expenses increased by
$649,000, or 71.0%, to $1.6 million or 21.0% of net sales for the year ended
January 31, 1997 from $914,000 or 19.9% of net sales for the comparable prior
year period. This increase resulted from the marketing efforts related to
expanded efforts to increase the number of OEM customers.
Engineering, research and development. Engineering, research and
development expenses decreased by $670,000, or 39.5%, to $1.0 million or 13.8%
of net sales for the year ended January 31, 1997 from $1.7 million or 36.9% of
net sales for the comparable prior year. The decrease in the dollar amount of
these expenses resulted from the cash constraints of the Company during fiscal
1997. Incremental engineering costs of $139,000 for the year ended January 31,
1997 associated with the development of software that is an integral part of the
Company's OEM products have been deferred. These costs are being amortized over
the products' useful life. Amortization expense on capitalized OEM software
development costs for the year ended January 31, 1997 was $11,000. There were no
costs deferred or amortized in the prior year.
General and administrative. General and administrative expenses decreased
by $792,000, or 34.5%, to $1.5 million for the year ended January 31, 1997 from
$2.3 million for the comparable prior year. The decrease in the dollar amount of
these expenses resulted from the cash constraints of the Company during fiscal
1997.
Interest expense. Interest expense increased to $136,000 for the year ended
January 31, 1997 from $99,000 for the comparable prior year, which reflects
increased borrowings by the Company during 1997.
Provision for income taxes. There was no net provision for income taxes for
the year ended January 31, 1997 and 1996 rather the tax provision attributable
to discontinued operations created the tax benefit attributable to continuing
operations.
31
<PAGE>
<PAGE>
UNAUDITED QUARTERLY RESULTS
Set forth below are selected unaudited Statements of Operations Data for
the six most recently completed fiscal quarters.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1997 1997 1997 1998 1998 1998
--------- -------- ----------- ----------- --------- --------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................... $ 2,471 $2,703 $ 890 $ 1,856 $ 2,185 $3,199
Operating income (loss) from continuing
operations................................. (172) (7) (817) (231) (320) 168
Income (loss) from continuing operations
before income taxes........................ (192) (41) (864) (249) (380) 91
Net income (loss) from continuing
operations................................. (80) 68 (833) (8) (511) 91
</TABLE>
See 'Selected Financial Data,' the Financial Statements of the Company and
the Notes thereto, appearing elsewhere in this prospectus. The Company has
experienced and may in the future continue to experience fluctuations in its
quarterly operating results due to any one or combination of factors as
described in 'Risk Factors -- Potential Fluctuations in Operating Results'
appearing elsewhere in this prospectus.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the offering the Company has financed its operations primarily
through advances from Osicom and borrowings under its short term bank line of
credit. The Company believes its cash from operations and the proceeds of this
offering will be sufficient to meet its projected working capital needs for at
least the twelve months following the consummation of this offering. However,
there can be no assurance that the Company's working capital requirements will
not exceed the Company's ability to generate sufficient cash to support its
requirements. The Company cannot give any assurances that sufficient capital
will be available when needed on terms acceptable to the Company, if at all.
The Company had an operating cash flow deficit of $1.3 million during the
six months ended July 31, 1998, as compared to an operating cash flow deficit of
$357,000 during the six months ended July 31, 1997. This increase in the net
operating cash flow outlays reflects the significant growth in accounts
receivable and inventory caused by the growth in demand for the Company's OEM
products. The Company anticipates positive cash flows from its operating
activities during its next fiscal year, however, there can be no assurance that
positive cash flows from operations will be achieved. The Company also had
operating cash flow of $45,000 during the year ended January 31, 1998 and an
operating cash flow deficit of $537,000 during the year ended January 31, 1997.
Investing activities during the six months ended July 31, 1998 consisted of
purchases of property and equipment of $232,000 and expenditures for software
development costs capitalized of $192,000. During the six months ended July 31,
1997 the Company's investing activities included $262,000 for purchases of
property and equipment and $200,000 in expenditures for capitalized software
development. The Company experienced similar levels of capital expenditures
during the years ended January 31, 1998 and 1997.
Financing activities of the Company during the six months ended July 31,
1998 provided net cash inflows of $2.1 million as compared with $758,000 during
the year ended July 31, 1997. Financing activities during the six months ended
July 31, 1998 consisted of net proceeds from parent company advances of $1.6
million, net proceeds from short-term debt of $492,000 net of long-term debt
repayments of $7,000. During the six months ended July 31, 1997 the Company's
financing activities included net proceeds from parent company advances of
$669,000, net proceeds from short-term debt of $223,000 net of long-term debt
repayments of $132,000. The Company principally funded its investing and
operating activities during the years ended January 31, 1998 and 1997 through
advances from Osicom and an asset based lending facility.
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At July 31, 1998, the Company had a credit facility of $5 million of which
$1.5 million was unused at July 31, 1998 provided by Coast Business Credit, a
division of Southern Pacific Bank, an asset based lender, collateralized by
accounts receivable, inventory and equipment and a guarantee by Osicom. The loan
bears interest at 2.5% over the bank's prime rate but not less than 8%; the
interest rate on the line of credit remained unchanged at 11% during the six
months ended July 31, 1998.
From time to time the Company has received advances, including payment of
expenses on behalf of the Company from Osicom which are subordinate to bank
debt. As of January 31, 1998, the balance due Osicom was approximately $1.8
million. As of January 31, 1998, Osicom began accruing interest on the
outstanding balance at 11.5% per year.
YEAR 2000 CONVERSION
During fiscal 1998 the Company commenced, for all of its systems, products
and suppliers, a year 2000 date conversion project to address all necessary code
changes, testing, implementation and exposure areas. The Company has completed
its analysis of its internal information technology systems and product lines,
and has ascertained that these systems and products are year 2000 compliant.
Project completion is planned for the end of fiscal 1999; the remaining cost of
this project has not yet been determined, but it is not expected to be
significant. The Company expects its year 2000 date conversion project to be
completed on a timely basis. However, there can be no assurance that the systems
of other companies on which the Company's systems also rely will be timely
converted or that any such failure to convert by another company would not have
an adverse effect on the Company's results of operations or financial condition.
EFFECTS OF INFLATION AND CURRENCY EXCHANGE RATES
The Company believes that the relatively moderate rate of inflation in the
United States over the past few years has not had a significant impact on the
Company's sales or operating results or on the prices of raw materials. There
can be no assurance, however, that inflation will not have a material adverse
effect on the Company's operating results in the future.
The majority of the Company's sales are currently denominated in U.S.
dollars and to date its business has not been significantly affected by currency
fluctuations. However, the Company conducts business in several different
countries and thus fluctuations in currency exchange rates could cause the
Company's products to become relatively more expensive in particular countries,
leading to a reduction in sales in that country. In addition, inflation in such
countries could increase the Company's expenses. In the future, the Company may
engage in foreign currency denominated sales or pay material amounts of expenses
in foreign currencies and, in such event, may experience gains and losses due to
currency fluctuations. The Company's operating results could be adversely
affected by such fluctuations.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued several pronouncements
effective for fiscal years beginning after December 15, 1997 including Statement
of Financial Accounting Standards ('SFAS') No. 129 'Disclosure of Information
about Capital Structure', SFAS No. 130 'Reporting Comprehensive Income', SFAS
No. 131 'Disclosure about Segments of an Enterprise and Related Information',
and SFAS No. 132 'Employers' Disclosures about Pensions and other Postretirement
Benefits'. In addition, the Accounting Standards Executive Committee issued
Statement of Position No 97-2 'Software Revenue Recognition' that supercedes
Statement of Position No. 91-1 'Software Revenue Recognition' effective for
transactions entered into fiscal years beginning after December 15, 1997. The
adoption of these standards has had no material effects, if any, on Company's
financial position or results of operations.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ('SFAS 133') SFAS 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities and requires all derivatives to be recorded
on the balance sheet at fair value. SFAS 133 is effective for years beginning
after June 15, 1999. Adoption of SFAS 133 is not expected to have a material
impact on the Company's results of operations, financial position or cash flows.
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BUSINESS
OVERVIEW
The Company is a designer, manufacturer and supplier of embedded networking
systems. The Company's networking silicon chip products and the accompanying
networking software may be incorporated into the basic design of a wide variety
of electrical devices, thereby enabling those devices to be connected to a LAN
and the Internet. Such network connectivity makes it possible for those devices
to be monitored and controlled from a remote location. The Company believes its
family of embedded networking system products, the NET+ product line, is the
first standards-based networking system to offer a single chip solution that, in
conjunction with the physical interface and memory, encompasses all of the
required hardware and software necessary to network-enable these electrical
devices. The Company's technology is designed to have broad applicability and
therefore may be incorporated into virtually any electrical device. The
Company's NET+ products and predecessor products are currently contained in an
array of imaging products, including printers, scanners, fax machines, copiers
and multi-function peripherals manufactured by OEMs such as Minolta Corporation,
NEC Corporation and Xerox Corporation. The Company's NET+ products are also in
various stages of being incorporated by 21 OEMs into the design of other
products in new markets, such as industrial automation equipment, communication
devices, data acquisition and test equipment, internet devices and utility
monitoring equipment.
The widespread networking of electrical devices is highly dependent upon
the emergence of one, or only a very few, industry standard
languages -- referred to as 'transmission protocols' -- through which these
devices communicate with one another. The market for embedded networking systems
in general, and the Company's products in particular, has developed as a result
of the recent convergence in networking technology on common, or 'standard,'
transmission protocols such as TCP/IP and Ethernet. A similar convergence of
technology and standards also made possible the now-widespread networking of
PCs.
Virtually any electrical device that does not require a person's constant
presence is a candidate for networking. Nevertheless, the majority of such
devices in use today are not connected to a network and must be operated or
monitored in person. The relatively few devices that currently are connected to
a network achieve that connection through proprietary networks created by their
OEMs or solutions assembled by their OEMs from the various components available
from multiple third-party hardware and software vendors. Both proprietary and
multi-sourced networks are generally expensive to build and maintain,
rudimentary in their operation, and difficult to upgrade. The Company believes
that these proprietary and multi-sourced device networks have been relied upon
primarily because there was no standards-based, easy-to-embed, low-cost,
single-source networking solution available to OEMs. The Company believes its
NET+ products provide the first such solution.
The Company's NET+ products are designed to simplify the process by which
OEMs add network connectivity to the devices and appliances they manufacture and
by which they enhance that connectivity over time. The NET+ solution reduces the
time and expense of that process, thus enhancing the economic feasibility of
adding network connectivity to OEM products. Consisting of ASICs and software
engineered specifically to network-enable devices, the NET+ family of products
offers end-users of an OEM's devices the opportunity to monitor and control
these devices from a remote location via the Internet or a LAN. The Company
believes demand by end-users for the lower cost, ease of use and labor saving
benefits of networking in imaging and a variety of other vertical markets, is
the source of the current and future demand for the Company's products from
OEMs.
The Company believes that it is the only supplier to provide a
standards-based embedded networking system based on a single chip. Its strategy
is to leverage this 'first-to-market' position by having its technology adopted
by leading OEMs in those product markets which the Company believes are, or will
soon be, seeking to offer embedded network connectivity. As of July 31, 1998, in
addition to the Company's 18 OEM customers in the imaging industry, 21 OEMs in
five other vertical markets have
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contracted with the Company to design NET+ARM'TM' into their products. The
Company has achieved design wins in the following new vertical markets:
<TABLE>
<CAPTION>
NET+ARM'TM' DESIGN
NEW VERTICAL MARKET WINS
- - - - - ----------------------------------------------------------------- --------------------
<S> <C>
Industrial Automation Equipment.................................. 8
Communications and Other Devices................................. 5
Data Acquisition and Test Equipment.............................. 4
Internet Devices................................................. 2
Utility Monitoring Equipment..................................... 2
</TABLE>
The Company plans to enhance its competitive position over time by working
with OEMs to customize its standard NET+ product line in conformity with the
specific networking standards and requirements of their vertical markets. The
Company employed this strategy in the imaging vertical market by developing the
NET+ARM'TM'NCC, a variation of NET+ARM'TM' that enhances functionality for
imaging applications. As of July 31, 1998, all 18 of the Company's OEM customers
have indicated that they will adopt NET+ARM'TM'NCC as their network connectivity
solution.
INDUSTRY BACKGROUND
Virtually any electrical device that does not require a person's constant
presence is a candidate to become connected to a network. Connection to a
network affords the operators of these devices the convenience of controlling or
monitoring them from where the operators are rather than from where the devices
are. Device networking can be as simple as a home security company receiving a
message that a door in a subscriber's house is open, or as complex as the
control of a multi-step chemical process through a refinery. Other examples of
existing device networks include the management of heating, ventilation and air
conditioning of office buildings and the coordination of trains in metropolitan
subway systems. Despite the many benefits of networking, and the vast number of
devices that are potential candidates to be networked, few such devices outside
the imaging market are currently connected to any kind of network.
The connection of PCs in business environments across LANs, WANs, and, more
recently, in home and mobile environments across the Internet marks the first
extensive networking of devices. As network connectivity for PCs became more
prevalent, so too did the networking of the imaging devices that printed out,
scanned in, faxed and copied the documents those PCs created. The primary
motivating factor in the demand for networking of imaging devices was cost. A
single networked printer could serve an entire office whereas, in the absence of
networking, the same office would have required a printer for every work
station. Network connectivity for imaging devices was facilitated by the
convergence on common transmission protocols for computer networks. Imaging
device networking solutions, like those manufactured and sold by the Company,
incorporated those common transmission protocols.
In vertical markets other than imaging, network connectivity has generally
been based upon the unique or 'proprietary' communication protocols of
individual OEMs. Creating and upgrading proprietary networks generally has been
costly and time consuming for these OEMs. In addition, this OEM-specific
approach generally has been restrictive for end-users because they have been
unable to gain the benefits of new, add-on products and software developed by
third-party vendors based on networking industry standards resulting in obsolete
and less than optimal systems and costly upgrades for end-users.
With the recent convergence on common networking protocols, such as TCP/IP
and Ethernet, OEMs have increasingly begun to develop standards-based networking
solutions for incorporation into their products. These solutions are designed to
integrate multiple hardware and software sub-systems commercially available from
numerous and distinct third-party vendors. A multi-source solution requires the
engineering and integration of components including a CPU chip, an Ethernet
chip, a direct memory access ('DMA') controller, a memory controller, a Web
server, a Hyper Text Transfer Protocol ('HTTP') server, a real time operating
system ('RTOS') and software drivers, all of which must be compatible in order
for the entire networking solution to function optimally. Thus, while
multi-sourced
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networking solutions are in some ways superior to proprietary solutions, OEMs
and users of multi-sourced solutions face the problems of integration cost and
sub-system integration and component incompatibility.
As an alternative to the multi-sourced solution, some OEMs have designed
standards-based solutions in which the device or devices to be networked are
connected to a PC. However, because such solutions require a PC to be dedicated
to device networking, the PC-based solution may be uneconomical.
The Company therefore believes that historically, there have not been
cost-effective and practical alternatives when OEMs and end-users have sought
remote management and control of devices. As a result, most non-imaging devices
have not been connected to any kind of network. In situations in which OEMs have
achieved network connectivity in their devices, they have sacrificed time,
effort and expense creating proprietary solutions, PC-based solutions or
solutions assembled from numerous and distinct vendors. As a result, end-users
have purchased systems which either were not economical or contained generally
rudimentary levels of network connectivity that could not be easily upgraded.
<TABLE>
<CAPTION>
Evolution of Embedded Networking Technology
PC-BASED/BOARD SOLUTION
Expensive
Prohibitive to small devices
<S> <C> <C>
PROPRIETARY SOLUTION [GRAPHIC] [GRAPHIC]
Customized
Rudimentary Long development time [NET+ARM'TM'Logo]
Inflexible Networking expertise needed
Costly NET+ARM'TM' SOLUTION
System-on-silicon
Single source
MULTI-SOURCED SOLUTION Hardware/software
Complex assembly of Inexpensive
many standard components
provided by numerous and
distinct vendors
- - - - - ------------------------------------------------------------------------------
1980's Early 1900s Now
</TABLE>
THE NET+ SOLUTION
The Company's NET+ product line is a networking system-on-silicon developed
by the Company based on its 14 years of experience in providing networking
connectivity for imaging devices. NET+ products are designed to enable
cost-effective incorporation of networking capability into a wide variety of
electrical devices. The Company believes that its NET+ product line offers a
superior networking solution to OEMs because it is:
STANDARDS - BASED. NET+ products are based on existing Internet and
LAN networking standards. This makes it possible for electrical devices to
communicate with other standards-based equipment, thus enabling the free
exchange of information, distributed processing and remote maintenance and
processing. Furthermore, this makes it possible for third-party software
developers to readily design new products for use in NET+ equipped devices.
The Company believes that end-user demand will be higher for NET+ equipped,
standards-based products than for comparable products containing solutions
not based on standard transmission protocols.
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COMPREHENSIVE. NET+ products offer a comprehensive single chip
solution that, in conjunction with the physical interface and memory,
consolidates all required hardware and software necessary to network enable
electrical devices. In addition, the NET+ solution offers OEMs a package of
development tools to facilitate a shorter time-to-market for these
network-ready products. OEMs that adopt the Company's NET+ technology do
not need to develop in-house networking expertise in order to offer
state-of-the-art connectivity in their products. This enables them to focus
their engineering resources on developing other aspects of their products.
Furthermore, OEMs incorporating NET+ solutions into their products do not
need to acquire networking hardware or software from multiple third-party
vendors.
NON-PC RELIANT. Electrical devices equipped with NET+ products do not
require connection to a dedicated PC in order to be networked. By
eliminating the expense of a dedicated PC as part of their network
solution, NET+ products provide OEMs and their end-users with a cost
structure that is economically feasible for a broad range of devices for
which networking would otherwise not be cost effective.
PROVEN TECHNOLOGY. The Company's technology contained in its NET+
products is the result of 14 years of experience in providing networking
connectivity for electrical devices. The Company's technology embodies
refinements and enhancements developed by the Company during those years of
service to OEMs in the imaging market.
BUSINESS STRATEGY
The Company's strategy is to (i) capitalize on its existing OEM customer
relationships in the imaging industry; (ii) identify and penetrate new OEM
vertical markets; (iii) influence industry standards for network connectivity in
those new vertical markets; and (iv) develop customized versions of NET+
products to reinforce its position in the vertical markets it has entered.
CAPITALIZE ON EXISTING OEM CUSTOMER RELATIONSHIPS. Eighteen OEMs in
the imaging industry have adopted the Company's device networking solutions
over the past four years, incorporating them into 35 different products. Of
these products, four have begun commercial shipments of an imaging product
incorporating the NET+ technology and 25 others are in various stages of
designing the NET+ solution into one or more of their products. The Company
estimates that its 18 OEM customers market and sell more than 235 products
that do not incorporate the Company's technology. The Company believes that
it has demonstrated a high level of performance and reliability to these
OEM customers. Therefore, the Company seeks to capitalize on its existing
relationships to design its NET+ solution into other products.
IDENTIFY AND PENETRATE NEW VERTICAL MARKETS. The overall addressable
market for embedded networking systems is comprised of electrical devices
in a variety of vertical markets, each of which has its own combination of
OEMs and end-users. The Company targets those vertical markets where, in
its estimation, the demand for embedded networking has developed or will
develop rapidly. See ' -- Sales and Marketing.' For example, the Company
has identified the industrial automation market as one in which OEMs have
demonstrated early demand for the Company's product. As of July 31, 1998,
the Company had achieved eight design wins in this vertical market. The
Company's ability to target multiple new vertical markets results from the
basic design of the Company's NET+ products, specifically their suitability
for incorporation into a very wide variety of electrical devices with
minimal additional research or product development expense by the Company.
The Company evaluates each new vertical market opportunity based upon four
criteria: (i) significant potential sales of the Company's products within
three to five years; (ii) absence of widely accepted network connectivity
architecture; (iii) compatibility with the Company's sales and marketing
channels; and (iv) ease of adaptability to the Company's existing
technology.
INFLUENCE TECHNOLOGY STANDARDS IN NEW VERTICAL MARKETS. The Company
believes that each vertical market it targets is likely to have one or more
OEMs that will be early adopters of device networking technology. The
Company anticipates that these OEMs will have significant influence in
determining the network connectivity standards within that vertical market.
The Company seeks to establish relationships with these early-adopter OEMs.
The Company plans to develop its products
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in conjunction with these early adopters, and thereby position the
Company's products as the state-of-the-art for embedded networking in each
vertical market it enters. For example, in June 1998 the Company joined
with key industrial automation OEMs Richard Hirschmann GmbH & Co., Object
Automation, Inc., Automation Research Corp., Parker - Hannifin Corporation,
Performance Software, Inc. and Jetter GmbH to create the Industrial
Automation Open Networking Alliance ('Alliance'). The Alliance is designed
to promote the standards-based approach to networking for industrial
automation that is embodied in the Company's technology.
DEVELOP CUSTOMIZED NET+ PRODUCTS. Expanding on its strategy to
penetrate new vertical markets, the Company intends to bolster its
competitive position within those markets by developing customized versions
of the NET+ solution. The Company believes that this approach to product
development will increase the attractiveness of the NET+ solution over the
more generic, less function-rich solutions of existing competitors, and
increase the necessary investment of new competitors seeking to enter that
vertical market.
PRODUCTS AND SERVICES
The Company's technology solution is available in product form as an ASIC
bearing the NET+ name joined to the name of the core microprocessor which it
contains. The Company's current products include NET+ARM'TM', an ASIC containing
the ARM'r' microprocessor from Advanced RISC Machines, Ltd., and NET+ARM'TM'NCC,
a customized version of NET+ARM'TM' containing application software customized
for the imaging industry. NET+ARM'TM' products currently operate at a speed of
12 million instructions per second ('MIPS'). The Company has announced expanded
product offerings to include other NET+ARM'TM' products that will operate at
speeds of 15 and 40 MIPS and will contain software customized to meet the needs
of OEMs in other vertical markets. The Company also plans to offer products
containing other state-of-the-art microprocessors. NET+ARM'TM' is available to
OEMs at a cost of $27.50 per unit in quantities of 10,000 units. The Company
believes that the price at which NET+ARM'TM' is available to OEM customers
represents a significant cost savings relative to the cost of the currently
available components necessary to achieve functionality equivalent to that of
NET+ARM'TM', which it believes is not less than $50.00 per unit. See
' -- Product Development.' The Company's development tools, a suite of design
products assembled to help OEMs quickly and easily incorporate NET+ products
into their devices, are sold separately from the networking products. The
Company also continues to sell DPO, its interface specification and OEM network
connectivity solution contained on a printed circuit board.
NET+ARM'TM'
NET+ARM'TM' is a networking system-on-silicon which, in conjunction with
the physical interface and memory, contains all of the required hardware and
software necessary to network-enable electrical devices. Using its proprietary
unifying logic, NET+ARM'TM' combines on a single ASIC the Company's proven core
networking technology, a 32-bit RISC processor (the ARM7 TDMI), a 10/100 Megabit
Ethernet Media Access Controller ('MAC'), and a commercially available RTOS. In
this single source configuration, device designers can quickly and easily port
their own remote monitoring and control applications to NET+ARM'TM'.
NET+ARM'TM' includes software that operates on the ASIC, 'firmware,' that
provide all of the functionality needed to implement LAN and Internet
connectivity. This includes a full HTTP server, which allows end-users to
communicate with their device or appliance using standard Web browsers. Other
firmware components provide support for SNMP or simple network management
protocol, Internet e-mail, and/or FTP or file transfer protocol, along with all
of the software needed to operate on the Internet (a TCP/IP network).
The Company believes that the designs of the internal bus, DMA channels,
the 1284 and serial ports, and timers are each distinctive to the Company. The
interface between the Ethernet MAC and the DMA system is also believed by the
Company to be unique to NET+ARM'TM'. Most Ethernet MACs require separate RAM to
be used for interim data storage. The use of this supplemental RAM adds
approximately 5% to an OEM's unit cost. By contrast, NET+ARM'TM''s DMA system
uses multiple
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DMA channels that have components (called 'buffer descriptor blocks') that
enable data to be passed efficiently between the Ethernet MAC and the main
memory bank. This eliminates the need for supplemental RAM. The OEM therefore
does not incur the expense of the extra RAM chip, and the NET+ARM'TM''s
processing speed is enhanced by avoiding the time-consuming step of storing data
temporarily in the supplemental RAM. The Company plans to file patent
applications for certain aspects of its networking technology.
NET+ARM'TM' also contains numerous software components that have been
developed by the Company, including the drivers for Ethernet, serial and
parallel ports, and flash ROM, as well as HTTP, FTP, SMTP (simple mail transfer
protocol) and other applications. These components allow customers to develop
prototypes on a network, transfer data and configure their devices in a matter
of days, versus the six months generally required with alternative approaches.
The Company sources the ARM'r' processor core through a sub-license from
its chip fabricator, Atmel Corporation, one of a number of firms offering ARM'r'
sub-licenses. The Company sources the pSOS+ real-time operating system through a
license from Integrated Systems, Inc. ('ISI').
NET+ARM'TM' NCC
The Company's first customized, vertical-market application of NET+ARM'TM'
is an embedded networking solution designed for use by manufacturers of imaging
devices. Known as NET+ARM'TM' NCC, this product utilizes the same core
technology found in NET+ARM'TM' and adds application software
developed by the Company specifically for use in imaging
devices. Such application software includes the Company's
own RTOS specifically designed for imaging devices. The NCC version of
NET+ARM'TM' enables devices to report status messages, such as 'toner low' or
'paper jam' to network administrators via e-mail across a LAN or the Internet.
These e-mail messages can also be forwarded to pagers. NET+ARM'TM' NCC offers
full networking operating system support, full print server applications and
management capabilities. Like NET+ARM'TM', it is available for installation on
the controller board, thereby eliminating the need for a separate network
interface card ('NIC'), or if desired by an OEM, on a network interface card.
The Company developed NET+ARM'TM' NCC in coordination with its strategic
partnerships with imaging technology leaders including Adobe Systems, Inc. and
Imaging Technogies Corp.
DEVELOPMENT TOOLS
NET+ARM'TM' is sold to OEMs with a set of integrated tools for hardware and
software development, some of which, the Company believes, are unique to the
Company. These include the Company's Hyper Text Markup Language ('HTML')-to-C
compiler which OEM customers can use to generate HTML Web pages.
The Company also provides to customers target development boards with
schematics and computer aided design ('CAD') electronic format files which
assist OEM hardware and software application developers in the debugging process
of their product-specific applications being ported to NET+ARM'TM'. Developers
also receive an embedded In Circuit Emulator ('ICE') debugging tool to enable
testing and evaluation of hardware and their software after it has been ported
to NET+ARM'TM'. A cross-compiler, linker and symbolic debugger must be obtained
by the OEM from ISI. Full documentation provided to OEMs includes a guide to
'getting started,' hardware and software reference manuals, development board
jumpers and a components guide.
The development tools also include the ARM tools and ISI's pRISM+'TM' open,
graphical development environment. ISI's pRISM+ supports embedded developers
with tools that span the complete development process, from conception to
development and through the life cycle support process. Its components include
the pRISM+ Manager, pRISM+ Wizard, object browser, project editor, source editor
and 'make' capability.
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DPO PRODUCTS
DPO, the Company's network connectivity solution for the imaging industry
which it began shipping in 1995, has been incorporated by OEMs into 24 products.
DPO is available to OEMs as an 'interface specification' providing a
standardized design for the hardware and software to be used for connection and
communication between a print server and the printer controller contained within
an imaging device. It includes a standardized hardware design for lines, wires,
voltages, connector sizes, etc. It also includes a standardized software design
for the instructions which the print server and printer controller will use to
communicate with one another. The DPO Interface Specification is an open-
architecture specification licensed to controller designers and imaging device
OEMs. The DPO Interface Specification enables direct Ethernet connectivity to an
imaging device and allows that device to receive data faster than would be
possible with a standard parallel interface. DPO meets the networking
functionality standard established by Hewlett-Packard Company, enabling OEM
products which contain DPO to be functionally competitive with those of
Hewlett-Packard Company on the basis of networking connectivity.
The Company's DPO NIC is a printed circuit board containing one portion of
the DPO Interface Specification; the other portion is on the imaging device's
printer controller. The NIC is installed in the imaging device itself and
provides the communications link between the device and a network, allowing that
device to be shared by different computers on the network. DPO can function on
networks comprised of multiple protocols and operating systems, including Novell
NetWare, AppleTalk, UNIX, TCP/IP and Windows NT. The DPO NIC includes Windows
NT-based and Web browser-based central management software, so that support
functions such as setup and status reporting can be done remotely.
Sales of DPO are expected to represent a material though declining
percentage of the Company's revenues in the future. By the end of fiscal 1998,
the Company expects that a substantial majority of the DPO NICs being shipped
will include the NET+ARM'TM' product. Because NET+ARM'TM' offers an OEM the same
network functionality at a substantial savings of cost, power and size, the
Company expects that its current customers for DPO will transition to
NET+ARM'TM' located directly on their controllers rather than on the NIC for the
new versions of their imaging products priced at $1,500 or more. The Company
believes that such OEMs will continue to use DPO cards in their lower cost
products.
TRAINING AND TECHNICAL SUPPORT
The Company believes its OEM customers place significant emphasis on vendor
support. Therefore, the Company seeks to provide customers comprehensive
support. Design support is provided for the first six months of the OEM's design
cycle. Full technical support for all hardware, software and embedded products
is provided for the first 12 months after product shipment. Support and training
services provided by the Company to imaging OEM customers to date, include:
PROGRAM MANAGEMENT. The Company provides its OEM customers assistance
in: (i) analyzing interface specifications; (ii) lead time planning; (iii)
delivery scheduling; and (iv) product cycle planning.
CONSULTING. The Company's field application engineering staff provides
development period consulting services that range from answering questions
to assisting in problem solving and performing design reviews of customer
products.
PRODUCT INTEGRATION SUPPORT. The Company provides its OEM customers
product testing and support during the OEM's process of integrating the
Company's technology into its products.
TECHNICAL SUPPORT. Post-integration support typically includes beta
test period support and assistance to the OEM's support specialists.
TRAINING. The Company provides 'hands on' training in which OEMs are
taught to install the Company's products (both hardware and software), set
up and configure all network operating systems and protocols, and
understand Ethernet and Token Ring topology. OEM staff are also trained to
provide 'help desk' support, configure the product and diagnose end-user
problems over the phone. OEM managers are trained for 'second level'
support, in which a senior staff member
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is trained to solve more complex problems and back up help desk staff. OEM
field engineers are trained to solve problems by taking traces, studying
network environments, protocols and stacks. OEM sales and marketing staff
are educated through a question and answer session.
JOINT MARKETING ASSISTANCE. The Company makes joint sales calls with
its customers, provides collateral, participates in the organization of
press releases and tours, and creates Web links to customer product pages.
PRODUCT UPDATES. Updates on all releases of NET+ software are
available to OEMs initially under warranty and thereafter on an optional
service and maintenance contract basis.
PRODUCT DEVELOPMENT
The Company's product development activities address four main market
needs: (i) to generally improve its products on an ongoing basis; (ii) to
customize NET+ products for greater functionality in targeted vertical markets;
(iii) to broaden the NET+ product line to include microprocessors having a
greater variety of speeds and price points, and (iv) to maintain the continued
compatibility of NET+ products with evolving industry networking standards.
The Company's development efforts are planned to include: (i) the
NET+ARM'TM'-15 and NET+ARM'TM'-40, announced in June 1998 and scheduled for
sample shipments by January 1999, which represent both faster microprocessor
speeds (15 MIPS and 40 MIPS) and also, in the case of NET+ARM'TM'-15, a lower
price point than the Company's current NET+ARM'TM'-12; (ii) a new NET+ARM'TM'
designed to support Microsoft Windows'TM'CE, which, the Company expects to begin
shipping in calendar 1999; and (iii) a next-generation NET+ARM'TM' that includes
the physical interface and memory, thereby simplifying for OEMs the task of
incorporating network connectivity into their products.
To meet the various needs of its customers, the Company also plans to offer
new products which contain other microprocessor cores and real time operating
systems. For example, the Company has already developed a version of NET+ARM'TM'
which contains the real time operating system from Wind River Systems, Inc. and
plans to deliver it to three OEM customers in September 1998. The Company
believes this strategy of offering flexible product configurations stems
directly from its standards-based approach and allows the Company to increase
its potential sales.
The Company has made and intends to continue making substantial investments
in engineering, research and development. For the six months ended July 31, 1998
and for the 1998, 1997 and 1996 fiscal years, the Company's engineering,
research and development expenses were approximately $950,000, $1.5 million,
$1.0 million and $1.7 million or 17.6%, 18.7%, 13.8%, and 36.9% of its net
sales, respectively. As of July 31, 1998, the Company had 28 full-time employees
who have an aggregate of more than 100 years of embedded networking and software
driver development experience engaged in research and development activities.
Their expertise includes software and hardware engineering, test, quality
assurance, and technical documentation. The Company's research and development
staff strives to develop new products involving both hardware and software
quickly and efficiently. The staff uses the most advanced development tools for
its designs and uses a variety of engineering techniques concurrently to keep
development and design cycles short.
SALES AND MARKETING
The Company markets, sells and licenses its products to OEMs through a
direct sales and marketing staff of 20 full-time employees. The Company's direct
sales staff solicits prospective customers, provides technical advice and
support with respect to the Company's products, and works closely with the
Company's customers during their development of new products. The direct sales
and marketing staff participates in select industry trade shows and conferences.
The Company also markets its products through the efforts of various
marketing alliances. These include, in the imaging vertical market, alliances
with the makers of printer controllers, and in new vertical markets, alliances
with independent product development consulting firms.
41
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<PAGE>
Printer Controller Alliances
Every imaging device contains a 'controller,' which is an information
processing device that controls the translation of digital information from a PC
into letters, numbers and graphical images on the printed page. The controller
also oversees such functions as the feeding of paper through the device and the
generation of status and error messages. In order for an imaging device to
achieve a network connection, its controller must incorporate an interface
specification (see ' -- Products and Services'). Once a controller has
incorporated a particular interface specification, only networking solutions
which also incorporate that specification can interact with that controller. The
Company's strategy for making sales to imaging device OEMs is to have its
interface specification incorporated as often as possible into the controllers
which those OEMs purchase from controller designers, because every imaging
device which utilizes a controller incorporating the Company's DPO interface
specification must adopt the Company's networking connectivity solution. The
printer controller designers which have incorporated the Company's DPO interface
specification include Adobe Systems, Inc., Advanced HiTech Corp., Destiny
Technology Corp., Imaging Technologies Corp. and Xionics Document Technologies,
Inc.
The Company may also license the interface specification of other vendors
in order to make sales of its products to imaging OEMs who do not utilize the
controllers of the firms with which the Company has allied itself. For instance,
the Company has licensed the PSIO interface specification of Peerless, Inc., in
order to make sales to OEMs who deploy Peerless' controller.
The Company and its printer controller partners actively engage in joint
marketing efforts, presenting their individual products as a fully compatible,
comprehensive imaging/networking solution to imaging OEMs.
Industrial Automation Open Networking Alliance
In June 1998, the Company joined with key industrial automation OEMs
Richard Hirschmann GmbH & Co., Object Automation, Inc., Automation Research
Corp., Parker-Hannifin Corporation, Performance Software, Inc. and Jetter GmbH
to create the Industrial Automation Open Networking Alliance. The Alliance is
designed to promote the standards-based approach to networking for industrial
automation that is embodied in the Company's technology.
Certified Developers
The Company also markets, sells and licenses its products in coordination
with independent product development consulting firms. These firms have hardware
and software engineering staffs ranging from five to 100 engineers. They consult
with large OEMs, recommending new products for development and offering their
expertise to OEMs during the design cycle of those products. Where network
connectivity is contemplated for such products, the Company provides incentives
to these developers to recommend the Company's solution by paying the developers
a percentage of the Company's sales to OEMs which result from these
recommendations. As of July 31, 1998, the Company had approved six consulting
firms as 'certified developers' of its NET+ products, five of which had already
achieved at least one NET+ design win.
OEM PRODUCT CYCLE
The process of gaining new imaging OEM design wins (whereby a vendor's
products become incorporated into the design of the products of an OEM) has
historically been a lengthy one, reflecting the reluctance of OEMs to rely upon
a vendor before the OEM has confirmed that the vendor's products perform to
specifications in a variety of conditions, are met with enthusiasm by end-users,
and receive satisfactory levels of technical support over the course of the OEM
product's life cycle. To date, the Company has experienced shorter time frames
for gaining design wins in its new vertical markets. However, once an OEM has
awarded a vendor a design win and the OEM's product has begun shipping, the
vendor's revenues from that shipping program generally continue over the course
of that product's life cycle.
42
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<PAGE>
From the time the Company achieves a design win, it is generally six to
twelve months before the Company begins shipments of its associated NET+
product. During this period, the Company supports the efforts of its OEM
customer to develop the OEM product into which the NET+ product will be
incorporated. Although no product shipments take place during this period, the
Company may achieve some revenue from the sale to the OEM of its development
tools. Upon completion of the development process, shipments of the Company's
products commence.
The Company believes that these shipments of the Company's product
represent a relatively secure source of revenue to the Company, because its
network connectivity solution is integral to the OEM's product and generally
cannot be 'designed out' without considerable expense. The Company is usually a
sole source supplier of this product to the OEM. Consequently, no competing
network connectivity solution is likely to replace the Company's products while
the OEM product's life cycle is ongoing. However, once that product life cycle
is complete, and the OEM is designing a next-generation product for which a
network connectivity solution is sought, a competing solution could potentially
replace that of the Company.
Although the Company routinely supports its ongoing shipping programs with
a full array of purchasing, maintenance and technical support, the cost of this
support is relatively small and diminishes over time. Hence, the security and
profitability of sales to OEM customers increases over time.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1997 1997 1997 1998 1998 1998
--------- -------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Imaging:
Design Wins.................................... 1 4 5 5 9(1) 8(1)
Shipping Customers(2).......................... 7 7 7 7 11 14
New Customers.................................. 1 1 2 1 3 3
NET+ARM'TM' Design Wins:
Imaging........................................ 0 0 0 0 9 8
New Markets.................................... 0 0 0 0 9 12
Backlog(3).......................................... $ 1,989 $ 307 $ 644 $ 1,927 $ 4,785 $4,553
</TABLE>
- - - - - ------------
(1) Imaging design wins for these periods reflect NET+ARM'TM' design wins.
(2) Represents the number of customers to which product was shipped during the
period indicated.
(3) Data is as of the last day of each period indicated.
NET+ARM'TM' DESIGN WIN CASE STUDIES
Two examples of recent NET+ARM'TM' design wins are provided below.
Internet Telephony. A communications company selected NET+ARM'TM' for its
new switch product. The switch is targeted to medium-sized offices and acts as a
combination PBX and Ethernet switch/LAN router. The system consists of a single
wire to the desktop that provides a LAN connection for a PC, as well as the
voice communications link to the PBX telephone system. The NET+ARM'TM' serves
several functions on the central switch, such as handling all the call
processing for the voice component and routing capabilities to and from a WAN
connection for the data portion. NET+ARM'TM' enables the company to monitor,
diagnose, control NET+ARM'TM' enable the company to get its product to market
quicker than would be possible with other available solutions. Using the
Company's development tools, the customer was able to get its entire Web page up
and running on the NET+ARM'TM' development board in one day.
Industrial Automation. A developer of embedded software for
mission-critical industrial automation applications is currently developing an
embedded valve control system. The system consists of a NET+ARM'TM' processor
that resides on top of a valve/actuator package and provides an Ethernet
connection directly to the valve without the need for any additional gateways.
The system provides continuous control of valve position, as well as monitoring
of diagnostic parameters such as friction, response speed, flowmeter output and
air pressure. NET+ARM'TM''s eighty percent 'headroom'
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<PAGE>
(processing power on the ASIC for OEM-specific software applications) is being
utilized by the customer to incorporate computer-intensive monitoring and
analytical applications that provide operators with real-time data to more
accurately predict maintenance schedules and quickly respond to valve problems.
NET+ARM'TM' was selected for the computing power it will provide to analyze
valve data. NET+ARM'TM' will also provide the Ethernet connection to alert the
control room of critical situations, such as incomplete valve shut-off.
NET+ARM'TM''s small footprint and low cost were also factors in the decision to
design NET+ARM'TM' into the valve control system; the customer estimated that
the incorporation of NET+ARM'TM' made possible a very significant unit cost
savings over other solutions. Time-to-market was also a factor; the customer
estimated that NET+ARM'TM''s built-in networking capabilities reduced
development time by at least four months.
IMAGING CUSTOMERS
The Company sells its products for incorporation into OEM devices. The
imaging OEMs who had incorporated the Company's solution into their products as
of July 31, 1998 included:
<TABLE>
<S> <C>
Brother International Corporation NEC Corporation
Fuji Xerox Co. Ltd. New Generation Computing, Inc.
Kyocera Communications Sharp Electronics Corporation
Minolta Corporation Xerox Corporation
</TABLE>
The Company's 18 imaging OEM customers had designed its solution into an
average of 1.9 imaging products each, for a total of 35 imaging products
currently available for sale which contain the Company's products. All of the
Company's net sales for the 1998 fiscal year, and 92% of net sales for the six
months ended July 31, 1998, was derived from the imaging device market. The
other 8% of net sales for this period was derived from products related to the
Company's NET+ technology to OEM customers that are in various stages of
designing the NET+ solution into their products. See ' -- Sales and Marketing.'
MANUFACTURING
The Company engages Atmel Corporation ('Atmel') to manufacture the
NET+ARM'TM' chip. Shipments of the chip are first delivered to the Company,
where its staff performs random quality assurance testing. The Company does not
have a written agreement with Atmel regarding production, relying instead upon
standard purchase orders. The Company has not generally experienced quality or
delivery problems with Atmel.
The Company believes that the production cost of the NET+ARM'TM' chip will
decline over time because the transistor spacing on the chip has been reduced
from .5 microns to .35 microns. The Company expects to further reduce chip costs
by decreasing the spacing either to .25 microns or .18 microns. These design
changes make it possible for each chip to be smaller in size allowing for more
chips to be produced out of each silicon wafer, thereby reducing per-chip costs.
Additionally, the Company obtains price quotes from possible second sources for
chips in order to ensure that the Company is receiving competitive price terms
from its current manufacturer.
The Company contracts with local qualified assemblers and with Uni
Precision Industrial, Ltd. ('Uni'), a Hong Kong-based subsidiary of Osicom, to
assemble printed circuit boards. The Company performs some final assembly of
printed circuit boards and, for quality assurance purposes, randomly tests
boards assembled by third parties. The Company believes that the terms of its
arrangement with Uni-Precision, Ltd., are at least as favorable as those it
could receive from an unrelated third party providing the same services. The
Company has no written agreement with Uni, and will continue utilizing its
services provided that the Company continues to receive price-competitive terms
from that vendor. See 'Certain Relationships and Related Party Transactions.'
The Company has 28 full-time employees performing manufacturing-related
activities, including purchasing, final assembly, testing, quality assurance,
packaging and shipping.
BACKLOG
The Company strives to ship its products within a short time after receipt
of a purchase order. The Company's business is characterized by short-term
shipment schedules. Orders constituting the Company's current backlog are
subject to changes in delivery schedules or to cancellation at the option
44
<PAGE>
<PAGE>
of the purchaser without significant penalty. The backlog at a particular time
can be affected by a number of factors, including the implementation priorities
of its OEM customers. Accordingly, although useful for scheduling production,
backlog as of any particular date may not be a reliable measure of sales for any
future period. See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations.'
As of July 31, 1998, the Company's backlog was approximately $4.6 million,
as compared to $307,000 as of July 31, 1997. The Company includes in its backlog
all firm purchase orders scheduled for delivery within the subsequent 12 months.
The Company anticipates that all of its backlog will be shipped to customers
within the current fiscal year. As of January 31, 1998, the Company's backlog
was approximately $1.9 million, as compared to $1.8 million, as of January 31,
1997.
COMPETITION
The Company's principal competition comes from products developed in-house
by current and prospective OEM customers, as well as hardware-only and
software-only products of other vendors combined by OEMs and other third-parties
into single, multi-sourced networking solutions. The Company believes it is the
only supplier of embedded networking products to offer a single-vendor,
standards-based solution which consolidates on one chip all necessary networking
hardware and software subsystems. Echelon Corporation, a supplier of a
proprietary networking solution, also offers a product which combines both
hardware and software.
The products of certain hardware-only and software-only vendors are
currently combined by some OEMs and other third-parties into multi-sourced
network solutions, and they therefore represent competition to the Company. It
is possible that one or more hardware-only vendors could choose to acquire or
develop a networking software capability and thus offer a comprehensive solution
similar to the Company's. Conversely, one or more software-only vendors could
choose to acquire or develop a networking hardware capability. While such a
scenario could threaten current or future market share captured by the Company,
the Company also believes that the impetus to offer a comprehensive embedded
networking solution may allow the Company to establish, for instance, product
alliances with the very large hardware-only vendors, making NET+ products the
networking solution married to these vendors' microprocessors. This would allow
the Company to leverage the extensive sales and marketing reach of these large
hardware-only vendors and thus turn this potential competitive threat to the
Company's advantage. The key hardware-only vendors are Motorola Corporation,
Hitachi, Ltd., Intel Corporation and potentially National SemiConductor
Corporation. Key software-only vendors are Integrated Systems, Inc., and Wind
River Systems, Inc.
In the imaging market, OEMs Hewlett-Packard Company and IBM Lexmark
International Group, Inc. have developed their own proprietary solutions.
INTELLECTUAL PROPERTY, TRADEMARKS AND PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright, distribution
software license agreements, trademark and trade secret law, employee and
third-party nondisclosure agreements, and other methods to safeguard its
software products. Despite these precautions, it may be possible for
unauthorized third parties to copy certain portions of the Company's products or
obtain and use information the Company regards as proprietary. While the
Company's competitive position may be affected by its ability to protect its
proprietary information, the Company believes that trademark and copyright
protections are not material to the Company's success.
The Company also relies on certain software that it licenses from third
parties, including software that is integrated with internally developed
software and used in the Company's products to perform key functions. These
third-party software licenses may not continue to be available to the Company on
commercially reasonable terms, and the related software may not continue to be
appropriately supported, maintained or enhanced by the licensors. The loss of
licenses to use, or the inability of licensors to support, maintain, and enhance
any of such software could result in increased costs, delays or reductions in
product shipments until equivalent software is developed or licensed, if at all,
and integrated.
FACILITIES
The Company leases approximately 36,000 square feet of office space in
Waltham, Massachusetts, for its corporate headquarters. Activities at its
Waltham headquarters include administration, sales, product development,
assembly, test and support. The Company's lease provides for base rent of
45
<PAGE>
<PAGE>
$34,175 per month and the lease expires on September 30, 2001. The Company
subleases 6,000 square feet of this office space to Osicom. The Company believes
that its current facilities are adequate to meet its needs for the foreseeable
future. See 'Certain Relationships and Related Party Transactions.'
EMPLOYEES
As of July 31, 1998, the Company had approximately 90 full-time employees,
of which 56 were engaged in product development, manufacturing-related duties
and customer support, 21 in sales and marketing, and 13 in finance,
administration, human resources, and internal systems support. The Company
believes its future success will depend, in part, on its continued ability to
attract and retain highly qualified personnel in a competitive market for
experienced and talented software engineers, chip designers and sales and
marketing personnel. None of the Company's employees are represented by a labor
union or subject to a collective bargaining agreement. The Company believes that
its relations with employees are good.
LEGAL PROCEEDINGS
There are currently no claims or actions pending against the Company.
46
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<PAGE>
MANAGEMENT
The following table sets forth information with respect to each person who
serves as an executive officer or director of the Company and their ages as of
July 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - - - - ------------------------------------ --- ----------------------------------------------------------
<S> <C> <C>
Cornelius 'Pete' Peterson VIII...... 61 Chief Executive Officer, President, Director
William E. Peisel................... 54 Executive Vice President, Chief Technical Officer
John K. Brennan..................... 44 Vice President, Manufacturing
Cornelius 'Neil' Peterson IX........ 38 Vice President, Sales and Marketing
Anis 'Arnie' Shikari................ 55 Vice President, New Market Sales
Daniel J. Sullivan.................. 41 Vice President, Finance, Chief Financial Officer
Leonard N. Hecht.................... 61 Director(1)(2)(3)
Bruce B. Roesner.................... 51 Director
Yechiam Yemini...................... 50 Director(3)
Renn Zaphiropoulos.................. 71 Director(1)(2)
</TABLE>
- - - - - ------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of the Executive Committee
------------------------
Each director will hold office until the next annual meeting of
stockholders of the Company or until his successor has been elected and
qualified. Officers of the Company are elected by the Company's Board and serve
at the Board's discretion.
EXECUTIVE OFFICERS AND DIRECTORS
Cornelius 'Pete' Peterson VIII has served as President and Director of the
Company since founding the Company in 1984. Prior to NSI, Mr. Peterson founded
Distribution Management Systems, Inc., a supplier of distribution systems for
Fortune 100 companies, which was sold in 1981 to Cullinet Corporation. Mr.
Peterson was also a founder of Softech, a leading supplier of computer language
and software development and services. Mr. Peterson holds B.S. and M.S. degrees
from the Massachusetts Institute of Technology. Mr. Peterson is the father of
Neil Peterson, Vice President, Sales and Marketing, of the Company.
William E. Peisel joined the Company in 1987, becoming Vice President,
Engineering in 1989. From 1985 to 1987, Mr. Peisel served as Vice President,
Engineering for EnMass Computer Corporation, a manufacturer of fault tolerant
transaction processing computers. From 1983 to 1985 Mr. Peisel served as
Director of Engineering for Computer Design and Application, and from 1981 to
1983, Director of Engineering for Honeywell Information Systems. He holds a
B.S.E.E. from Pratt Institute and an M.S.E.E. from Northeastern University.
John K. Brennan joined the Company in 1996 as Vice President,
Manufacturing. From January 1996 to July 1996, Mr. Brennan served as a Vice
President of Manufacturing for Leaf Systems, Inc., a manufacturer of high-end
digital cameras. From 1995 to 1996, Mr. Brennan served as director of materials
for MA-Com, Inc., a division of Amp, Inc. From 1993 to 1995, Mr. Brennan served
as director of materials of Leaf Systems, Inc. From 1986 to 1993, Mr. Brennan
served as Manufacturing Operations Manager for Whistler Corporation, a consumer
electronics manufacturer in the automotive industry. He holds a B.S. in Business
Administrative from Merrimack College and an M.B.A. from Boston University.
Cornelius 'Neil' Peterson IX joined the Company in 1986 and has served as
Vice President, Sales and Marketing, since 1993. From 1986 to 1993 Mr. Peterson
served as Regional Manager and Vice President of Commercial Sales. Mr. Peterson
has over fourteen years of sales and management experience handling major
accounts in the OEM, systems integrator, reseller, distributor, and direct sales
channels. From 1984 to 1986, Mr. Peterson served in the Major Account Sales
Division for Unisys (formerly Burroughs) Corporation. He holds a B.S. Degree
from Roger Williams University. Mr. Peterson is the son of Pete Peterson,
President of the Company.
47
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<PAGE>
Anis 'Arnie' Shikari has been Vice President of New Market Sales since
August 1998. From May 1993 to August 1998, Mr. Shikari was area manager or
director of the East Coast Sales Division of Rockwell Semiconductor Systems, a
division of Rockwell International. From 1991 to 1993, Mr. Shikari served as
marketing manager, commercial products, of Republic Electronics. From 1985 to
1991, Mr. Shikari served as director of sales and marketing of Cardion
Electronics. From 1969 to 1984, Mr. Shikari worked at G.E. Mobile Communications
in numerous capacities. He holds an M.S.E.E. from the University of Tennessee
and a B.S.E.E. from East Pakistan Engineering University.
Daniel J. Sullivan has been Vice President, Finance, and Chief Financial
Officer since August 1998. Mr. Sullivan was Vice President, Finance and
Operations at ITK International (formerly Telebit) from 1996 to August 1998.
From 1995 to 1996, Mr. Sullivan served as corporate controller and from 1989 to
1995 as operations controller, of ITK. From 1985 to 1989, Mr. Sullivan served as
Corporate Manufacturing Financial Planning Manager at Apollo Computers. He holds
a B.S. in biology from Merrimack College and an M.B.A. from New Hampshire
College.
Leonard N. Hecht has been a Director of the Company since August 1998. He
is President of Chrysalis Capital Group, an investment banking company
specializing in mergers, acquisitions and financing which he founded. From 1987
to 1993, Mr. Hecht was Managing Director of the Investment Banking Group and
head of the Technology Assessment Group of Houlihan Lokey Howard & Zukin, a
financial advisory firm. From 1984 to 1987, Mr. Hecht was Vice Chairman of the
Board and Chief Executive Officer of Quantech Electronics Corp., a diversified
publicly-held electronics company. Prior to joining Quantech, Mr. Hecht was a
founding principal of Xerox Development Corporation, a wholly-owned subsidiary
of the Xerox Corporation. Xerox Development Corporation was active in strategic
planning, mergers and acquisitions, divestitures, licensing, joint ventures and
venture investing for the Xerox Corporation. Mr. Hecht has been a director of
Osicom since 1996 and is a director of DCC Compact Classics.
Bruce B. Roesner, Ph.D. has been a Director of the Company since August
1998. He is Chief Technical Officer and Chairman of SCS Corporation, a maker of
programmable, Radio Frequency Identification Systems. Dr. Roesner co-founded SCS
in 1992 and served as its president and chief executive officer until May 1995.
Prior to SCS, he was founder of Instant Circuit Holdings, Inc., vice president
of Array Devices, Inc. (a division of Solitron Corporation), an executive of
Applied Micro Circuits Corporation, and a manager of advanced integrated circuit
technologies for Burroughs Corporation (now Unisys Corporation). Prior to his
service at Burroughs, Dr. Roesner was a senior member of the technical staff at
Hughes Aircraft Corporation. Dr. Roesner received his M.S. and Ph.D. degrees in
electrical engineering from Purdue University. He holds more than 20 patents in
the field of integrated circuits.
Yechiam Yemini has been a Director of the Company since August 1998. Since
1980, he has been a Professor of Computer Science at Columbia University, where
he directs the Distributed Computing and Communications (DCC) lab which he also
founded. Technologies created at DCC lab have been widely exported to thousands
of network sites and commercialized by several companies. Professor Yemini is a
co-founder of Comverse Technology Inc., a supplier of computer and
telecommunications systems and software for multi-media communications and
information processing applications for telecom networks. He is also co-founder
and Director of System Management Arts, Inc., a leading technology vendor of
software that automates root-cause diagnosis of network problems. Professor
Yemini serves as a director of several high-tech companies, advises a major
venture fund on high-tech investments, and serves on the US-Israel Science &
Technology Commissions. He is the author of over 150 publications and five
patents.
Renn Zaphiropoulos has been a Director of the Company since August 1998. He
is an Adjunct Professor of Business Administration at Southern Utah University
and is a frequent lecturer at the graduate school level on a variety of
management subjects. Mr. Zaphiropoulos is a pioneer in the development of the
electrostatic writing techniques for the production of hard copy. In 1969 he
co-founded Versatec, a leading manufacturer of electrostatic plotters, which was
merged into Xerox Corporation in December 1975. Mr. Zaphiropoulos became a
director of Osicom in March 1998. Mr. Zaphiropoulos also serves as a director of
Optical Coating Laboratories, Inc., and as a director and consultant to a number
of private, development stage high-tech firms.
48
<PAGE>
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
EXECUTIVE COMMITTEE
The Board of Directors of the Company has appointed an Executive Committee,
which currently consists of Leonard Hecht and Yechiam Yemini. The Executive
Committee's duties include reviewing all financial budgets, performance targets
and business plans and objectives.
AUDIT COMMITTEE
The Board of Directors of the Company has appointed an Audit Committee,
which currently consists of Leonard Hecht and Renn Zaphiropoulos. The Audit
Committee's duties include engaging and discharging the Company's independent
accountants; reviewing and approving the engagement of the independent
accountants for audit and non-audit services requested; reviewing with the
independent accountants the scope and timing of the audit and non-audit
services; reviewing the completed audit with the independent accountants
regarding their report, the conduct of the audit, accounting adjustments,
recommendations for improving internal accounting and auditing procedures with
the Company's financial staff; and initiating and supervising any special
investigations it deems necessary.
COMPENSATION COMMITTEE
The Board of Directors of the Company has also appointed a Compensation
Committee which currently consists of Renn Zaphiropoulos and Leonard Hecht. The
Compensation Committee's duties include reviewing and making recommendations to
the Board of Directors regarding compensation and benefit plan matters,
including executive officer compensation, director compensation, employee stock
option grants, 401(k) plan matters, employee stock purchase plan matters and
other defined benefit plan matters.
COMPENSATION OF DIRECTORS
The Company compensates each director who is not an employee of the Company
$1,000 for each meeting of the Board or a committee attended in person, but not
if the director attends by telephone. The Chairman of the Board is compensated
$1,500 for each meeting of the Board he attends in person and the Chairman of
each committee is compensated $1,500 for each committee meeting attended in
person. The Company reimburses the out-of-pocket expenses incurred by directors
for attendance at Board or committee meetings.
Pursuant to the Company's Directors' Stock Option Plan, the Company will
grant options to purchase 25,000 shares of Common Stock per year to each
independent director, initially upon completion of the offering and thereafter
annually immediately following the annual meeting of the Company's stockholder.
The initial grant will have an exercise price equal to the offer price set forth
on the cover page of this Prospectus, and future grants will be at an exercise
price equal to the market price per share on the date of such grant.
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<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes all compensation awarded to, earned by, or
paid to (i) all individuals who served or functioned as the Company's Chief
Executive Officer during the fiscal year ended January 31, 1998 and (ii) the
Company's four most highly compensated executive officers who were serving at
the end of the fiscal year ended January 31, 1998 whose annual salary and bonus
exceeded $100,000 (all of the foregoing individuals being hereinafter referred
to collectively as the 'Named Executive Officers'), for services rendered in all
capacities to the Company and its subsidiaries for the Company's last fiscal
year, ended January 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
----------------- ------------
RESTRICTED
STOCK
FISCAL SALARY BONUS AWARD(S)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)
- - - - - --------------------------- ---- -------- ------ ------------
<S> <C> <C> <C> <C>
Cornelius 'Pete' Peterson, ............................................ 1998 $152,629 $ -- $8,237
Chief Executive Officer, President
William E. Peisel, .................................................... 1998 135,789 -- 4,000
Executive Vice President, Chief Technical Officer
John K. Brennan, ...................................................... 1998 101,264 10,000 --
Vice President, Manufacturing
Cornelius 'Neil' Peterson, ............................................ 1998 79,667 69,995(2) 4,000
Vice President, Sales & Marketing
</TABLE>
- - - - - ------------
(1) During fiscal 1998 Pete Peterson, Neil Peterson and William Peisel received
options to purchase 41,182, 20,000 and 20,000 Osicom shares, respectively.
Each of such persons has made an irrevocable election to convert such
options into options to purchase the Company's Common Stock on a one for
1.667 basis. These options are exercisable at an exercise price of $5.00 per
share.
(2) Bonus represents commissions paid on the basis of sales achieved during the
year.
The following table summarizes all grants of stock options made during the
year ended January 31, 1998 to each of the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZED
----------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
NUMBER OF OPTIONS PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM (2)
OPTIONS IN FISCAL PRICE EXPIRATION ---------------------
NAME GRANTED(1) YEAR ($/SH) DATE 5%($) 10%($)
- - - - - --------------------------------------------------- ---------- ---------- -------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Cornelius 'Pete' Peterson.......................... 8,237 38.30% $ 5.00 7-30-2000 6,507 13,673
William E. Peisel.................................. 4,000 18.60% $ 5.00 8-29-2007 12,560 31,880
John K. Brennan.................................... 0 -- -- -- -- --
Cornelius 'Neil' Peterson.......................... 4,000 18.60% $ 5.00 8-29-2007 12,560 31,880
</TABLE>
- - - - - ------------
(1) These options were granted as options to purchase Osicom common stock. Upon
consummation of this offering, such options will be converted to options to
purchase the Company's Common Stock on the basis of one share for every
1.667 shares of Osicom common stock covered by such options and at an
exercise price of $5.00 per share.
(2) The value indicated is a net amount, since the aggregate exercise price has
been deducted from the final appreciated value.
The following table sets forth information concerning each exercise of
stock options during the year ended January 31, 1998 by each of the Named
Executive Officers and the January 31, 1998, value of unexercised options.
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AGGREGATED OPTION EXERCISES IN 1998 AND JANUARY 31, 1998 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT FISCAL YEAR-END(#)
---------------------------------
NAME EXERCISABLE UNEXERCISABLE
- - - - - ---------------------------------------------------------------------------------- -------------- ---------------
<S> <C> <C>
Cornelius 'Pete' Peterson......................................................... 27,061 --
William E. Peisel................................................................. -- 8,330
John K. Brennan................................................................... -- 1,226
Cornelius 'Neil' Peterson......................................................... -- 8,142
</TABLE>
STOCK OPTION PLAN
The Company has established an incentive and non-qualified stock option
plan (the 'Stock Option Plan') to become effective upon the closing of the
offering. The Stock Option Plan is to be administered by the Compensation
Committee (the 'Committee') of the Board of Directors. References herein to the
'Board' mean the Board of Directors or the Committee, as the case may be. A
total of 2,000,000 shares of Common Stock is reserved for issuance under the
Stock Option Plan. It is anticipated that the Company will grant options to
purchase 672,000 shares under the Stock Option Plan on or about the date of the
commencement of this offering.
The purpose of the Stock Option Plan is to advance the Company's interests
by enhancing its ability to attract and retain key employees and consultants.
All grants will be made at the discretion of the Board to such individuals and
in such amounts as the Board deems advantageous for compensation and incentive
purposes. The Company's employees are all eligible for the grant of options.
The Stock Option Plan will provide for the grant of both incentive stock
options as defined in Section 422 of the Code and non-qualified options subject
to the rules contained in Section 83 of the Code. No options may be granted
under the Stock Option Plan more than ten years after the closing date of the
Offering. All options under the Stock Option Plan will be non-transferable
except upon death. The exercise price of a stock option granted under the Stock
Option Plan may not be less than 100% (110% in the case of incentive stock
options granted to owners of more than 10% of the total combined voting power of
all classes of stock of the Company and its subsidiaries) of the fair market
value of the underlying stock at the time of grant.
The term of each option will be set by the Board but cannot exceed ten
years from grant (five years from grant, in the case of an incentive stock
option granted to someone owning more than 10% of the total combined voting
power of all classes of stock of the Company and its subsidiaries). Each option
will become exercisable in two installments: on the first anniversary of the
date of grant as to 50% of the shares covered by the option, and on the second
anniversary of the grant date as to the remaining 50%. The Board has the
authority to grant options with shorter or longer vesting schedules, including
options that vest immediately as well as placing other restrictions on vesting.
The exercise price of an option may be paid either in cash, certified check,
bank draft or money order or, if the Board so permits, by delivery of previously
owned Common Stock or a promissory note or a combination of the foregoing.
If a participant's employment with the Company terminates by reason of
death, each option held by the participant immediately prior to death will be
exercisable, to the extent it was then exercisable, for 12 months after death or
until the end of the option period if earlier. The options which were not
exercisable at the time of death will immediately terminate upon death. If a
participant's employment terminates for any other reason all of the
participant's options that are not then exercisable will immediately terminate.
The participant's options that were then exercisable will continue to be
exercisable for 3 months, unless the participant is discharged for cause, as
determined in the Board's sole discretion. In such a case, all previously vested
options shall be forfeited immediately.
In the Board's sole discretion, options granted under the Stock Option Plan
will also terminate in the event of certain mergers, consolidations or sales of
assets or public or private Common Stock offerings of the Company. However, in
such instances, the Stock Option Plan also provides that at least
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30 days in advance of such an event all outstanding vested and non-vested
options shall become exercisable for a limited period of time. Options not
exercised during that time period shall be forfeited.
The Board retains the right to amend the Stock Option Plan or any
outstanding option. An amendment adversely affecting the rights of an employee
under a previously granted option requires the employee's consent, and certain
Stock Option Plan amendments, including any increase in the number of shares
available under the Stock Option Plan, a change in the group of eligible
employees, a reduction in the minimum option price for incentive stock Options,
an extension of the term of the Stock Option Plan, or amendments affecting the
status of already granted incentive stock options, require stockholder approval.
The number of shares reserved for issuance under the Stock Option Plan, as
well as the number of shares subject to outstanding options, option price, and
other option provisions, including where relevant the kind of shares subject to
options, is subject to adjustment in the event of a stock dividend, stock split
or similar capital change or to take into consideration material changes in
accounting practice or principles or certain corporate transactions. The Board
may, at any time, discontinue granting options under the Stock Option Plan.
DIRECTOR STOCK OPTION PLAN
The Company has established a stock option plan for the members of its
Board of Directors (the 'Director Stock Option Plan') to become effective upon
the closing of the offering. The purpose of the Director Stock Option Plan is to
attract and retain the best available personnel for service as independent
directors of the Company. All grants under the Director Stock Option Plan are
automatic and nondiscretionary. A total of 400,000 shares of Common Stock is
reserved for issuance under the Director Stock Option Plan, of which options for
100,000 shares are outstanding as of the date of this Prospectus.
The Director Stock Option Plan will provide for the grant of non-qualified
options subject to the rules contained in Section 83 of the Code. No options may
be granted under the Director Stock Option Plan more than ten years after the
closing date of the Offering. All options under the Director Stock Option Plan
will be non-transferable except upon death. The exercise price of a stock option
granted under the Director Stock Option Plan may not be less than 100% of the
fair market value of the underlying stock at the time of grant.
The term of each option will be ten years from grant. Each option will
become exercisable in two installments: six months following the date of grant
as to 50% and twelve months following the date of grant as to the remaining 50%.
The exercise price of an option may be paid either in cash, certified check,
bank draft or money order or, if the Board so permits, by delivery of previously
owned Common Stock or a promissory note or a combination of the foregoing.
If a director's status as a member of the Board of Directors terminates by
reason of death, each option held by the director immediately prior to death
will be exercisable, to the extent it was then exercisable, for the remaining
term of the option. The options which were not exercisable at the time of death
will immediately terminate upon death. If a director's status as a member of the
Board of Directors terminates for any other reason all of the director's options
that are not then exercisable will immediately terminate. The director's options
that were then exercisable will continue to be exercisable for the remaining
term of the option.
In the Board's sole discretion, options granted under the Director Stock
Option Plan will also terminate in the event of certain mergers, consolidations
or sales of assets or public or private Common Stock offerings of the Company.
However, in such instances, the Director Stock Option Plan also provides that at
least 30 days in advance of such an event all outstanding vested options shall
become exercisable for a limited period of time. Options not exercised during
that time period shall be forfeited.
The Board retains the right to amend the Director Stock Option Plan or any
outstanding option. An amendment adversely affecting the rights of a director
under a previously granted option requires the director's consent, and certain
Director Stock Option Plan amendments, including any increase in the number of
shares available under the Director Stock Option Plan, and an extension of the
term of the Director Stock Option Plan, require shareholder approval.
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<PAGE>
The number of shares reserved for issuance under the Director Stock Option
Plan, as well as the number of shares subject to outstanding options, option
price, and other option provisions, including where relevant the kind of shares
subject to options, is subject to adjustment in the event of a stock dividend,
stock split or similar capital change or to take into consideration material
changes in accounting practice or principles or certain corporate transactions.
The Board may, at any time, discontinue granting options under the Director
Stock Option Plan.
OSICOM STOCK OPTIONS
Osicom has historically granted options under stock option plans to
executive officers and employees of the Company. No further options will be
granted to executive officers or employees under the Osicom stock option plans.
In connection with this offering, the Company has given all holders of
options to purchase Osicom common stock who are executive officers and employees
of the Company, the opportunity to convert such options into options to purchase
shares of the Company on a one for 1.667 basis at an exercise price of $5.00 per
share. Holders of options to purchase 127,245 shares of Osicom common stock have
made an irrevocable election to convert such options into options to purchase
76,347 shares of the Company's Common Stock upon consummation of this offering.
Such options are exercisable at a price of $5.00 per share.
EMPLOYMENT AGREEMENTS
The Company has no employment agreements with any of its employees.
LONG-TERM INCENTIVE PLANS
The Company has no long-terms incentive plans other than the Stock Option
Plan and the Directors Stock Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Leonard Hecht and Renn
Zaphiropolus. There are currently no compensation committee interlocks with
other entities or insider participation on the Compensation Committee.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of the date of this Prospectus and as adjusted
to reflect the sale of the shares offered thereby by (i) each person known to
own beneficially 5% or more of the outstanding shares of Common Stock; (ii) each
director of the Company; (iii) each executive officer; and (iv) all executive
officers and directors as a group. Unless otherwise noted below, such
stockholders have sole voting and investment power as to shares shown.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING AFTER THE OFFERING
------------------------- --------------------------
NUMBER NUMBER
NAME OF BENEFICIAL HOLDER OF SHARES PERCENTAGE OF SHARES(1) PERCENTAGE
- - - - - ------------------------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Osicom Technologies, Inc................................... 3,323,327 100.0% 3,323,327 53.4%
2800 28th Street
Suite 100
Santa Monica, CA 90405
Cornelius 'Pete' Peterson(2)............................... 145,061(1) 4.2 226,016 3.5
William E. Peisel(3)....................................... 4,330(2) * 8,954 *
John K. Brennan(3)......................................... 1,226(2) * 1,908 *
Cornelius 'Neil' Peterson(3)............................... 4,142(2) * 9,892 *
Anis 'Arnie' Shikari....................................... -- -- -- --
Daniel J. Sullivan......................................... -- -- -- --
Yechiam Yemini............................................. -- -- -- --
Leonard N. Hecht........................................... -- -- 23,060 *
Bruce B. Roesner........................................... -- -- -- --
Renn Zaphiropoulos......................................... -- -- 23,966 *
All Executive Officers and Directors as a Group (10
persons)................................................. 154,759 4.4% 293,800 4.6%
</TABLE>
- - - - - ------------
* Less than 1%
(1) Includes the exercise of all rights received in this offering by the named
persons, except Osicom, pursuant to agreements between such persons and the
Underwriter, as follows:
Pete Peterson will receive 80,955 rights.
William Peisel will receive 4,628 rights.
John Brennan will receive 682 rights.
Neil Peterson will receive 5,750 rights.
Leonard Hecht will receive 23,060 rights.
Renn Zaphiropoulos will receive 23,966 rights.
(2) Includes exercisable options held by Mr. Peterson to acquire 27,061 shares
of common stock from the Company; 43,000 options to acquire shares of the
common stock of the Company owned by Osicom; and 75,000 shares of common
stock of the Company owned by Osicom which is issuable to Mr. Peterson all
of which are exercisable within 60 days of the date of this Prospectus. See
'Certain Relationships and Related Party Transactions.'
(3) All of such shares are subject to options which are exercisable within 60
days of the date of this Prospectus.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The Company entered into three agreements with Osicom, which govern the
business relationship between the Company and Osicom.
The Company entered into a supply agreement, effective May 1, 1998
(the 'Supply Agreement') with Osicom pursuant to which the Company sells to
Osicom several products, including the NET+ARM'TM' ASIC for fixed prices. The
prices are subject to change consistent with any changes in the Company's
costs for such products. The Supply Agreement also provides that Osicom
manufactures products for the Company at Osicom's best price, as determined
by agreement between Osicom and the Company from time to time. The Supply
Agreement has a term of five years and does not obligate Osicom to purchase
any products from the Company or the Company to utilize Osicom for
manufacturing.
The Company and Osicom entered into a sublease agreement dated as of August
1, 1998, for the sublease by the Company to Osicom of approximately 6,000
square feet of space at the Company's offices in Waltham, Massachusetts
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<PAGE>
<PAGE>
(the 'Sublease'). The Sublease provides for the payment by Osicom to the Company
of rent in the amount of $88,000 per year, payable each October 1, January 1,
April 1 and July 1.
The Company and Osicom entered into an agreement effective May 1, 1998,
which provides for the terms and conditions of the transfer by the Company to
Osicom of the right to manufacture and sell certain products relating to the
Commercial Line (the 'Intercompany Agreement'). The Intercompany Agreement
provides that Osicom shall have the right to manufacture and sell the Company's
stand alone print servers to distributors who will then market such products
directly to the consumer. The Intercompany Agreement provides that the Company
assign certain accounts receivables accruing after July 31, 1998, computer
software and furniture, fixtures, equipment and trademarks to Osicom. The
Company also sold its remaining inventory of stand-alone print servers to
Osicom, at the Company's cost. The Intercompany Agreement also requires the
Company to provide certain manufacturing and engineering support to Osicom,
for which Osicom shall pay 110% of the actual cost of such
support to the Company. The Intercompany Agreement provides
that certain software licenses are to be transferred by the Company to
Osicom and that Osicom shall assume license payments under such licenses. It
also requires Osicom to assign all its rights in the trademark NET+ARM'TM' to
the Company. The Intercompany Agreement further requires Osicom to use its best
efforts to obtain a consent in writing from ARM, Limited to the assignment of
the rights to NET+ARM'TM'. Lastly, Osicom has agreed to cause certain
intellectual property previously owned by Osicom to be co-owned by the Company
and Osicom. The term of the Intercompany Agreement is for one year, unless
terminated by written agreement of the parties thereto.
In the ordinary course of business, a wholly owned subsidiary of Osicom,
Uni Precision Industrial, Ltd. manufactures and assembles products for the
Company on a competitive bid basis.
From time to time the Company has received non-interest bearing advances
from Osicom. As of January 31, 1998, Osicom began accruing interest on the
outstanding balance at 11.5% per year. As of July 31, 1998, the balance of such
advances was $3.8 million.
Between October 1997 and January 1998, Osicom issued, in a series of
transactions, to Cornelius 'Pete' Peterson, the President and Chief Executive
Officer of the Company, 46,023 shares of Osicom common stock in cancellation of
the Company's loan from Mr. Peterson. The shares were valued at their
then-current fair market values. The loan had a balance of $369,107, including
accrued interest. As part of such transaction, Osicom agreed that Mr. Peterson
could exchange such shares for shares in the Company at the time of an initial
public offering by the Company. Therefore, upon the closing of this offering,
Osicom will exchange with Mr. Peterson 75,000 shares of the Company's Common
Stock for his 46,023 shares of Osicom common stock. Osicom has granted to Mr.
Peterson an option to acquire 43,000 shares of NSI Common Stock owned by Osicom
at an exercise price equal to the offering price of $5.00 per share.
All future transactions between the Company and its officers, directors,
and Osicom or its affiliates will be approved by a majority of the unrelated
directors of the Company.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 35,000,000 shares
of Common Stock, par value $0.01 per share, and 5,000,000 shares of preferred
stock, par value $0.01 per share. As of the date of this Prospectus, there were
3,323,327 shares of Common Stock and no shares of preferred stock issued and
outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by the stockholders and do not have
cumulative voting rights. The election of directors is determined by a plurality
of the votes cast. The Company's Restated Articles of Organization (the
'Articles') require the approval of the holders of a majority of the Common
Stock. Except as otherwise required by law and as may be required by the terms
of the preferred stock, all other matters are determined by a majority of the
votes cast. The holders of Common Stock are entitled to receive dividends when,
as and if declared by the Company's Board of Directors out of funds legally
available for the payment thereof, subject to any preferential dividend rights
of outstanding preferred stock.
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<PAGE>
Upon the liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to receive ratably the net assets of the Company
available for distribution after preferred distributions, if any, to the holders
of preferred stock. The shares of Common Stock that will be outstanding upon the
consummation of the offering will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock which the Company may designate and
issue in the future. See 'Risk Factors -- Anti-Takeover Provisions' and
' -- Preferred Stock.'
Holders of Common Stock do not have any preemptive or subscription rights,
nor any redemption or conversion rights.
PREFERRED STOCK
The Company has authorized 5,000,000 shares of preferred stock which the
Company's Board has discretion to issue in such series and with such preferences
and rights as it may designate without the approval of the holders of Common
Stock. Such preferences and rights may be superior to those of the holders of
Common Stock. For example, the holders of preferred stock may be given a
preference in payment upon liquidation of the Company or for the payment or
accumulation of dividends before any distributions are made to the holders of
Common Stock. As of the date of this Prospectus, no Preferred Stock has been
designated or issued by the Company, and the Company has no plans, agreements or
understandings for the issuance of preferred stock. For a description of the
possible anti-takeover effects of the preferred stock, see 'Risk
Factors -- Anti-Takeover Provisions' and ' -- Certain Anti-Takeover Provisions.'
RIGHTS
The Company is granting on the date hereof the rights to the holders of
Osicom common stock and Osicom Securities. The rights, subject to minimum
exercise requirements, are each exercisable for one share of Common Stock at an
exercise price of $5.00 per share. Persons may not exercise rights for fewer
than 75 shares of Common Stock. For purposes of this offering, a person that
holds Osicom common stock and Osicom Securities in multiple accounts must meet
the 75 share minimum purchase requirement in each account. Accordingly, persons
holding fewer than 75 rights in an account should consider the advisability of
consolidating their rights into one account, selling rights, or purchasing
additional rights to comply with the minimum exercise requirements of this
offering. Rights may be transferred, in whole or in part, by endorsing and
delivering to AST a rights certificate that has been properly endorsed for
transfer, with instructions to reissue the rights, in whole or in part, in the
name of the transferee. AST will reissue certificates for the transferred rights
to the transferee, and will reissue a certificate for the balance, if any, to
the holder of the rights, in each case to the extent it is able to do so prior
to the expiration date of the rights. This offering will terminate and the
rights will expire at 5:00 p.m., New York City time, on the expiration date,
which is , 1998. After the expiration date of the rights, unexercised
rights will be null and void. For more information about the rights and the
offering process, reference should be made to 'The Offering' and to 'Risk
Factors -- Cancellation of Rights Offering.'
LIMITATION ON LIABILITY
The Articles of Organization of the Company limit or eliminate the
liability of the Company's directors or officers to the Company or its
stockholders for monetary damages to the fullest extent permitted by the
Massachusetts General Corporation Law, as amended (the 'MGCL'). The MGCL
provides that a director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for a breach of fiduciary duty
as a director, except for liability: (i) for any breach of such person's duty of
loyalty; (ii) for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law; (iii) for the payment of unlawful
dividends and certain other actions prohibited by Massachusetts corporate law;
and (iv) for any transaction resulting in receipt by such person of an improper
personal benefit.
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The Company has directors' and officers' liability insurance to provide its
directors and officers with insurance coverage for losses arising from claims
based on breaches of duty, negligence, error and other wrongful acts. See
'Business -- Legal Proceedings' for a discussion of pending litigation.
CERTAIN ANTI-TAKEOVER PROVISIONS
The ability of the Company's Board to establish the rights of, and to
issue, substantial amounts of preferred stock without the need for stockholder
approval, upon such terms and conditions, and having such rights, privileges and
preferences as the Company's Board may determine in the exercise of its business
judgment, may, among other things, be used to create voting impediments with
respect to changes in control of the Company or to dilute the stock ownership of
holders of Common Stock seeking to obtain control of the Company. The rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, any preferred stock that may be issued in the future. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions, financings and other corporate transactions, may have the
effect of discouraging, delaying or preventing a change in control of the
Company. The Company has no present plans to issue any shares of preferred
stock. See 'Risk Factors -- Anti-Takeover Provisions,' 'Common Stock' and
' -- Preferred Stock.'
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company, 40 Wall Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 6,228,327
(6,664,077 if the Underwriter's over-allotment option is exercised in full)
shares of Common Stock outstanding. Of these shares, the Common Stock sold in
this offering, except for certain shares described below, will be freely
tradeable without restriction or further registration under the Act. The
remaining 3,323,327 shares of Common Stock were sold by the Company in reliance
on an exemption from the registration requirements of the Act and are
'restricted securities' as defined in Rule 144 and may not be sold in the
absence of registration under the Act unless an exemption is available,
including an exemption afforded by Rule 144 or Rule 701. See 'Risk
Factors -- Shares Eligible for Future Sale.'
LOCK-UP AGREEMENTS
Osicom and each executive officer and director of the Company and of
Osicom, who have agreed to exercise rights to purchase 464,419 shares of Common
Stock in this offering, have agreed with the Underwriter that they will not
sell or otherwise dispose of any shares of Common Stock until 180 days from the
Expiration Date of the Rights Offering (the 'Lock-Up Expiry Date.') without the
prior written consent of Tucker Anthony Incorporated.
UNDERWRITING
The Company and the Underwriter have entered into the Standby Underwriting
Agreement on the date hereof, pursuant to which the Underwriter is required,
subject to certain terms and conditions (all of which are set forth below), to
purchase the Unsubscribed Shares. If all of the rights are exercised, there will
be no Unsubscribed Shares and the Underwriter will not be required to purchase
any shares of Common Stock.
The Underwriter has agreed, subject to the condition that the Company
comply with its obligations under the Standby Underwriting Agreement and subject
to the Underwriter's right to terminate its obligations under the Standby
Underwriting Agreement (as specified below), to purchase all of the Unsubscribed
Shares. The Company will pay the Underwriter the Financial Advisory Fee equal to
3% of the exercise price per share for each share of Common Stock included in
the offering. The Financial Advisory Fee is for services and advice rendered in
connection with the structuring of the offering, valuation of the business of
the Company, and financial advice to the Company before and during the
57
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offering. An additional fee of 4% of the exercise price per share will be paid
to the Underwriter (i) for each share of Common Stock purchased by the
Underwriter pursuant to the Standby Underwriting Agreement and (ii) for each
share of Common Stock purchased upon the Underwriter's exercise of Rights. In
addition, the Company has agreed to pay the Underwriter a non-accountable
expense allowance in the aggregate amount of $150,000. The Company has granted
to the Underwriter a 30-day option commencing on the Expiration Date to purchase
a maximum of 435,750 additional shares of Common Stock at a per share price
equal to the Exercise Price less the Financial Advisory Fee and the Underwriting
Discount. The Underwriter may exercise such option in whole or in part only to
cover over-allotments made in connection with the sale of shares of Common Stock
by the Underwriter.
Prior to the Expiration Date, the Underwriter may offer shares of Common
Stock on a when-issued basis, including shares to be acquired through the
purchase and exercise of rights, at prices set from time to time by the
Underwriter. It is not contemplated that the offering price set on any calendar
day will be increased independently by the Underwriter more than once during
such day. After the Expiration Date, the Underwriter may offer shares of Common
Stock, whether acquired pursuant to the Standby Underwriting Agreement, the
exercise of the rights or the purchase of Common Stock in the market, to the
public at a price or prices to be determined. The Underwriter may thus realize
profits or losses independent of the Underwriting Discount and the Financial
Advisory Fee. Shares of Common Stock subject to the Standby Underwriting
Agreement will be offered by the Underwriter when, as and if sold to, and
accepted by, the Underwriter and will be subject to its right to reject orders
in whole or in part.
Prior to this offering there has been no public market for the Common Stock
or the rights. Consequently, the exercise price was determined by negotiations
between the Company and the Underwriter. In determining the exercise price, the
Underwriter and the Board of Directors of the Company considered such factors as
the future prospects and historical growth rate in revenues and earnings of the
Company, its industry in general and the Company's position in its industry;
revenues, earnings and certain other financial and operating information of the
Company in recent periods; market valuations of the securities of companies
engaged in activities similar to those of the Company; the management of the
Company; and, with respect to the Company, the advice of the Underwriter.
The Underwriter will be prohibited from engaging in any market making
activities with respect to the Company's when-issued Common Stock and Common
Stock until the Underwriter has completed its participation in the distribution
of shares offered hereby. As a result, the Underwriter may be unable to provide
a market for the Company's when-issued Common Stock and Common Stock should it
desire to do so, during certain periods while the rights are exercisable.
In connection with this offering, the Underwriter may engage in
stabilizing, syndicate covering transactions or other transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock. A
'syndicate covering transaction' is the placing of any bid or the effecting of
any purchase on the behalf of the Underwriter to reduce a short position created
in connection with this offering. After the opening of quotations for the Common
Stock on the Nasdaq National Market, stabilizing bids for the purpose of
preventing or retarding a decline in the market price may be initiated by the
Underwriter in any market at a price no higher that the last independent
transaction price for the Common Stock and then maintained, reduced or raised to
follow the independent market. Such transactions may stabilize the market price
of the Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
The Underwriter has informed the Company that the Underwriter does not
intend to confirm sales of shares of the rights or the Common Stock to any
accounts over which it exercises discretionary authority.
The Company and Osicom have agreed to indemnify the Underwriter against
certain liabilities arising out of or based upon misstatements or omissions in
this Prospectus or the Registration Statement of which this Prospectus is a part
and certain other liabilities, including liabilities under the Act, and to
contribute to certain payments that the Underwriter may be required to make.
The Underwriter may terminate its obligations under the Standby
Underwriting Agreement (i) if any calamitous domestic or international event or
act or occurrence has disrupted or, in the
58
<PAGE>
<PAGE>
Underwriter's opinion, will in the immediate future materially disrupt, the
general securities market in the United States; (ii) if trading in the Common
Stock (on a when-issued basis) shall have been suspended by the SEC or Nasdaq;
(iii) if trading on the New York Stock Exchange, the American Stock Exchange or
the Nasdaq National Market or in the over-the-counter market shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required on the
over-the-counter market by the NASD or by order of the SEC or any other
government authority having jurisdiction; (iv) if the United States shall have
become involved in a war or major hostilities which, in the Underwriter's
opinion, will affect the general securities market in the United States; (v) if
a banking moratorium has been declared by a New York, Massachusetts, California
or federal authority; (vi) if a moratorium in foreign exchange trading has been
declared; (vii) if the Company shall have sustained a loss material to the
Company by fire, flood, accident, hurricane, earthquake, theft, sabotage or
other calamity or malicious act, whether or not such loss shall have been
insured, or from any labor dispute or any legal or governmental proceeding;
(viii) if there shall be such material adverse market conditions (whether
occurring suddenly or gradually between the date of this Prospectus and the
closing of the offering) affecting markets generally or technology issues
particularly as in the Underwriter's reasonable judgment would make it
inadvisable to proceed with the offering, sale or delivery of the shares of
Common Stock offered hereby; or (ix) if there shall have been such material
adverse change, or any development involving a prospective material adverse
change (including a change in management or control of the Company), in the
condition (financial or otherwise), business prospects, net worth or results of
operations of the Company since January 31, 1998.
The Company has agreed that, without the prior written consent of the
Underwriter, it will not offer, sell, grant any option for the sale of, or
otherwise dispose of any shares of Common Stock (or securities convertible into
shares of Common Stock) (collectively, the 'Securities') acquired in the rights
offering or held by it as of the date hereof until after the Lock-Up Expiry
Date, other than (i) Common Stock to be sold in the offering, and (ii) Company
option issuances and sales of Common Stock pursuant to exercise of stock options
issued under the Stock Option Plan without the prior written consent of Tucker
Anthony Incorporated. Each director and executive officer of Osicom and each
director, executive officer, and certain other employees of the Company who will
beneficially own approximately shares of Common Stock after the
completion of the offering, have agreed with the Underwriter that they will not
sell or otherwise dispose of any shares of Common Stock until after the Lock-Up
Expiry Date without the prior written consent of Tucker Anthony Incorporated.
LEGAL MATTERS
The validity of the rights and shares of Common Stock offered hereby will
be passed upon for the Company by Greenbaum, Rowe, Smith, Ravin, Davis & Himmel
LLP, Woodbridge, New Jersey. Certain legal matters in connection with this
offering are being passed upon for the Underwriter by Morgan, Lewis & Bockius
LLP, Philadelphia, Pennsylvania.
EXPERTS
The financial statements of the Company as of January 31, 1998 and 1997 and
for each of the two years in the period ended January 31, 1998 included in this
Prospectus have been audited by BDO Seidman, LLP, independent accountants, and
for the year ended January 31, 1996 by Weinbaum & Yalamanchi, independent
accounts, have been so included in reliance on their reports, given upon their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
This Prospectus, which constitutes a part of a Registration Statement on
Form S-1 (including all amendments thereto, the 'Registration Statement') filed
by the Company with the SEC under the Act, omits certain of the information set
forth in the Registration Statement. Reference is hereby made to the
Registration Statement and to the exhibits thereto for further information with
respect to the Company and the securities offered hereby. Copies of the
Registration Statement and the exhibits
59
<PAGE>
<PAGE>
thereto are on file at the offices of the SEC and may be obtained upon payment
of the prescribed fee or may be examined without charge at the public reference
facilities of the SEC described below.
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents, and each statement is qualified in its
entirety by reference to the copy of the applicable document filed with the SEC.
The Company is subject to certain of the informational reporting
requirements of the Securities Exchange Act of 1934, as amended and, in
accordance therewith, files reports and other information with the SEC. Such
reports and other information can be inspected and copied at the public
reference facility maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004 and at the regional offices of the SEC located at
Seven World Trade Center, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials may also be
obtained in person from the Public Reference Section of the SEC at its principal
office located at 450 Fifth Street, N.W., Washington, D.C. 20549-1004 at
prescribed rates. Additionally, such material may be obtained at the web site
the SEC maintains at http://www.sec.gov which contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC.
60
<PAGE>
<PAGE>
NETSILICON, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Certified Public Accountants........................................................ F-2
Balance Sheets as of January 31, 1998 and 1997............................................................. F-4
Statements of Operations for the Years Ended January 31, 1998, 1997 and 1996............................... F-5
Statements of Stockholder's Equity for the Years Ended January 31, 1998, 1997, and 1996.................... F-6
Statements of Cash Flows for the Years Ended January 31, 1998, 1997 and 1996............................... F-7
Notes to Financial Statements.............................................................................. F-8
Interim Balance Sheet (Unaudited) at July 31, 1998......................................................... F-21
Interim Statements of Operations (Unaudited) for the Three and Six Months Ended July 31, 1998 and 1997..... F-22
Interim Statements of Cash Flows (Unaudited) for the Six Months Ended July 31, 1998 and 1997............... F-23
Notes to Interim Financial Statements (Unaudited) for the Six Months Ended July 31, 1998 and 1997.......... F-24
</TABLE>
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors of
NETsilicon, Inc.
We have audited the accompanying balance sheets of NETsilicon, Inc. (the
'Company') as of January 31, 1998 and 1997 and the related statements of
operations, stockholder's equity, and cash flows for each of the years then
ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly,
in all material respects, the financial position of NETsilicon, Inc. as of
January 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the years then ended in conformity with generally accepted
accounting principles.
/s/ BDO SEIDMAN LLP
.....................................
BDO SEIDMAN LLP
Los Angeles, California
June 26, 1998, except as for Notes A, I, J and Q
which are as of August 26, 1998
F-2
<PAGE>
<PAGE>
WEINBAUM & YALAMANCHI
INDEPENDENT ACCOUNTANTS REPORT
The Board of Directors of
NETsilicon, Inc.
We have audited the accompanying statements of operations, stockholders'
equity and cash flows for the year ended January 31, 1996 of NETsilicon, Inc.,
formerly known as Digital Products, Inc., ('the Company'). 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the Company's results of operations and cash flows for
the year ended January 31, 1996 in conformity with generally accepted accounting
principles.
/s/ WEINBAUM & YALAMANCHI
.....................................
WEINBAUM & YALAMANCHI
Los Angeles, California
April 28, 1997
F-3
<PAGE>
<PAGE>
NETSILICON, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash............................................................................. $ 185,100 $ 393,800
Accounts receivable, net (Notes D and S)......................................... 3,595,300 3,426,000
Inventory, net (Notes B, D and S)................................................ 2,607,400 2,662,800
Prepaid expenses and other current assets........................................ 172,600 85,600
---------- ----------
TOTAL CURRENT ASSETS........................................................ 6,560,400 6,568,200
---------- ----------
PROPERTY AND EQUIPMENT, NET (Notes C, D and E)........................................ 773,900 471,100
---------- ----------
OTHER ASSETS
Capitalized software, net (Note B)............................................... 221,400 127,300
Capitalized software of discontinued operations, net (Note A).................... 330,100 384,600
Other assets..................................................................... 47,600 63,700
---------- ----------
TOTAL OTHER ASSETS.......................................................... 599,100 575,600
---------- ----------
TOTAL ASSETS.......................................................................... $7,933,400 $7,614,900
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Short term debt (Note D)......................................................... $2,987,100 $2,696,100
Current maturities of long term debt (Note E).................................... 17,900 598,500
Accounts payable................................................................. 1,777,300 1,945,300
Due to affiliates (Note F)....................................................... 2,171,000 947,500
Other current liabilities........................................................ 394,000 621,900
---------- ----------
TOTAL CURRENT LIABILITIES................................................... 7,347,300 6,809,300
---------- ----------
LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS (Notes E and G).......................... -- 43,100
---------- ----------
TOTAL LIABILITIES........................................................... 7,347,300 6,852,400
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes E and G)
STOCKHOLDER'S EQUITY (Notes I, J and K)
Common stock, $.01 par value; 35,000,000 authorized;
3,323,300 shares issued and outstanding........................................ 33,200 33,200
Additional paid-in capital....................................................... 2,529,800 2,529,800
Accumulated deficit.............................................................. (1,976,900) (1,800,500)
---------- ----------
TOTAL STOCKHOLDER'S EQUITY.................................................. 586,100 762,500
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............................................ $7,933,400 $7,614,900
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
<PAGE>
NETSILICON, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES............................................................ $ 7,920,300 $ 7,444,500 $ 4,598,500
COST OF SALES (Note F)............................................... 4,060,200 4,293,600 2,662,100
----------- ----------- -----------
GROSS PROFIT.................................................... 3,860,100 3,150,900 1,936,400
----------- ----------- -----------
OPERATING EXPENSES
Selling and marketing........................................... 1,809,600 1,562,700 914,500
Engineering, research and development........................... 1,482,600 1,027,700 1,698,200
General and administrative...................................... 1,795,400 1,502,300 2,293,600
----------- ----------- -----------
TOTAL OPERATING EXPENSES................................... 5,087,600 4,092,700 4,906,300
----------- ----------- -----------
OPERATING LOSS FROM CONTINUING OPERATIONS............................ (1,227,500) (941,800) (2,969,900)
Interest expense................................................ (118,500) (136,200) (99,100)
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES.................. (1,346,000) (1,078,000) (3,069,000)
Income tax benefit (Note L)..................................... 493,000 968,600 642,900
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS...................................... $ (853,000) $ (109,400) $(2,426,100)
INCOME FROM DISCONTINUED OPERATIONS NET OF INCOME TAX OF $493,000,
$968,600 AND $642,900 (Note A)..................................... 676,600 1,329,500 882,400
----------- ----------- -----------
NET INCOME (LOSS).................................................... $ (176,400) $ 1,220,100 $(1,543,700)
----------- ----------- -----------
----------- ----------- -----------
NET INCOME (LOSS) PER SHARE (Notes K and M)
BASIC
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................. 3,323,300 2,753,400 2,385,400
NET INCOME (LOSS) PER COMMON SHARE
From continuing operations............................ $(0.26) $(0.04) $(1.02)
From discontinued operations.......................... $ 0.20 $ 0.48 $ 0.37
----------- ----------- -----------
Net income (loss) per common share.................... $(0.06) $ 0.44 $(0.65)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
<PAGE>
NETSILICON, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL TOTAL
-------------------- -------------------- PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------- -------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1995............ 2,369,600 $23,700 141,700 $ 14,200 $2,515,200 $(1,476,900) $ 1,076,200
Stock option exercises (Note J)........ 22,300 200 9,700 9,900
Net loss............................... (1,543,700) (1,543,700)
--------- ------- -------- -------- ---------- ----------- -------------
Balance at January 31, 1996............ 2,391,900 23,900 141,700 14,200 2,524,900 (3,020,600) (457,600)
Stock option exercises................. 10,900 100 (100) --
Cashless exercise of options and
warrants (Note J).................... 299,200 3,000 (3,000) --
Preferred stock conversion............. 621,300 6,200 (141,700) (14,200) 8,000 --
Net income............................. 1,220,100 1,220,100
--------- ------- -------- -------- ---------- ----------- -------------
Balance at January 31, 1997............ 3,323,300 33,200 -- -- 2,529,800 (1,800,500) 762,500
Net loss (Note A)...................... (176,400) (176,400)
--------- ------- -------- -------- ---------- ----------- -------------
Balance at January 31, 1998............ 3,323,300 $33,200 -- $ -- $2,529,800 $(1,976,900) $ 586,100
--------- ------- -------- -------- ---------- ----------- -------------
--------- ------- -------- -------- ---------- ----------- -------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
<PAGE>
NETSILICON, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................ $ (176,400) $ 1,220,100 $(1,543,700)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities
Depreciation and amortization.............................. 580,500 674,200 799,000
Intangible assets valuation allowance...................... 237,900 -- --
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable................. (169,300) (1,037,100) 338,400
(Increase) decrease in inventories......................... 55,400 560,300 (304,900)
(Increase) decrease in other current assets................ (87,000) 105,600 (83,000)
Increase (decrease) in accounts payable.................... (168,000) (1,562,600) 492,000
Decrease in bank overdraft................................. -- -- (296,000)
Increase (decrease) in other current liabilities........... (227,800) (497,900) 151,000
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES... 45,300 (537,400) (447,200)
----------- ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment............................. (604,800) (138,600) (156,900)
Software development costs (Note B)............................. (556,000) (369,500) (433,300)
Other assets.................................................... 16,100 (2,700) 128,400
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES................. (1,144,700) (510,800) (461,800)
----------- ----------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from affiliates advances, net of repayments............ 854,400 947,500 --
Proceeds from issuance of short-term debt, net of repayments
(Note D)...................................................... 291,000 917,000 766,200
Repayments of long-term debt (Note E)........................... (254,700) (441,900) (71,900)
Proceeds from long-term debt (Note E)........................... -- -- 224,200
Proceeds from stock option exercises............................ -- -- 9,900
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES............. 890,700 1,422,600 928,400
----------- ----------- -----------
INCREASE (DECREASE) IN CASH.......................................... (208,700) 374,400 19,400
CASH -- BEGINNING OF YEAR............................................ 393,800 19,400 --
----------- ----------- -----------
CASH -- END OF YEAR.................................................. $ 185,100 $ 393,800 $ 19,400
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS
NETsilicon, Inc. (the 'Company') is designer, manufacturer and supplier of
embedded networking systems. The Company's networking silicon chip products and
the accompanying networking software may be incorporated into the basic design
of a wide variety of electrical devices, thereby enabling those devices to be
connected to a Local Area Network ('LAN') and the Internet. Such network
connectivity makes it possible for those devices to be monitored and controlled
from a remote location. The Company's NET+ and predecessor products are
currently contained in an array of imaging products including printers,
scanners, fax machines, copiers and multi-function peripherals manufactured by
original equipment manufacturers ('OEMs').
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that affect
the reported amounts of assets, liabilities, revenues and expenses. Actual
results could differ from these estimates.
The accompanying financial statements are the responsibility of the
management of the Company.
A. THE COMPANY AND BASIS OF PRESENTATION
The Company, incorporated in Massachusetts on April 17, 1984 under the name
of Digital Products, Inc. is a wholly-owned subsidiary of Osicom Technologies,
Inc. ('Osicom') and operates as a product line unit. In September 1996 Osicom
acquired the Company through a merger with a newly-formed corporation for Osicom
common stock in a transaction accounted for as a pooling of interests. The
accompanying financial statements represent only the assets, liabilities,
operations and financial position of the Company.
The Company was comprised of two product lines: OEM and Commercial. The
Company developed both board and system level products to satisfy the specific
design needs of OEM's and the full system (hardware and software) solutions for
end-user customers. The end-user customers were reached through value added
resellers and distributors; this sales activity is referred to as 'commercial
sales'. The Company has decided to focus its resources on the future development
of its NET+ family of products within the OEM line.
As a result, in May 1998, the Company sold its Commercial line to Osicom,
which consisted principally of specific sales employees and capitalized software
related to Commercial products. Based on this transaction, the Company has
accounted for the Commercial line as a discontinued operation. Capitalized
software related to the Commercial line of business has been separately stated
on the balance sheets presented. The Company did not experience a gain or loss
on disposal as Osicom purchased the capitalized software and other miscellaneous
assets at their book value as of the date of purchase. Due to the similar nature
of the raw materials utilized in the manufacturing of products within each
business line, Osicom also has been granted the option to purchase existing
Company inventory at cost for a period of nine months. Sales, cost of sales,
selling, marketing, engineering, research and development expenses included in
discontinued operations within the Company's historical Statements of Operations
represent only those transactions specific to the Commercial line. No general
and administrative expenses have been allocated to the discontinued operations.
See Note Q.
General and administrative expenses include an amount that management
considers to be a reasonable allocation of general corporate expenses.
Management and administrative salaries are allocated based upon estimated time
devoted to NSI operations; all other allocations of general corporate expenses,
including public company costs, were based upon specific identification of the
relationship of NSI operations to the total operations of Osicom. Management
believes that such allocated general expenses are representative of the expenses
NSI will incur as a separate public company; however, the amounts of such
allocated expenses are not necessarily indicative of expenses that would have
been incurred by NSI on a stand-alone basis. Included in general and
administrative expenses are $202,900 and $50,000 of allocated corporate overhead
expenses for the years ended January 31, 1998 and 1997, respectively.
F-8
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates -- The financial statements are prepared in conformity
with generally accepted accounting principles which requires management to make
estimates that affect the reported amounts of assets, liabilities, revenues and
expenses, the disclosure of contingent assets and liabilities and the values of
purchased assets and assumed liabilities in acquisitions. Actual results could
differ from these estimates.
Accounts and Notes Receivable -- In the normal course of business, the
Company extends unsecured credit to its customers related to the sales of
various products. Typically credit terms require payment within thirty days from
the date of shipment. The Company evaluates and monitors the creditworthiness of
each customer on a case-by-case basis.
Allowance for Doubtful Accounts -- The Company provides an allowance for
doubtful accounts based on its continuing evaluation of its customers' credit
risk. The Company generally does not require collateral from its customers.
Inventory -- Inventory, comprised of raw materials, work in process,
finished goods and spare parts, are stated at the lower of cost (first-in,
first-out method) or market.
Inventories at January 31, 1998 and 1997 consist of:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Raw material............................................ $1,350,400 $1,297,400
Work in process......................................... 1,273,400 1,433,600
Finished goods.......................................... 175,600 322,800
---------- ----------
2,799,400 3,053,800
Less: Valuation reserve................................. 192,000 391,000
---------- ----------
$2,607,400 $2,662,800
---------- ----------
---------- ----------
</TABLE>
Fair Value of Financial Instruments -- The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques as appropriate. Except for financial instruments issued in
conjunction with related party transactions management believes that there are
no material differences between the recorded book values of its financial
instruments and their estimated fair value. It is not practicable to estimate
the fair value of related party notes payable or notes receivable of the Company
due to their related party nature.
Property and Equipment -- Property and equipment are recorded at historical
cost. Depreciation and amortization are provided over the estimated useful lives
of the individual assets or the terms of the leases if shorter using accelerated
and straight-line methods. Useful lives for property and equipment range from 3
to 7 years. Depreciation of leasehold improvements is computed using the
straight-line method over 5 years.
Capitalized leases are initially recorded at the present value of the
minimum payments at the inception of the contracts, with an equivalent liability
categorized as appropriate under current or non-current liabilities. Such assets
are depreciated on the same basis as described above. Interest expense, which
represents the difference between the minimum payments and the present value of
the minimum payments at the inception of the lease, is allocated to accounting
periods using a constant rate of interest over the lease.
Property and equipment are reviewed for impairment whenever events or
circumstances indicate that the asset's undiscounted expected cash flows are not
sufficient to recover its carrying amount. The Company measures impairment loss
by comparing the fair market value, calculated as the present value of expected
future cash flows, to its net book value. Impairment losses, if any, are
recorded currently.
Software Development -- Software development costs where technological
feasibility has not been established are expensed in the period in which they
occurred, otherwise, development costs that will
F-9
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
become an integral part of the Company's products are deferred in accordance
with Statement of Financial Accounting Standards Nos. 2 and 86. The deferred
costs are amortized using the straight-line method over the remaining estimated
3 year economic life of the product or the ratio that current revenues for the
product bear to the total of current and anticipated future revenues for that
product. Amortization expense for the years ended January 31, 1998, 1997 and
1996 was $277,300, $321,900 and $391,000. Accumulated amortization was $132,200
and $1,159,900 as of January 31, 1998 and 1997, respectively.
The recoverability of capitalized software costs are reviewed on an ongoing
basis primarily based upon projections of discounted future operating cash flows
from each software product line. The excess amount, if any, of the remaining net
book value over the calculated amount is fully reserved. During the quarter
ended July 31, 1997, the Company recorded a reduction to the net book value of
its capitalized software development costs of $237,900 to reflect the decline in
the net realizable value of these assets as the result of changing market
conditions.
Revenue Recognition -- The Company generally recognizes product revenue
upon shipment of product. Revenue from service obligations is deferred and
recognized over the lives of the contracts. The Company accrues for warranty
costs, sales returns, and other allowances at the time of shipment.
Income Taxes -- Income taxes are accounted for in accordance with Statement
of Financial Accounting Standards No. 109 'Accounting for Income Taxes.' The
statement employs an asset and liability approach for financial accounting and
reporting of deferred income taxes generally allowing for recognition of
deferred tax assets in the current period for future benefit of net operating
loss and research credit carryforwards as well as items for which expenses have
been recognized for financial statement purposes but will be deductible in
future periods. A valuation allowance is recognized, if on the weight of
available evidence it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Advertising -- The Company expenses advertising expenditures as incurred.
Advertising expenses of the Company consist of allowances given to customers as
well as direct expenditures by the Company.
Income and Loss Per Common Share -- In 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ('SFAS') No.
128, 'Earnings Per Share' effective for financial statements issued for period
ending after December 15, 1997, including interim periods. SFAS 128 requires
dual presentation of basic and diluted earnings per share ('EPS') on the face of
the income statement. It also requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. (See Note M). This statement also requires restatement
of all prior-period EPS data presented. The adoption had no effect on the
calculation of EPS. Basic income and loss per common share is computed by
dividing net income or loss available to common shareholders by the weighted
average number of common shares outstanding during each period presented.
Diluted EPS is based on the weighted average number of common shares outstanding
as well as dilutive potential common shares, which in the Company's case consist
of convertible securities outstanding, warrants to acquire common stock and
shares issuable under stock benefit plans. Potential common shares are not
included in the diluted loss per share computation for the years ended January
31, 1998 and 1996 as they would be anti-dilutive.
Stock-Based Compensation -- The Company has adopted SFAS No. 123,
'Stock-Based Compensation' as of February 1, 1996. SFAS No. 123 also encourages,
but does not require companies to record compensation cost for stock-based
employee compensation. The Company has chosen to continue to account for
stock-based compensation utilizing the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to
Employees.' Accordingly, compensation cost for stock options issued to employees
is measured as the excess, if any, of the fair market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock. (See Note K).
Capital Structure -- SFAS No. 129, 'Disclosure of Information about Capital
Structure' is effective for financial statement issued for periods ending after
December 15, 1997. The new standard reinstates
F-10
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
various securities disclosure requirements previously in effect under Accounting
Principles Board Opinion No. 15, which has been superseded by SFAS No. 128. The
adoption of SFAS No. 129 had no effect on the Company's financial position or
results of operations.
Comprehensive Income -- SFAS No. 130, 'Reporting Comprehensive Income' is
effective for financial statements with fiscal years beginning after December
15, 1997. Earlier application is permitted. SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. The Company does not expect the
adoption of SFAS No. 130 to have a material effect, if any, on the Company's
financial position or results of operations.
Segment Reporting -- SFAS No. 131, 'Disclosure about Segments of an
Enterprise and Related Information' is effective for financial statements with
fiscal years beginning after December 15, 1997. The new standard requires that
public business enterprises report certain information about operating segments
in complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also requires
that public business enterprises report certain information about their products
and services, the geographic areas in which they operate and their major
customers. The Company does not expect the adoption of SFAS No. 131 to have a
material effect, if any, on its results of operations.
Pensions and Postretirement Benefits -- SFAS No. 132, 'Employers'
Disclosures about Pensions and Other Postretirement Benefits' is effective for
financial statements with fiscal years ending beginning after December 15, 1997;
earlier application is permitted. The new standard revises employers'
disclosures about pension and other postretirement benefit plans but does not
change the measurement or recognition of those plans. SFAS No. 132 standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures previously required when
no longer useful. The Company does not expect the adoption of SFAS No. 132 to
have a material effect, if any, on its financial position or results of
operations.
Software Revenue Recognition -- The Accounting Standards Executive
Committee issued Statement of Position ('SOP') No. 97-2 'Software Revenue
Recognition' which superceded Statement of Position No. 91-1 'Software Revenue
Recognition' effective for transactions entered into in fiscal years beginning
after December 15, 1997. The adoption of this standard will have no material
effect on the Company's financial position or results of operations.
C. PROPERTY AND EQUIPMENT
Property and equipment of the Company consisted of the following components
as of January 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Manufacturing, engineering and plant equipment and
software.............................................. $2,931,800 $2,362,700
Office furniture and fixtures........................... 313,800 312,000
Leasehold and building improvements..................... 138,900 105,000
---------- ----------
Total property and equipment....................... 3,384,500 2,779,700
Less: Accumulated depreciation.......................... (2,610,600) (2,308,600)
---------- ----------
Net book value..................................... $ 773,900 $ 471,100
---------- ----------
---------- ----------
</TABLE>
F-11
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
D. SHORT TERM DEBT
Short term debt at January 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Floating interest rate loan (2.5% over lender's prime
rate) secured by all the tangible assets of the
Company; weighted average interest rate for the year
ended January 31, 1998 was 11.8%...................... $2,987,100 $2,696,100
---------- ----------
---------- ----------
</TABLE>
On October 11, 1996, the Company obtained a $3,000,000 line of credit from
Coast Business Credit which was increased to $5,000,000 subsequent to January
31, 1998. The line of credit is collateralized by substantially all the assets
of the Company and a guarantee by Osicom. Advances are limited to 80% of
eligible receivables and 30% of eligible inventory. The loan bears interest at
2.5% over the bank's prime rate but not less than 8%; the interest rate on the
line of credit remained unchanged at 11% during the year ended January 31, 1998.
The proceeds of this loan were used to repay the line of credit outstanding at
the acquisition of the Company by Osicom under which the interest rate was 4%
over the lender's prime rate. The highest and average amounts outstanding were
$2,987,100 and $2,298,000 during the year ended January 31, 1998. The highest
amount and average amounts outstanding were $2,779,000 and $1,868,300 during the
year ended January 31, 1997, respectively.
The Company is in compliance with its loan covenants at January 31, 1998.
E. LONG TERM DEBT
Long term debt at January 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Floating interest rate notes payable to former shareholder of
the Company (3% over prime rate); interest rate at January
31, 1997 was 11.25%........................................ $ -- $ 30,900
Floating interest rate notes payable to former shareholder of
the Company (4% over prime rate); interest rate at January
31, 1997 was 12.25%........................................ -- 117,700
5.5% term note payable to former shareholder and present
officer of the Company..................................... -- 364,000
Obligations under finance leases (See Note G)................ 17,900 129,000
------- --------
17,900 641,600
Less: Current portion........................................ 17,900 598,500
------- --------
$ -- $ 43,100
------- --------
------- --------
</TABLE>
The Company had various notes payable to certain of its former shareholders
which were due December 1997 with interest only payable monthly. The holder of
the note payable due to a former shareholder and present officer of the Company
received 46,023 shares of Osicom's common stock in satisfaction of principal and
accrued interest of $369,100 during October 1997 and January 1998. As part of
this transaction, Osicom agreed that the holder could exchange such shares for
shares in the Company in the event the Company has an initial public offering.
Therefore, upon closing of the anticipated initial public offering, Osicom will
exchange 75,000 shares of the Company's common stock for the Osicom shares.
The Company is obligated under capital leases that expire through October
1, 1998. At January 31, 1998 and 1997, the net book value of equipment under
capital leases was $18,900 and $142,700, respectively.
F-12
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
F. DUE TO AFFILIATES
Due to affiliates at January 31, 1998 and 1997 consist of:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Due to Osicom............................................ $1,812,200 $ 947,500
Due to Uni............................................... 358,800 --
---------- ---------
$2,171,000 $ 947,500
---------- ---------
---------- ---------
</TABLE>
From time to time the Company has received non-interest bearing advances,
including payments of expenses on behalf of the Company, from Osicom which are
subordinate to bank debt. As of January 31, 1998, Osicom began accruing interest
on the outstanding balance at 11.5% per year.
In the ordinary course of business a wholly-owned subsidiary of Osicom, Uni
Precision Industrial, Ltd. ('Uni'), manufactured and assembled products for the
Company on a competitive bid basis. During the year ended January 31, 1998
purchases from Uni were $775,600 of which $358,800 were unpaid at January 31,
1998.
G. LEASES AND OTHER COMMITMENTS
Rental expense under operating leases was $330,800, $291,600 and $291,300
for the years ended January 31, 1998, 1997 and 1996, respectively. The table
below sets forth minimum payments under capital and operating leases with
remaining terms in excess of one year, at January 31, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ----------
<S> <C> <C>
1999....................................................... $21,200 $ 410,100
2000....................................................... -- 410,100
2001....................................................... -- 273,400
2002....................................................... -- --
2003....................................................... -- --
------- ----------
21,200 $1,093,600
----------
----------
Less: Amount representing interest......................... (3,300)
-------
Present value of minimum annual rentals.................... $17,900
-------
-------
</TABLE>
H. LITIGATION
The Company is not aware of any claims or actions pending against it.
F-13
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
I. STOCKHOLDERS' EQUITY
The Company amended its Certificate of Incorporation in August 1998 to
authorize the issuance of the following shares:
35,000,000 shares of Common Stock ($.01 par value)
5,000,000 shares of Preferred Stock ($.01 par value)
The Company's Board of Directors has discretion to issue preferred stock in
such series and with such preferences as it may designate without the approval
of the holders of common shares. As of January 31, 1998 no such designations
have been made.
Concurrent with the change in authorized shares the Company affected a
33,233.27-for-one stock split resulting in 3,323,300 shares being issued and
outstanding post split.
All shareholder's equity accounts have been retroactively restated to
reflect these changes.
J. OTHER CAPITAL STOCK TRANSACTIONS AND BUSINESS ACQUISITIONS
Private Placements -- During the year ended January 31, 1996, the Company
issued 22,300 common shares upon exercise of employee stock options receiving
net proceeds of $9,900.
Options and Warrants -- During September, 1996 options and warrants to
acquire 505,700 Class A common shares at prices ranging from $0.10 to $0.75 were
exercised in 'cashless' transactions. In satisfaction of the $346,700 liability
representing the difference between the agreed upon value of the Company's
common stock in connection with the acquisition by Osicom of $1.27 and the
exercise price due upon exercise the Company issued 299,200 shares of Class A
common stock to the holders.
K. STOCK OPTION PLANS AND STOCK AWARD PLAN
The Company adopted two stock option plans in August 1998: The 1998
Incentive and Non-Qualified Stock Option Plan and the 1998 Director Option Plan.
The purpose of these plans is to attract, retain, motivate and reward officers,
directors, employees and consultants of the Company to maximize their
contribution towards the Company's success. All options will be granted at
prices not less than fair value at the date of grant and will have terms varying
up to 10 years.
Additionally, the employees of the Company hold options granted under
Osicom's stock option plans. The employees of the Company may elect to either
retain their Osicom options or exchange the options on a five-for-one basis for
options of the Company at an exercise price equal to the exercise price of the
rights to be distributed to Osicom's shareholders in connection with the
Company's planned initial public offering or $5.00 per share.
The following table summarizes the activity in the Osicom stock option
plans as it relates to the employees of the Company on the basis of those
employees who have irrevocably elected to exchange their Osicom options for
those of the Company:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Shares under option at February 1, 1996................ --
Granted........................................... 48,460 $ 5.00
Exercised......................................... --
Canceled.......................................... --
-------
Shares under option at January 31, 1997................ 48,460 $ 5.00
Granted........................................... 21,507 $ 5.00
Exercised......................................... --
Canceled.......................................... --
-------
Shares under option at January 31, 1998................ 69,967 $ 5.00
-------
-------
</TABLE>
F-14
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
All stock options issued to employees have an exercise price not less than
the fair market value of the Company's common stock on the date of grant which
is equal to the anticipated initial offering price of the Company's common
stock, and in accordance with the accounting for such options utilizing the
intrinsic value method there is no related compensation expense recorded in the
Company's financial statements. Had compensation cost for stock-based
compensation been determined based on the fair value at the grant dates in
accordance with the method delineated in Statement of Financial Accounting
Standards No. 123, the Company's net loss and loss per share for the years ended
January 31, 1998, 1997 and 1996, would have been revised to the pro forma
amounts presented below:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ----------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported................................... $(176,400) $ 1,220,100 $(1,543,700)
Pro forma..................................... $(231,400) $ 1,205,800 $(1,543,700)
Basic income (loss) per share:
As reported................................... $ (0.06) $ 0.44 $ (0.65)
Pro forma..................................... $ (0.07) $ 0.44 $ (0.65)
</TABLE>
Additional information relating to stock options outstanding and
exercisable at January 31, 1998 summarized by exercise price are as follows:
<TABLE>
<CAPTION>
OUTSTANDING
---------------------------------------- EXERCISABLE
WEIGHTED AVERAGE ----------------
EXERCISE PRICE ------------------------------ WEIGHTED AVERAGE
PER SHARE SHARES LIFE (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
- - - - - ----------------------------------- ------ ------------ -------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$5.00.............................. 69,967 4.4 $ 5.00 27,061 $ 5.00
------ ------
$5.00.............................. 69,967 4.4 $ 5.00 27,061 $ 5.00
------ ------
------ ------
</TABLE>
The fair value of option grants is estimated on the date of grant utilizing
the Black-Scholes option-pricing model with the following weighted average
assumptions for grants during the years ended January 31, 1998: expected life of
option 3 years, expected volatility of 35%, risk free interest rate of 5.35% and
a 0% dividend yield. The fair value, at date of grant, using these assumptions
was $1.50 per option and the weighted average was $1.50. The assumptions for the
year ended January 31, 1997 were: expected life of option of 3 years, expected
volatility of 35%, risk free interest rate of 6.25% and a 0% dividend yield. The
fair value, at date of grant, using these assumptions was $1.55 per option and
the weighted average was $1.55.
L. INCOME TAXES
The Company's provision for taxes on income consists of for the years ended
January 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Income taxes:
Current.......................................... $ -- $ -- $ --
Deferred......................................... -- -- --
--------- --------- ---------
Total....................................... -- -- --
Allocation of tax expense to discontinued
operations..................................... (493,000) (968,600) (642,900)
--------- --------- ---------
Income tax provision (benefit)................... $(493,000) $(968,600) $(642,900)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's operations generate permanent and temporary differences for
depreciation, amortization, and valuation allowances. The Company has recorded a
100% valuation allowance against its deferred tax assets, including net
operating loss and research credit carryforwards, in accordance with the
provisions of Statement of Financial Accounting Standards No. 109. Such
allowance is recognized if,
F-15
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
based on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities recognized for financial reporting purposes
and such amounts recognized for tax purposes. Deferred tax assets and
liabilities are comprised of the following at January 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Valuation allowances................................. $ 88,200 $ 320,900
Research and development credits..................... 210,000 210,000
Tax loss carryforward................................ 656,900 236,200
Other................................................ 34,400 84,300
--------- ---------
Gross deferred tax assets....................... 989,500 851,400
Less: valuation allowance............................ (757,300) (635,600)
--------- ---------
Deferred tax asset.............................. 232,200 215,800
Deferred tax liabilities:
Software development costs........................... (232,200) (215,800)
--------- ---------
Deferred tax liabilities........................ (232,200) (215,800)
--------- ---------
Net deferred tax asset (liability).............. $ -- $ --
--------- ---------
--------- ---------
</TABLE>
At January 31, 1998, the Company has federal net operating losses of
approximately $1,558,400 and research and development credits of $210,000 which
may be available to reduce future taxable income; these carryforwards expire at
various dates through 2013. The Internal Revenue Code of 1986, as amended
('Code'), reduces the extent to which net operating loss and tax credit
carryforwards may be utilized in a single taxable year in the event there has
been an 'ownership change' of a company as defined by applicable Code
provisions. The acquisition of the Company by Osicom in September 1996 resulted
in such an ownership change. Further ownership changes, as defined by the Code,
may reduce the extent to which any net operating losses and credits may be
utilized.
The reconciliation between income tax expense and a theoretical United
States tax computed by applying a rate of 35% for the years ended January 31,
1998, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Loss before income taxes from continuing
operations..................................... $(1,346,000) $(1,078,000) $(3,069,000)
----------- ----------- -----------
----------- ----------- -----------
Theoretical tax expense (benefit) at 35%......... $ (471,100) $ (377,300) $(1,074,200)
Impact of non-qualified stock options............ (60,000) -- --
Impact of state taxes and other.................. (83,600) (164,300) (109,000)
Change in valuation allowance.................... 121,700 (427,000) 540,300
----------- ----------- -----------
$ (493,000) $ (968,600) $ (642,900)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
M. EARNINGS PER SHARE CALCULATION
The following data show the amounts used in computing basic earnings per
share.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss)................................ $ (176,400) $ 1,220,100 $(1,543,700)
Less: preferred dividends........................ -- -- --
----------- ----------- -----------
Net loss available to common shareholders used in
basic EPS...................................... $ (176,400) $ 1,220,100 $(1,543,700)
----------- ----------- -----------
----------- ----------- -----------
Average number of common shares used in basic
EPS............................................ 3,323,300 2,753,400 2,385,400
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-16
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company had a net loss for the years ending January 31, 1998 and 1996.
Accordingly, the effect of dilutive securities including convertible preferred
stock as well as warrants to acquire common stock and stock options, vested and
nonvested, are not included in the calculation of EPS because their effect would
be antidilutive. The following data shows the effect on income and the weighted
average number of shares of dilutive potential common stock.
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- -----------
<S> <C> <C> <C>
Net income (loss) available to common shareholders
used in basic EPS................................. $(176,400) $1,220,100 $(1,543,700)
Adjustments......................................... -- -- --
--------- ---------- -----------
Net income (loss) available to common shareholders
after assumed conversions of dilutive
securities........................................ $(176,400) $1,220,100 $(1,543,700)
--------- ---------- -----------
--------- ---------- -----------
Average number of common shares used in basic EPS... 3,323,300 2,753,400 2,385,400
Effect of dilutive securities:
Convertible preferred stock.................... -- 381,900 621,300
Warrants....................................... -- 172,000 279,900
Stock benefit plans............................ -- 16,000 36,700
--------- ---------- -----------
Average number of common shares and dilutive
potential common stock used in diluted EPS........ 3,323,300 3,323,300 3,323,300
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
The shares issuable upon exercise of options and warrants represents the
quarterly average of the shares issuable at exercise net of the shares assumed
to have been purchased, at the average market price for the period, with the
assumed exercise proceeds. Accordingly, options with exercise prices in excess
of the average market price for the period are excluded because their effect
would be antidilutive. The average market price for the periods presented has
been assumed to be equal to the exercise price of the rights to be distributed
to Osicom's shareholders in connection with the Company's planned initial public
offering. All options outstanding during the periods presented are exercisable
at prices equal to or greater than this price and are therefore excluded from
diluted income per share as they would be anti-dilutive.
Income (loss) per share for the years ended January 31, 1997 and 1996 has
been restated to give effect to the application of SFAS 128 which was adopted by
the Company for periods ending after December 15, 1997. There was no effect of
the restatement on income (loss) per share for the year ended January 31, 1997.
N. OTHER RELATED PARTY TRANSACTIONS
Summarized below are all material related party transactions entered into
by the Company and its subsidiaries during the periods presented not otherwise
disclosed in these notes.
The Company had outstanding indebtedness to former shareholders and a
current officer of the Company as more fully described in Note E. During the
years ended January 31, 1998, 1997 and 1996 the interest expense incurred on
these notes was $27,100, $22,300 and $13,600, respectively.
O. SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest expense and taxes paid approximated the related expenses for the
years ended January 31, 1998, 1997 and 1996.
F-17
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The stock issued by Osicom in satisfaction of a note payable including
accrued interest to a current officer and former shareholder of the Company
neither provided nor used cash. Accordingly, the values assigned to such stock
have been excluded from the statements of cash flows.
P. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade receivables. As regards the former, the Company places its temporary
cash investments with high credit financial institutions and limits, by policy,
the amount of credit exposure to any one institution. No accounts at a single
bank accounted for more than 10% of current assets.
Although the Company is directly affected by the economic well being of its
significant customers listed in the following tables, management does not
believe that significant credit risk exists at January 31, 1998. The Company
performs ongoing credit evaluations of its customers' financial condition and
does not require collateral.
The following data shows the customers accounting for more than 10% of net
receivables at January 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Ingram Micro........................................................................ 26.6% 38.2%
Tech Data Corporation............................................................... 17.0 18.6
Kyocera Communications Systems Co., Ltd. ........................................... 18.4 3.5
</TABLE>
The following data shows that sales to major customers during the years
ended January 31, 1998, 1997 and 1996 as a percentage of net sales:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Xerox Corporation..................................................... 33.7% 21.0% --%
Konica Business Systems............................................... 8.8 -- --
NEC................................................................... 10.8 0.4 --
Digital Equipment, Inc................................................ 5.3 33.3 47.1
Black Box Corporation................................................. 3.7 7.8 14.9
Paradyne Corporation.................................................. 2.3 10.4 5.8
</TABLE>
Q. SUBSEQUENT EVENTS
Effective May 1, 1998 the Company sold its Commercial product line to
Osicom as described in Note A. The agreement provides for the terms and
conditions of the transfer by the Company to Osicom of the right to manufacture
and sell Commercial products. The agreement provides that Osicom shall have the
right to manufacture and sell the Company's stand alone print servers to
distributors who will then market such products directly to the consumer. The
Company has assigned accounts receivables accruing after July 31, 1998, computer
software and furniture, fixtures, equipment, software licenses and trademarks to
Osicom. Any future licensing fees will be paid by Osicom. Osicom has the option
to acquire inventory of stand alone print servers at the Company's cost during
the period of the agreement. The agreement requires the Company to provide
certain engineering support to Osicom, for which Osicom shall pay 100% of the
actual cost of such support to the Company. It also requires Osicom to assign
all its rights in the trademark NET+ARM'TM' to the Company and requires Osicom
to use its best efforts to obtain a consent in writing from ARM, Limited to the
assignment of the rights to NET+ARM'TM'. Lastly, Osicom has agreed to cause
certain intellectual property previously owned by Osicom to be co-owned by the
Company and Osicom. The agreement is for one year unless earlier terminated by
mutual agreement.
F-18
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company entered into a supply agreement with Osicom pursuant to which
the Company sells to Osicom several products, including the NET+ARM'TM' chips
for fixed prices. The prices are subject to change consistent with any changes
in the Company's costs for such products. The agreement also provides that
Osicom manufacturers products for the Company at Osicom's best price, as
determined by mutual agreement. The agreement has a term of five years and does
not obligate Osicom to purchase any products from the Company or the Company to
utilize Osicom for manufacturing.
The Company and Osicom entered into a one year sublease agreement for
approximately 6,000 square feet of office space at the Company's facilities for
an annual rental of $88,000 per year payable quarterly. The sublease may be
extended for one year terms for the term of the Company's facility lease.
During February, 1998 the Company obtained an increase in its line of
credit from $3,000,000 to $5,000,000.
R. SEGMENT INFORMATION
Information for the years ended January 31, 1998, 1997 and 1996 in the
table below is presented on the same basis utilized by the Company to manage its
business. Export sales and certain income and expense items are reported in the
geographic area where the final sale to customers is made, rather than where the
transaction originates.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Net sales:
United States................................ $ 6,743,000 $7,444,500 $ 4,598,500
Asia......................................... 1,150,700 -- --
Other........................................ 26,600 -- --
----------- ---------- -----------
Total net sales......................... $ 7,920,300 $7,444,500 $ 4,598,500
----------- ---------- -----------
----------- ---------- -----------
Net income (loss) from continuing operations:
United States................................ $ (652,900) $ (109,400) $(2,426,100)
Asia......................................... (195,500) -- --
Other........................................ (4,600) -- --
----------- ---------- -----------
Total net income (loss)................. $ (853,000) $ (109,400) $(2,426,100)
----------- ---------- -----------
----------- ---------- -----------
Total assets:
United States................................ $ 7,164,000 $7,614,900
Asia......................................... 769,400 --
Other............................................. -- --
----------- ----------
Total assets............................ $ 7,933,400 $7,614,900
----------- ----------
----------- ----------
</TABLE>
F-19
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
S. VALUATION AND QUALIFYING ACCOUNTS
Changes in the inventory valuation reserve were as follows:
<TABLE>
<S> <C>
Balance at February 1, 1995...................................................... $ 214,700
Additions charged to costs and expenses..................................... 100,000
Amounts used during year.................................................... (17,700)
---------
Balance at January 31, 1996...................................................... 297,000
Additions charged to costs and expenses..................................... 156,000
Amounts used during year.................................................... (62,000)
---------
Balance at January 31, 1997...................................................... 391,000
Additions charged to costs and expenses..................................... 146,000
Amounts used during year.................................................... (345,000)
---------
Balance at January 31, 1998...................................................... $ 192,000
---------
---------
</TABLE>
Changes in the accounts receivable valuation reserve were as follows:
<TABLE>
<S> <C>
Balance at February 1, 1995...................................................... $ 92,000
Additions charged to costs and expenses..................................... 393,500
Amounts used during year.................................................... (69,000)
---------
Balance at January 31, 1996...................................................... $ 416,500
Additions charged to costs and expenses..................................... --
Amounts used during year.................................................... (136,500)
---------
Balance at January 31, 1997...................................................... 280,000
Additions charged to costs and expenses..................................... 22,600
Amounts used during year.................................................... (285,500)
---------
Balance at January 31, 1998...................................................... $ 17,100
---------
---------
</TABLE>
F-20
<PAGE>
<PAGE>
NETSILICON, INC.
INTERIM BALANCE SHEET
<TABLE>
<CAPTION>
JULY 31,
1998
-----------
(UNAUDITED)
<S> <C>
ASSETS
CURRENT ASSETS
Cash.......................................................................................... $ 571,600
Accounts receivable, net...................................................................... 3,976,100
Inventory, net................................................................................ 4,128,400
Prepaid expenses and other current assets..................................................... 285,000
-----------
TOTAL CURRENT ASSETS..................................................................... 8,961,100
-----------
PROPERTY AND EQUIPMENT, NET........................................................................ 838,800
OTHER ASSETS
Capitalized software, net..................................................................... 245,700
-----------
TOTAL OTHER ASSETS....................................................................... 245,700
-----------
TOTAL ASSETS....................................................................................... $10,045,600
-----------
-----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Short term debt............................................................................... $ 3,478,800
Current maturities of long term debt.......................................................... 11,000
Accounts payable.............................................................................. 2,744,400
Due to affiliates............................................................................. 3,342,400
Other current liabilities..................................................................... 482,700
-----------
TOTAL CURRENT LIABILITIES................................................................ 10,059,300
-----------
LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS....................................................... --
-----------
TOTAL LIABILITIES........................................................................ 10,059,300
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT
Common stock, $.01 par value; 35,000,000 authorized; 3,323,300 and 6,228,300 shares issued and
outstanding, respectively.................................................................... 33,200
Additional paid-in capital.................................................................... 2,529,800
Accumulated deficit........................................................................... (2,576,700)
-----------
TOTAL STOCKHOLDER'S DEFICIT.............................................................. (13,700)
-----------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT........................................................ $10,045,600
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
<PAGE>
NETSILICON, INC.
INTERIM STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES................................................ $3,198,900 $2,702,700 $5,383,900 $5,173,800
COST OF SALES............................................ 1,497,400 1,375,700 2,534,400 2,744,400
---------- ---------- ---------- ----------
GROSS PROFIT................................... 1,701,500 1,327,000 2,849,500 2,429,400
---------- ---------- ---------- ----------
OPERATING EXPENSES
Selling and marketing............................... 626,500 478,100 1,254,300 903,300
Engineering, research and development............... 501,900 402,400 949,900 800,200
General and administrative.......................... 405,400 454,000 797,300 905,400
---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES....................... 1,533,800 1,334,500 3,001,500 2,608,900
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS....... 167,700 (7,500) (152,000) (179,500)
Interest expense.................................... (76,800) (33,900) (136,900) (53,800)
---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES.................................................. 90,900 (41,400) (288,900) (233,300)
Benefit (provision) for income taxes................ -- 109,800 (131,000) 221,300
---------- ---------- ---------- ----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS............. $ 90,900 $ 68,400 $ (419,900) $ (12,000)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET OF INCOME
TAX OF $0, $109,800, $(131,000), AND $221,300.......... -- 150,600 (179,900) 303,800
---------- ---------- ---------- ----------
NET INCOME (LOSS)........................................ $ 90,900 $ 219,000 $ (599,800) $ 291,800
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME (LOSS) PER SHARE
BASIC
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING..... 3,323,300 3,323,300 3,323,300 3,323,300
NET INCOME (LOSS) PER COMMON SHARE
From continuing operations................ $ 0.03 $ 0.02 $ (0.13) $ --
From discontinued operations.............. $ -- $ 0.05 $ (0.05) $ 0.09
---------- ---------- ---------- ----------
Net income (loss) per common share........ $ 0.03 $ 0.07 $ (0.18) $ 0.09
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
DILUTED
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING..... 3,323,300 3,323,300 -- --
NET INCOME (LOSS) PER COMMON SHARE
From continuing operations................ $ 0.03 $ 0.02 -- --
From discontinued operations.............. $ -- $ 0.05 -- --
---------- ----------
Net income (loss) per common share........ $ 0.03 $ 0.07
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
<PAGE>
NETSILICON, INC.
INTERIM STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 31,
-------------------------
1998 1997
----------- ----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................... $ (599,800) $ 291,800
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities
Depreciation and amortization.............................................. 224,300 342,600
Intangible valuation allowance............................................. -- 237,900
Changes in current assets and liabilities:
Increase in accounts receivable............................................ (380,800) (727,500)
Increase in inventories.................................................... (1,521,000) (224,900)
Increase in other current assets........................................... (112,400) (75,100)
Increase (decrease) in accounts payable.................................... 967,100 (316,200)
Increase in other current liabilities...................................... 88,700 114,500
----------- ----------
NET CASH USED IN OPERATING ACTIVITIES................................. (1,333,900) (356,900)
----------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment............................................. (232,000) (261,800)
Software development costs...................................................... (192,000) (200,000)
Other assets.................................................................... 47,600 27,800
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES................................. (376,400) (434,000)
----------- ----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from parent company advances, net of repayments........................ 1,612,000 668,700
Proceeds from issuance of short-term debt, net of repayments.................... 491,700 222,500
Repayments of long-term debt.................................................... (6,900) (131,500)
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................. 2,096,800 759,700
----------- ----------
INCREASE (DECREASE) IN CASH.......................................................... 386,500 (31,200)
CASH -- BEGINNING OF YEAR............................................................ 185,100 393,800
----------- ----------
CASH -- END OF PERIOD................................................................ $ 571,600 $ 362,600
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
NETsilicon, Inc. (the 'Company') is designer, manufacturer and supplier of
embedded networking systems. The Company's networking silicon chip products and
the accompanying networking software may be incorporated into the basic design
of a wide variety of electrical devices, thereby enabling those devices to be
connected to a Local Area Network ('LAN') and the Internet. Such network
connectivity makes it possible for those devices to be monitored and controlled
from a remote location. The Company's NET+ and predecessor products are
currently contained in an array of imaging products including printers,
scanners, fax machines, copiers and multi-function peripherals manufactured by
original equipment manufacturers ('OEMs').
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial data as of July 31, 1998 and for the three and
six months ended July 31, 1998 and 1997, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the financial statements and the notes thereto
included in the Company's audited annual financial statements for the year ended
January 31, 1998.
The Company was comprised of two product lines: OEM and Commercial. The
Company developed both board and system level products to satisfy the specific
design needs of OEM's and the full system (hardware and software) solutions for
end-user customers. The end-user customers were reached through value added
resellers and distributors; this sales activity is referred to as 'commercial
sales'. The Company determined that it would be most advantageous to focus its
resources on the future development of its NET+ product within the OEM line.
As a result, in May 1998, the Company sold its Commercial line to Osicom,
which consisted principally of specific sales employees and capitalized software
related to Commercial products. Based on this transaction, the Company has
accounted for the Commercial line as a discontinued operation. Capitalized
software related to the Commercial line of business has been separately stated
on the balance sheets presented. The Company did not experience a gain or loss
on disposal as Osicom purchased the capitalized software and other miscellaneous
assets at their book value as of the date of purchase. Due to the similar nature
of the raw materials utilized in the manufacturing of products within each
business line, Osicom also has been granted the option to purchase existing
Company inventory at cost for a period of nine months. Sales, cost of sales,
selling, marketing, engineering, research and development expenses included in
discontinued operations within the Company's historical Statements of Operations
represent only those transactions specific to the Commercial line. No general
and administrative expenses have been allocated to the discontinued operations.
See Note Q.
General and administrative expenses include an amount that management
considers to be a reasonable allocation of general corporate expenses.
Management and administrative salaries are allocated based upon estimated time
devoted to NSI operations; all other allocations of general corporate expenses,
including public company costs, were based upon specific identification of the
relationship of NSI operations to the total operations of Osicom. Management
believes that such allocated general expenses are representative of the expenses
NSI will incur as a separate public company; however, the amounts of such
allocated expenses are not necessarily indicative of expenses that would have
been incurred by NSI on a stand-alone basis. Included in general and
administrative expenses are $40,000 and $50,700 for the quarters ended July 31,
1998 and 1997, respectively and $80,000 and $110,700 for the six months ended
July 31, 1998 and 1997, respectively.
F-24
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that affect
the reported amounts of assets, liabilities, revenues and expenses, the
disclosure of contingent assets and liabilities and the values of purchased
assets and assumed liabilities in acquisitions. Actual results could differ from
these estimates.
In the opinion of Management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows as of July 31, 1998 and for the three and
six months ended July 31, 1998, have been made. The results of operations for
the three and six months ended July 31, 1998 are not necessarily indicative of
the operating results for the full year.
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards
('SFAS') No. 128 which requires dual presentation of basic and diluted earnings
per shares ('EPS') on the face of the income statement. SFAS No. 128 also
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic net income and loss per common share is computed by dividing net income or
loss available to common shareholders by the weighted average number of common
shares outstanding during each period presented. Diluted EPS is based on the
weighted average number of common shares outstanding as well as dilutive
potential common shares, which in the Company's case consist of shares issuable
under stock benefit plans. Potential common shares are not included in the
diluted loss per share computation for the quarter ended July 31, 1997 and the
six months ended July 31, 1997 and 1998 as they would be anti-dilutive.
The Company has restated all prior period per share data presented as
required by SFAS No. 128. There was no effect from the restatement on basic or
diluted EPS for the three and six months ended July 31, 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ('FASB') has issued several SFAS
effective for fiscal years beginning after December 15, 1997 including SFAS No.
129 'Disclosure of Information about Capital Structure', SFAS No. 130 'Reporting
Comprehensive Income', SFAS No. 131 'Disclosure about Segments of an Enterprise
and Related Information', and SFAS No. 132 'Employers' Disclosures about
Pensions and other Postretirement Benefits'. The adoption of these standards has
had no material effects, if any, on Company's financial position or results of
operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities and requires all derivatives to be recorded on the balance
sheet at fair value. SFAS 133 is effective for years beginning after June 15,
1999. Adoption of SFAS 133 is not expected to have a material impact on the
Company's results of operations, financial position or cash flows.
F-25
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
BALANCE SHEET DETAIL
Inventories at July 31, 1998 consist of:
<TABLE>
<S> <C>
Raw materials......................................................... $2,063,900
Work in process....................................................... 1,799,100
Finished goods........................................................ 327,900
----------
4,190,900
Less: Valuation reserve............................................... 62,500
----------
$4,128,400
----------
----------
</TABLE>
Due to affiliates at July 31, 1998 consist of:
<TABLE>
<CAPTION>
ACTUAL
----------
<S> <C>
Due to Osicom......................................................... $3,829,900
Due from Osicom....................................................... (974,700)
Due to Uni............................................................ 487,200
----------
Due to affiliates................................................ $3,342,400
----------
----------
</TABLE>
From time to time the Company has received advances, including payments of
expenses on behalf of the Company, from Osicom which are subordinate to bank
debt. As of January 31, 1998, Osicom began accruing interest on the outstanding
balance at 11.5% per year; interest charges from Osicom were $50,000 for both
the three and six month periods ended July 31, 1998.
As more fully explained in 'Basis of Presentation', the Company transferred
its Commercial product line to Osicom in May 1998. The balance that would have
been due the Company for the net book value of the capitalized software related
to the Commercial line is show as a balance due from Osicom at July 31, 1998.
In the ordinary course of business, a wholly owned subsidiary of Osicom,
Uni Precision Industrial, Ltd. ('Uni'), manufactured and assembled products for
the Company on a competitive bid basis. During the three months ended July 31,
1998 and 1997 purchases from Uni were $454,200 and $270,000, respectively.
During the six months ended July 31, 1998 and 1997 purchases from Uni were
$804,300 and $298,900, respectively.
STOCKHOLDER'S EQUITY
The Company is authorized to issue the following shares of stock:
35,000,000 shares of Common Stock ($.01 par value)
5,000,000 shares of Preferred Stock ($.01 par value)
STOCK OPTION PLANS
The Company adopted two stock option plans in August 1998: The 1998
Incentive and Non-Qualified Stock Option Plan and 1998 Director Option Plan. The
purpose of these plans is to attract, retain, motivate and reward officers,
directors, employees and consultants of the Company to maximize their
contribution towards the Company's success. All options will be granted at
prices not less than fair value at the date of grant and will have terms varying
up to 10 years.
Additionally, the employees of the Company hold options granted under
Osicom's stock option plans. The employees of the Company may elect to either
retain their Osicom options or exchange the options on a five-for-one basis for
options of the Company at an exercise price equal to the exercise price of the
rights to be distributed to Osicom's shareholders in connection with the
Company's planned initial public offering or $5.00 per share.
F-26
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The following table summarizes the activity in the Osicom stock option
plans as it relates to the employees of the Company on the basis of those
employees who have irrevocably elected to exchange their Osicom options for
those of the Company:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Shares under option at January 31, 1998........................................... 69,967 $ 5.00
Granted...................................................................... 6,380 $ 5.00
Exercised.................................................................... --
Canceled..................................................................... --
---------
Shares under option at July 31, 1998.............................................. 76,347 $ 5.00
---------
---------
</TABLE>
All stock options issued to employees have an exercise price not less than
the fair market value of the Company's common stock on the date of grant which
is equal to the anticipated initial offering price of the Company's common
stock, and in accordance with the accounting for such options utilizing the
intrinsic value method there is no related compensation expense recorded in the
Company's financial statements.
EARNINGS PER SHARE CALCULATION
The following data show the amounts used in computing basic earnings per
share for the three and six months ended July 31, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Six Months
ended July 31, ended July 31,
---------------------------- ------------------------
1998 1997 1998 1997
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss)....................................... $ 90,900 $ 219,000 $ (599,800) $ 291,800
Adjustments............................................. -- -- -- --
------------ ------------ ---------- ----------
Net income (loss) available to common shareholders used
in basic EPS.......................................... $ 90,900 $ 219,000 $ (599,800) $ 291,800
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Average number of common shares used in basic EPS....... 3,323,300 3,323,300 3,323,300 3,323,300
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
</TABLE>
The Company had a net loss for the three and six months ended July 31, 1997
and the six months ended July 31, 1998. Accordingly, the effect of dilutive
securities including vested and nonvested stock options to acquire common stock
are not included in the calculation of EPS because their effect would be
antidilutive. The following data shows the effect on income and the weighted
average number of shares of dilutive potential common stock.
F-27
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
Three Months Six Months
ended July 31, ended July 31,
---------------------------- ------------------------
1998 1997 1998 1997
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) available to common shareholders used
in basic EPS.......................................... $ 90,900 $ 219,000 $ (599,800) $ 291,800
Adjustments............................................. -- -- -- --
------------ ------------ ---------- ----------
Net income (loss) available to common shareholders after
assumed effects of dilutive securities................ $ 90,900 $ 219,000 $ (599,800) $ 291,800
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Average number of common shares used in basic EPS....... 3,323,300 3,323,300 3,323,300 3,323,300
Effect of dilutive securities:
Stock benefit plans................................ -- -- -- --
------------ ------------ ---------- ----------
Average number of common shares and dilutive potential
common stock used in diluted EPS...................... 3,323,300 3,323,300 3,323,300 3,323,300
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
</TABLE>
The shares issuable upon exercise of options represents the quarterly
average of the shares issuable at exercise net of the shares assumed to have
been purchased, at the average market price for the period, with the assumed
exercise proceeds. The average market price for the periods presented has been
assumed to be equal to the exercise price of the rights to be distributed to
Osicom's shareholders in connection with the Company's planned initial public
offering. All options outstanding during the periods presented are exercisable
at prices equal to or greater than this price and are therefore excluded from
diluted income per share as they would be anti-dilutive.
Income per share for the three and six months ended July 31, 1997 has been
restated to give effect to the application of SFAS 128 which was adopted by the
Company for periods ending after December 15, 1997. There was no effect from the
restatement on basic or diluted EPS for the three and six months ended July 31,
1997.
CONCENTRATIONS OF CREDIT RISK
The following data shows the customers accounting for more than 10% of net
receivables at July 31, 1998:
<TABLE>
<S> <C>
Ingram Micro........................................................................... 23.3%
Kyocera Communications Systems Co., Ltd................................................ 16.0
Xerox Corporation...................................................................... 13.0
</TABLE>
The following data shows that sales to major customers during the three and
six months ended July 31, 1998 and 1997 as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Six Months
ended July 31, ended July 31,
---------------------------- ------------------------
1998 1997 1998 1997
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Xerox Corporation........................................ 23.7% 18.4% 22.5% 40.0%
Kyocera Communications Systems Co., Ltd.................. 18.6 -- 20.2 2.3
Mita Industrial Co. Ltd.................................. 11.8 -- 15.2 --
Minolta Corporation...................................... 8.4 20.9 5.0 10.9
Konica Business Machines................................. 6.1 20.3 -- 13.3
NEC Technologies......................................... -- 15.1 20.2 12.0
Digital Equipment Inc.................................... -- 13.6 2.2 7.4
</TABLE>
F-28
<PAGE>
<PAGE>
______________________________ _____________________________
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY
OTHER THAN THE SECURITIES COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. EXCEPT WHERE OTHERWISE INDICATED, THIS
PROSPECTUS SPEAKS AS OF THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS FURNISHED OR
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................................................ 3
Risk Factors.............................................................................................. 8
The Company............................................................................................... 17
The Offering.............................................................................................. 18
Federal Income Tax Consequences........................................................................... 21
Use of Proceeds........................................................................................... 23
Dividend Policy........................................................................................... 23
Capitalization............................................................................................ 24
Dilution.................................................................................................. 25
Selected Financial Data................................................................................... 26
Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 27
Business.................................................................................................. 34
Management................................................................................................ 46
Principal Stockholders.................................................................................... 53
Certain Relationships and Related Party Transactions...................................................... 53
Description of Capital Stock.............................................................................. 54
Shares Eligible for Future Sale........................................................................... 56
Underwriting.............................................................................................. 56
Legal Matters............................................................................................. 58
Experts................................................................................................... 58
Additional Information.................................................................................... 58
Index to Financial Statements............................................................................. F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE EXPIRATION DATE), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
______________________________ _____________________________
<PAGE>
______________________________ _____________________________
2,905,000 SHARES OF
COMMON STOCK
(AND RIGHTS TO ACQUIRE UP
TO 2,905,000 OF SUCH SHARES)
[LOGO OF NET SILICON]
------------------------
PROSPECTUS
------------------------
, 1998
TUCKER ANTHONY
INCORPORATED
______________________________ _____________________________
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses (other than underwriting discounts and commissions
and Underwriter's non-accountable expense allowance) payable in connection with
this offering of the rights and the sale of the Common Stock offered hereby are
as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
Securities and Exchange Commission registration fee...................................... $ 4,927.61
NASD filing fee.......................................................................... 2,170.00
Nasdaq filing fee........................................................................ 15,000.00
Printing and engraving expenses.......................................................... 160,000.00
Legal fees and expenses.................................................................. 100,000.00
Accounting fees and expenses............................................................. 70,000.00
Blue Sky fees and expenses (including legal fees)........................................ 15,000.00
Transfer agent and rights agent and registrar fees and expenses.......................... 25,000.00
Miscellaneous............................................................................ 207,902.39
-----------
Total............................................................................... $600,000.00
-----------
-----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Articles of Organization permit indemnification to the
fullest extent permitted by Massachusetts law. The Registrant's By-laws require
the Registrant to indemnify any person who was or is an authorized
representative of the Registrant, and who was or is a party or is threatened to
be made a party to any corporate proceeding, by reason of the fact that such
person was or is an authorized representative of the Registrant, against
expenses, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with such third party
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, the best interests of the
Registrant and, with respect to any criminal third party proceeding (including
any action or investigation which could or does lead to a criminal third party
proceeding) had no reasonable cause to believe such conduct was unlawful. The
Registrant shall also indemnify any person who was or is an authorized
representative of the Registrant and who was or is a party or is threatened to
be made a party to any corporate proceeding by reason of the fact that such
person was or is an authorized representative of the Registrant, against
expenses actually and reasonably incurred by such person in connection with the
defense or settlement of such corporate action if such person acted in good
faith and in a manner reasonably believed to be in, or not opposed to, the best
interests of the Registrant, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Registrant unless and only to the extent that the
Massachusetts Court of Chancery or the court in which such corporate proceeding
was pending shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such authorized
representative is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper. Such
indemnification is mandatory under the Registrant's By-laws as to expenses
actually and reasonably incurred to the extent that an authorized representative
of the Registrant has been successful on the merits or otherwise in defense of
any third party or corporate proceeding or in defense of any claim, issue or
matter therein.
The determination of whether an individual is entitled to indemnification
may be made by a majority of disinterested directors, independent legal counsel
in a written legal opinion or the stockholders. Massachusetts law also permits
indemnification in connection with a proceeding brought by or in the right of
the Registrant to procure a judgment in its favor. Insofar as indemnification
for liabilities arising under the Act may be permitted to directors, officers or
persons controlling the Registrant pursuant to the foregoing provisions, the
Registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
II-1
<PAGE>
<PAGE>
that Act and is therefore unenforceable. The Registrant expects to obtain a
directors and officers liability insurance policy prior to the effective date of
this Registration Statement.
The Standby Underwriting Agreement provides that the Underwriters are
obligated, under certain circumstances, to indemnify directors, officers and
controlling persons of the Registrant against certain liabilities, including
liabilities under the Act. Reference is made to Section 8 of the form of Standby
Underwriting Agreement which will be filed by amendment as Exhibit 1.1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- - - - - ----------- ---------------------------------------------------------------------------------------------- --------
<S> <C> <C>
*1.1 -- Form of Standby Underwriting Agreement.....................................................
*3.1 -- Restated Articles of Organization of the Company...........................................
3.3 -- Amended and Restated By-laws of the Company................................................
*5.1 -- Opinion of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel LLP...............................
*8.1 -- Opinion of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel LLP regarding tax matters.........
10.1 -- NETsilicon, Inc. 1998 Incentive and Nonqualified Stock Option Plan.........................
10.2 -- NETsilicon, Inc. 1998 Director Stock Option Plan...........................................
10.3 -- Supply Agreement between Osicom Technologies, Inc. and the Company dated as of May 1,
1998.......................................................................................
10.4 -- Intercompany Agreement between Osicom Technologies, Inc. and the Company dated as of May 1,
1998.......................................................................................
10.5 -- Agreement of Sublease between Osicom Technologies, Inc. and the Company dated as of
August 1, 1998.............................................................................
10.6 -- Loan and Security Agreement between the Company and Coast Business Credit dated October 11,
1996, as amended...........................................................................
23.1 -- Consent of BDO Seidman, LLP................................................................
23.2 -- Consent of Weinbaum & Yalamanchi...........................................................
*23.3 -- Consent of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel LLP (to be included in Exhibits
5.1 and 8.1)...............................................................................
24.1 -- Power of Attorney (included on signature page).............................................
27.1 -- Financial Data Schedule....................................................................
</TABLE>
- - - - - ------------
* To be filed by amendment.
(b) Financial statement schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are either included in the
financial statements or are not required under the related instructions or are
inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in
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<PAGE>
<PAGE>
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value
of securities offered would not exceed that which was registered) and
any deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in 'Calculation of Registration Fee'
table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement; and
(iv) To reflect the results of this offering.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 above, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the standby underwriting agreement
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Act, the information omitted
from the form of prospectus filed as part of a registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be part of this registration statement as of the time it was declared
effective; and (3) that for the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the results of the
subscription offer, the transactions by the underwriters during the subscription
period, the amount of unsubscribed securities to be purchased by the
underwriters, and the terms of any subsequent reoffering thereof. If any public
offering by the underwriters is to be made on terms differing from those set
forth on the cover page of the prospectus, a post-effective amendment will be
filed to set forth the terms of such offering.
II-3
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Waltham, Massachusetts on August 26,
1998.
NETSILICON, INC.
By: /S/ CORNELIUS PETERSON
...............................
CORNELIUS PETERSON VIII
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Cornelius Peterson VIII, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
revocation, for him or her and in his or her name, place and stead, in any and
all capacities, to sign (i) any and all amendments (including post-effective
amendments) to this Registration Statement and to file the same with all
exhibits thereto, and other documents in connection therewith and (ii) any
registration statement and any and all amendments thereto, relating to the offer
covered hereby filed pursuant to Rule 462(b) under the Securities Act of 1933,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent, full power and authority to do and perform each and every act and
thing requisite and necessary to be done as fully to all intents and purposes as
he or she might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent, or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE(S) DATE
- - - - - ------------------------------------------ --------------------------------------------- ------------------
<S> <C> <C>
/S/ CORNELIUS PETERSON President and Chief Executive Officer and August 26, 1998
......................................... Director
Cornelius Peterson VIII
/S/ DANIEL J. SULLIVAN Vice President -- Finance, Chief Financial August 26, 1998
......................................... Officer
Daniel J. Sullivan
/S/ YECHIAM YEMINI Director August 26, 1998
.........................................
Yechiam Yemini
/S/ LEONARD HECHT Director August 26, 1998
.........................................
Leonard Hecht
/S/ RENN ZAPHIROPOULOS Director August 26, 1998
.........................................
Renn Zaphiropoulos
/S/ BRUCE B. ROESNER Director August 26, 1998
.........................................
Bruce B. Roesner
</TABLE>
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<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- - - - - ----------- ---------------------------------------------------------------------------------------------- --------
<S> <C> <C>
*1.1 -- Form of Standby Underwriting Agreement.....................................................
*3.1 -- Restated Articles of Organization of the Company...........................................
3.3 -- Amended and Restated By-laws of the Company................................................
*5.1 -- Opinion of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel LLP...............................
*8.1 -- Opinion of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel LLP regarding tax matters.........
10.1 -- NETsilicon, Inc. 1998 Incentive and Nonqualified Stock Option Plan.........................
10.2 -- NETsilicon, Inc. 1998 Director Stock Option Plan...........................................
10.3 -- Supply Agreement between Osicom Technologies, Inc. and the Company dated as of May 1,
1998.......................................................................................
10.4 -- Intercompany Agreement between Osicom Technologies, Inc. and the Company dated as of May 1,
1998.......................................................................................
10.5 -- Agreement of Sublease between Osicom Technologies, Inc. and the Company dated as of
August 1, 1998.............................................................................
10.6 -- Loan and Security Agreement between the Company and Coast Business Credit dated October 11,
1996, as amended...........................................................................
23.1 -- Consent of BDO Seidman, LLP................................................................
23.2 -- Consent of Weinbaum & Yalamanchi...........................................................
*23.3 -- Consent of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel LLP (to be included in Exhibits
5.1 and 8.1)...............................................................................
24.1 -- Power of Attorney (included on signature page).............................................
27.1 -- Financial Data Schedule....................................................................
</TABLE>
- - - - - ------------
* To be filed by amendment
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................. 'TM'
The registered trademark symbol shall be expressed as.................. 'r'
<PAGE>
<PAGE>
AMENDED AND RESTATED BY-LAWS
of
NETsilicon, Inc.
ARTICLE I
Stockholders
1. Annual Meeting. The annual meeting of stockholders shall be held on
the second Wednesday in April in each year after 1984 (or if that is a legal
holiday in the place where the meeting is to be held, on the next succeeding
full business day) at the principal office of the corporation in Massachusetts
at 9:00 a.m. unless a different hour or place within the United States is fixed
by the Board of Directors or the President. The purposes for which the annual
meeting is to be held, in addition to those prescribed by law, by the Articles
of Organization or by these By-Laws, may be specified by the Board of Directors
or the President. If no annual meeting has been held on the date fixed above, a
special meeting in lieu thereof may be held or there may be action by written
consent of the stockholders on matters to be voted on at the annual meeting, and
such special meeting or written consent shall have for the purposes of these
By-Laws or otherwise all the force and effect of an annual meeting.
2. Special Meetings. Special meetings of stockholders may be called by
the Chairman of the Board, the President or by two-thirds of the Board of
Directors. Special meetings shall be called by the Clerk, or in case of the
death, absence, incapacity or refusal of the Clerk, by any other officer, upon
written application of one or more stockholders who held at least one-tenth part
in interest of the capital stock entitled to vote at such meeting. The call for
the meeting may be oral or written and shall state the place, date, hour and
purposes of the meeting.
3. Notice of Meetings. A written notice of the place, date and hour of
all meetings of stockholders stating the purposes of the meeting shall be given
by the Clerk or an Assistant Clerk (or other person authorized by these By-Laws
or by law) at least seven days before the meeting to each stockholder entitled
to vote thereat and to each stockholder who, under the Articles of Organization
or under these By-Laws, is entitled to such notice, by leaving such notice with
him or at his residence or usual place of business, or by mailing it, postage
prepaid, and addressed to such stockholder at his address as it appears in the
records of the corporation. A written waiver of notice, executed before or after
a meeting by such stockholder or his attorney hereunto authorized and filed with
the records of the meeting, shall be deemed equivalent to notice of the meeting.
<PAGE>
<PAGE>
4. Quorum. The holders of a one-third in interest of all stock issued,
outstanding and entitled to vote at a meeting shall constitute a quorum, but, if
a quorum is not present, a lesser number may adjourn the meeting from time to
time, and the meeting may be held as adjourned without further notice.
5. Voting and Proxies. Stockholders shall have one vote for each share
of stock entitled to vote owned by them of record according to the books of the
corporation and a proportionate vote for a fractional share, unless otherwise
provided by law or by the Articles of Organization. Stockholders may vote either
in person or by written proxy dated not more than six months before the meeting
named therein. Proxies shall be filed with the Clerk of the meeting, or of any
adjournment thereof, before being voted except as otherwise limited therein,
proxies shall entitle the persons authorized thereby to vote at any adjournment
of such meeting but shall not be valid after final adjournment of such meeting.
A proxy with respect to stock held in the name of two or more persons shall be
valid if executed by one of them unless at or prior to exercise of the proxy the
corporation receives a specific written notice to the contrary from any one of
them. A proxy purporting to be executed by or on behalf of a stockholder shall
be deemed valid unless challenged at or prior to its exercise, and the burden of
proving invalidity shall rest on the challenger.
6. Action at Meeting. When a quorum is present, any matter before the
meeting shall be decided by vote of the holders of a majority of the shares of
stock voting on such matter, except where a larger vote is required by law, by
the Articles of Organization or by these By-Laws. Any election by stockholders
shall be determined by a plurality of the votes case, except where a larger vote
is required by law, by the Articles of Organization or by these By-Laws. No
ballot shall be required for any election unless requested by a stockholder
entitled to vote in the election. The corporation shall not directly or
indirectly vote any share of its own stock.
7. Action without Meeting. Any action to be taken at any annual or
special meeting of stockholders may be taken without a meeting if all
stockholders entitled to vote on the matter consent to the action in writing and
the written consents are filed with the records of the meetings of stockholders.
Such consents shall be treated for all purposes as a vote at a meeting.
ARTICLE II
Directors
1. Powers. The business of the corporation shall be managed by a
Board of Directors who may exercise all the powers of the corporation except
as otherwise provided by law, by the Articles of
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<PAGE>
<PAGE>
Organization or by these By-Laws. In the event of a vacancy in the Board of
Directors, the remaining Directors, except as otherwise provided by law, may
exercise the powers of the full Board until the vacancy is filled.
2. Election and Qualification. The stockholders at each annual meeting
shall fix the number of Directors (which shall be not less than six) and elect
the number of Directors so fixed. No Director need be a stockholder.
3. Nomination of Director by Stockholder. A stockholder may nominate
any person for election as a director only by giving written notice to the Clerk
of the Corporation at its principal office by certified mail, return receipt
requested, of such stockholder's intent no later than sixty (60) days prior to
the scheduled date of an annual meeting of stockholders. Such notice must
include the identity of the person to be nominated, a description of all
agreements, arrangements, or understandings between the nominating stockholder
and the person to be nominated pursuant to which the nomination is to be made or
the nominee is to be elected, and such other information regarding the nominee
as would be required to be included in a proxy statement filed pursuant to the
then current proxy rules of the Securities and Exchange Commission. The Board of
Directors may disqualify any nominee who fails to provide the Corporation with
complete and accurate information as required herein.
4. Vacancies; Reduction of Board. Any vacancy in the Board of
Directors, however occurring, including a vacancy resulting from the enlargement
of the Board of Directors, may be filled by the stockholders or by the Board of
Directors. In lieu of filling any such vacancy the stockholders or the Board of
Directors may reduce the number of Directors, but not to a number less than
three or less than the number of stockholders, if less than three.
5. Enlargement of the Board. The Board of Directors may be enlarged by
the stockholders at any meeting or by vote of a majority of the Directors then
in office.
6. Tenure. Except as otherwise provided by law, by the Articles of
Organization or by these By-Laws, Directors shall hold office until the next
annual meeting of stockholders and until their successors are chosen and
qualified. Any Director may resign by delivering his written resignation to the
corporation,at its principal office or to the President, Clerk or Secretary.
Such resignation shall be effective upon receipt unless it is specified to be
effective at some other time or upon the happening of some other event.
7. Removal. A Director may be removed from office (a) with or without
cause by vote of the holders of a majority of the shares
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<PAGE>
<PAGE>
of stock entitled to vote in the election of Directors, or (b) for cause by vote
of a majority of the Directors then in office. A Director may be removed for
cause only after reasonable notice and opportunity to be heard before the body
proposing to remove him.
8. Meetings. Regular meetings of the Board of Directors may be held
without notice at such time, date and place as the Board of Directors may from
time to time determine. A regular meeting of the Board of Directors may be held
without notice at the same place as the annual meeting of stockholders, or the
special meeting held in lieu thereof, following such meetings of stockholders.
Special meetings of the Board of Directors may be called, orally or in
writing, by the President, Treasurer or two or more Directors, designating the
time, date and place thereof.
9. Notice of Meetings. Notice of the time, date and place of all
special meetings of the Board of Directors shall be given to each Director by
the Secretary, or if there be no Secretary, by the Clerk or Assistant Clerk, or
in case of the death, absence, incapacity or refusal of such persons, by the
officer or one of the Directors calling the meeting. Notice shall be given to
each Director in person or by telephone, or by telegram sent to his business or
home address at least twenty-four hours in advance of the meeting, or by written
notice mailed to his business or home address no later than the fourth day prior
to the meeting. Notice need not be given to any Director if a written waiver of
notice, executed by him before or after the meeting, is filed with the records
of the meeting, or to any Director who attends the meeting without protesting
prior thereto or at its commencement the lack of notice to him. A notice or
waiver of notice of a meeting of the Board of Directors need not specify the
purposes of the meeting.
10. Quorum. At any meeting of the Board of Directors, a majority of the
Directors then in office shall constitute a quorum. Less than a quorum may
adjourn any meeting from time to time and the meeting may be held as adjourned
without further notice.
11. Telephonic Attendance at Meetings. Any or all directors may
participate in a meeting of the Board of Directors or a Committee of the Board
by means of which all persons participating in the meeting are able to hear each
other.
12. Action at Meeting. At any meeting of the Board of Directors at
which a quorum is present, a majority of the Directors present may take any
action on behalf of the Board of Directors, unless a large number is required by
law, by the Articles of Organization of by these By-Laws.
13. Action by Consent. Any action to be taken at any meeting of the
Board of Directors may be taken without a meeting if all the
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<PAGE>
<PAGE>
Directors consent to the action in writing and the written consents are filed
with the records of the meetings of the Board of Directors. Such consents shall
be treated for all purposes as a vote at a meeting of the Board of Directors.
14. Committees. The Board of Directors, by vote of a majority of the
Directors then in office, may elect from its number an Executive Committee or
other committees and may delegate thereto some or all of its powers except those
which by law, by the Articles of Organization, or by these By-Laws may not be
delegated. Except as the Board of Directors may otherwise determine, any such
committee may make rules for the conduct of its business, but unless otherwise
provided by the Board of Directors or in such rules, its business shall be
conducted so far as possible in the same manner as is provided by these By-Laws
for the Board of Directors. All members of such committees shall hold such
offices at the pleasure of the Board of Directors. The Board of Directors may
abolish any such committee at any time. Any committee to which the Board of
Directors delegates any of its powers or duties shall keep records of its
meetings and shall report its action to the Board of Directors. The Board of
Directors shall have power to rescind any action of any committee, but no such
rescission shall have retroactive effect.
15. Audit Committee. In addition to such committees of the Board of
Directors as may be appointed from time to time by the Board pursuant to Section
14 above, an audit committee shall be formed. Such committee shall consist of
two directors. The responsibilities of such committee shall include meeting with
the financial officers of the Corporation, and making recommendations to the
Board of Directors concerning the independent public accountants to be retained
by the Corporation, and the quality and depth of staffing of the accounting and
financial departments of the Corporation.
16. Executive Committee. In connection with the committees of the Board
of Directors as may be appointed from time to time by the Board pursuant to
Section 14 above, an executive committee shall be formed. Such committee shall
consist of two directors. The responsibilities of such committee shall include
review of all financial budgets, performance targets and business plan and
objectives.
ARTICLE III
Officers
1. Enumeration. The officers of the corporation shall consist of a
President, a Treasurer, a Clerk and such other officers, including one or more
Vice Presidents, Assistant
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<PAGE>
<PAGE>
Treasurers, Assistant Clerks or a Secretary, as the Board of Directors may
determine.
2. Election. The President, Treasurer and Clerk shall be elected
annually by the Board of Directors at their first meeting following the annual
meeting of stockholders. Other officers may be chosen by the Board of Directors
at such meeting or at any other meeting.
3. Qualification. No officer need be a stockholder Director. Any two or
more offices may be held by any person. The Clerk shall be a resident of
Massachusetts unless the Corporation has a resident agent appointed for the
purpose of service of process. Any officer may be required by the Board of
Directors to give bond for the faithful performance of his duties in such amount
and with such sureties as the Board of Directors may determine.
4. Tenure. Except as otherwise provided by law, by the Articles of
Organization or by these By-Laws, the President, Treasurer and Clerk shall hold
office until the first meeting of the Board of Directors following the next
annual meeting of stockholders and until their respective successors are chosen
and qualified; and all other officers shall hold office until the first meeting
of the Board of Directors following the next annual meeting of stockholders and
until their successors are chosen and qualified, or for such shorter term as the
Board of Directors may fix at the time such officers are chosen. Any officer may
resign by delivering his written resignation to the corporation at its principal
office or to the President, Clerk or Secretary, and such resignation shall be
effective upon receipt unless it is specified to be effective at some other time
or upon the happening of some other event.
5. Removal. The Board of Directors may remove any officer with or
without cause by a vote of a majority of the entire number of Directors then in
office; provided, that an officer may be removed for cause only after reasonable
notice and opportunity to be heard by the Board of Directors.
6. Vacancies. Any vacancy in any office may be filled for the unexpired
portion of the term by the Board of Directors.
7. President and Vice Presidents. The President shall be the chief
executive officer of the corporation and shall, subject to the direction of the
Board of Directors, have general supervision and control of its business. Unless
otherwise provided by the Board of Directors he shall preside, when present, at
all meetings of stockholders and of the Board of Directors.
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<PAGE>
<PAGE>
Any Vice President shall have such powers and shall perform such duties
as the Board of Directors may from time to time designate.
8. Treasurer and Assistant Treasurers. The Treasurer shall, subject to
the direction of the Board of Directors, have general charge of the financial
affairs of the corporation and shall cause to be kept accurate books of account.
He shall have custody of all funds; securities and valuable documents of the
corporation, except as the Board of Directors may otherwise provide.
Any Assistant Treasurer shall have such powers and perform such duties
as the Board of Directors may from time to time designate.
9. Clerk and Assistant Clerks. The Clerk shall keep a record of the
meetings of stockholders. In case a Secretary is not elected or is absent, the
Clerk or an Assistant Clerk shall keep a record of the meetings of the Board of
Directors. In the absence of the Clerk from any meeting of stockholders, an
Assistant Clerk if one is elected, otherwise a Temporary Clerk designated by the
person presiding at the meeting, shall perform the duties of the Clerk.
10. Secretary. The Secretary, if one is elected, shall keep a record of
the meetings of the Board of Directors. In the absence of the Secretary, the
Clerk and any Assistant Clerk, a Temporary Secretary shall be designated by the
person presiding at such meeting to perform the duties of the Secretary.
11. Other Powers and Duties. Subject to these By-Laws, each officer of
the corporation shall have in addition to the duties and powers specifically set
forth in these By-Laws, such duties and powers as are customarily incident to
his office, and such duties and powers as may be designated from time to time by
the Board of Directors.
ARTICLE IV
Capital Stock
1. Certificates of Stock. Each stockholder shall be entitled to a
certificate of the capital stock of the corporation in such form as may from
time to time be prescribed by the Board of Directors. Such certificate shall be
signed by the President or a Vice President and by the Treasurer or an Assistant
Treasurer. Such signatures may be facsimile if the certificate is signed by a
transfer agent, or by a registrar, other than a Director, officer or employee of
the corporation. In case any officer who has signed or whose facsimile signature
has been placed on such certificate shall have ceased to be such officer before
such certificate is
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<PAGE>
<PAGE>
issued, it may be issued by the corporation with the same effect as if he were
such officer at the time of its issue. Every certificate for shares of stock
which are subject to any restriction on transfer and every certificate issued
when the corporation is authorized to issue more than one class or series of
stock shall contain such legend with respect thereto as is required by law.
2. Transfers. Subject to any restrictions on transfer, shares of stock
may be transferred on the books of the corporation by the surrender to the
corporation or its transfer agent of the certificate therefor properly endorsed
or accompanied by a written assignment and power of attorney properly executed,
with transfer stamps (if necessary) affixed, and with such proof of the
authenticity of signature as the corporation or its transfer agent may
reasonably require.
3. Record Holders. Except as may be otherwise required by law, by the
Articles of Organization or by these By-Laws, the corporation shall be entitled
to treat the record holder of stock as shown on its books as the owner of such
stock for all purposes, including the payment of dividends and the right to vote
with respect thereto, regardless of any transfer, pledge or other disposition of
such stock, until the shares have been transferred on the books of the
corporation in accordance with the requirements of these By-Laws.
It shall be the duty of each stockholder to notify the corporation of
his post office address.
4. Record Date. The Board of Directors may fix in advance a time of not
more than sixty days preceding the date of any meeting of stockholders, or the
date for the payment of any dividend or the making of any distribution to
stockholders, or the last day on which the consent or dissent of stockholders
may be effectively expressed for any purpose, as the record date for determining
the stockholders having the right to notice of and to vote at such meeting, and
any adjournment thereof, or the right to receive such dividend or distribution
or the right to give such consent or dissent. In such case only stockholders of
record on such record date shall have such right, notwithstanding any transfer
of stock on the books of the corporation after the record date. Without fixing
such record date the Board of Directors may for any of such purposes close the
transfer books for all or any part of such period.
If no record date is fixed and the transfer books are not closed, (a)
the record date for determining stockholders having the right to notice of or to
vote at a meeting of stockholders shall be at the close of business on the day
next preceding the day on which notice is given, and (b) the record date for
determining
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stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors acts with respect thereto.
5. Replacement of Certificates. In case of the alleged loss,
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms as the Board of Directors may
prescribe.
6. Issuance of Capital Stock. The Board of Directors shall have the
authority to issue or reserve for issue from time to time the whole or any part
of the capital stock of the corporation which may be authorized from time to
time; to such persons or organizations, for such consideration, whether cash,
property, services or expenses, and on such terms as the Board of Directors may
determine, including without limitation the granting of options, warrants, or
conversion or other rights to subscribe to said capital stock.
ARTICLE V
Miscellaneous Provisions
1. Fiscal Year. Except as otherwise determined by the
Board of Directors, the fiscal year of the corporation shall be the
twelve months ending on January 31.
2. Seal. The Board of Directors shall have power to adopt
and alter the seal of the corporation.
3. Execution of Instruments. All deeds, leases, transfers, contracts,
bonds, notes and other obligations to be entered into by the corporation in the
ordinary course of its business without Director action, may be executed on
behalf of the corporation by the President or the Treasurer.
4. Voting of Securities. Unless otherwise provided by the Board of
Directors, the President or Treasurer may waive notice of and act on behalf of
this corporation, or appoint another person or persons to act as proxy or
attorney in fact for this corporation with or without discretionary power and/or
power of substitution, at any meeting of stockholders or shareholders of any
other corporation or organization, any of whose securities are held by this
corporation.
5. Resident Agent. The Board of Directors may appoint a resident agent
upon whom legal process may be served in any action or proceeding against the
corporation. Said resident agent shall be either an individual who is a resident
of and has a business address in Massachusetts, a corporation organized under
the laws of Massachusetts, or a corporation organized under the laws of any
other state of the United States which has qualified to do business in, and has
an office in, Massachusetts
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6. Corporate Records. The original, or attested copies, of the Articles
of Organization, By-Laws and records of all meetings of the incorporators and
stockholders, and the stock and transfer records, which shall contain the names
of all stockholders and the record address and the amount of stock held by each,
shall be kept in Massachusetts at the principal office of the corporation, or at
an office of its transfer agent, Clerk or resident agent, and shall be open at
all reasonable times to the inspection of any stockholder for any proper
purpose, but not to secure a list of stockholders for the purpose of selling
said list or copies thereof or of using the same for a purpose other than in the
interest of the applicant, as a stockholder, relative to the affairs of the
corporation.
7. Articles of Organization. All references in these ByLaws to the
Articles of Organization shall be deemed to refer to the Articles of
Organization of the corporation, as amended and in effect from time to time.
8. Amendments. The power to make, amend or repeal By-Laws shall be in
the stockholders, provided, however, that the Directors may make, amend or
repeal the By-laws (other than this Section 8) in whole or in part, except with
respect to any provisions thereof which by law, the Articles of Organization or
these By-Laws requires action by the stockholders. Not later than the time of
giving notice of the meeting of stockholders next following the making, amending
or repealing by the Directors of any By-Law, notice thereof stating the
substance of such change shall be given to all stockholders entitled to vote on
amending the By-Laws. Any amendment or repeal of these By-laws by the Directors
and any By-Law adopted by the Directors may be amended or repealed by the
stockholders.
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NETSILICON, INC.
1998 INCENTIVE AND
NON-QUALIFIED STOCK OPTION PLAN
1. PURPOSES OF PLAN. The purposes of the NETsilicon, Inc.1998 Incentive
and NonQualified Stock Option Plan (hereinafter referred to as the "Plan") are
to provide to employees and consultants of NETsilicon, Inc. (hereinafter
referred to as the "Corporation"), as well as employees and consultants
subsidiary or parent corporations which may currently exist or be formed or
acquired in the future, an opportunity for investment in the Corporation's
common stock (hereinafter referred to as the "Shares"), as an inducement for
such individuals to remain with the Corporation, and to encourage them to
increase their efforts to make the Corporation's business more successful.
2. EFFECTIVE DATE AND TERMINATION OF PLAN. The effective date of the
Plan is August 24, 1998, the date on which the Plan was adopted by the
Board of Directors of the Corporation. The Plan shall terminate on, and no
option shall be granted hereunder, after August 24, 2008; provided, however,
that the Board of Directors may at any time prior to that date terminate the
Plan; and provided further that any option granted hereunder prior to the
termination of the Plan shall remain exercisable in accordance with its terms as
then in effect.
3. ADMINISTRATION OF PLAN. The Plan shall be administered by the Board
of Directors of the Corporation. The Board of Directors may, however, to the
extent permissible under the Corporation's Articles of Organization, By-laws and
applicable law, delegate any of its functions under this Plan to a committee of
the Board of Directors or any other committee. Wherever in this Plan the term
"Board of Directors" is used it shall be construed to mean such committee to the
extent that the Board of Directors may have delegated any of its functions to
said committee and only to the extent of any such delegation. The acts of a
majority of the members present at any meeting of the Board of Directors at
which a quorum is present, or acts approved in writing by a majority of the
entire Board, shall be the acts of the Board of Directors for purposes of the
Plan.
4. ELIGIBILITY AND GRANT OF OPTIONS. Subject to the provisions of the
Plan, the Board of Directors shall (i) authorize the granting of incentive stock
options, non-qualified stock options or a combination of incentive stock options
and non-qualified stock options (hereinafter collectively referred to as
"options" unless otherwise stated); (ii) determine and designate from time to
time those employees and consultants (from the group consisting of all employees
and consultants) of the Company to whom options are to be granted and the
number of Shares to be optioned to each employee; (iii) determine the number of
Shares subject to each option; and (iv) determine the time or times when and the
manner in which each option shall be exercisable and the duration of the
exercise period. In determining the eligibility of an individual to receive an
option, as well as in determining the number of Shares to be optioned to any
individual, the Board of Directors shall consider the position and
responsibilities of the employee or consultant, the nature and value to the
Corporation, parent or subsidiary of his services and accomplishments, his
present and potential contribution to the success of the Corporation, parent
or subsidiary, and such other factors as the Board may deem relevant. To be
eligible to receive an incentive stock option or non-qualified stock option an
individual must be an employee of the Corporation, parent or subsidiary. A
Director shall abstain from voting on the grant of any options to himself, his
spouse, his children, grandchildren and parents. The grant of each option
shall be
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confirmed by a Stock Option Agreement (in the form prescribed by the Board of
Directors) which shall be executed by the Corporation and the optionee as
promptly as practicable after such grant. More than one option may be granted
to an individual.
1. Incentive stock options shall be those options which
satisfy the requirements of Section 422 of the Internal Revenue Code of
1986, as amended and which the Board of Directors has specifically
identified as incentive stock options in the Stock Option Agreement
executed by the Corporation and the optionee. In the case of incentive
stock options, the aggregate fair market value, determined at the time
incentive stock options are granted, of the stock with respect to which
the incentive stock options are exercisable for the first time by such
individual during any calendar year (under all such plans the
Corporation may adopt) shall not exceed one hundred thousand dollars
($100,000.00). In the event that an incentive stock option granted
pursuant to the terms of this Plan is granted to an employee who, prior
to the grant, holds more than ten percent (10%) of the total combined
voting power of all classes of stock of the Corporation, its parent or
a subsidiary ("10% shareholder") the option price under such grant
shall be at least one hundred ten percent (110%) of the fair market
value, and such option, by its terms, shall not be exercisable more
than five (5) years from the date of grant.
2. Nothing in the Plan or in any option granted pursuant to
the Plan shall confer on any individual any right to continue in the
employ of the Corporation or any parent or subsidiary or interfere in
any way with the right of the Corporation to terminate his employment
at any time.
5. NUMBER OF SHARES SUBJECT TO OPTIONS. The Board of Directors, prior
to the time options under the Plan become exercisable, shall reserve for the
purposes of the Plan a total of two million (2,000,000) Shares, which Shares may
be either authorized and unissued Shares, or previously issued Shares held in
the treasury of the Corporation, or both. Shares as to which an option granted
under the Plan shall remain unexercised at the expiration or termination
thereof, and Shares subject to options which are cancelled, may be the subject
of the grant of further options. Shares reserved pursuant to this paragraph may
be adjusted to reflect changes in the Corporation's capital structure as
discussed in paragraph 19 hereof.
6. OPTION PRICE. The option price per Share shall be determined in each
case by the Board of Directors and shall not be less than one hundred percent
(100%) (one hundred ten percent (110%) in the case of an incentive stock option
granted to a ten percent (10%) Shareholder) of the fair market value thereof as
determined by the Board by any reasonable method using market quotations on the
date the option is granted.
7. PERIOD OF OPTION AND WHEN EXERCISABLE. No option may be granted
under this Plan whose exercise date is later than ten (10) years after the date
of grant or five (5) years after the date of grant in the case of an incentive
stock option granted to a ten percent (10%) Shareholder. Generally, an option
may be exercised only by the optionee and subject to the rules set forth below
only if, at all times during the period beginning on the date of the granting of
such option and ending with the date of exercise of such option, the optionee is
an employee or consultant of the Corporation, its parent or a subsidiary.
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i. Except as otherwise provided herein, in the
case of an employee who terminates
employment, incentive stock options which
are vested but unexercised as of the date of
termination of employment must be exercised
within three (3) months of termination. In
the case of an employee who is discharged
for cause, as determined in the sole
discretion of the Board of Directors, all
previously vested but unexercised options
shall be forfeited immediately.
ii. In the case of an employee who dies during
the three (3) month period discussed in (i)
above, options which are vested but
unexercised as of the date of termination of
employment must be exercised within twelve
(12) months of death.
iii. Options which are vested but unexercised as
of the date of termination of employment due
to death, must be exercised within twelve
(12) months after the death of an optionee.
iv. In the event that the employee becomes
disabled as defined in Section 22(e) (3) of
the Internal Revenue code of 1986, as
amended, options which are vested but
unexercised as of the date of termination of
employment due to disability must be
exercised within twelve (12) months
following the date of termination of the
optionee's said employment.
v. In the event an optionee's employment is
terminated for any reason (including but not
limited to, voluntary or involuntary
termination or termination resulting from
the death or disability of the optionee),
all unvested options shall be immediately
forfeited.
Notwithstanding the foregoing, options may not be exercised after the
original five (5) or ten (10) year term, Options may be exercised on behalf of
the estate of a former employee by the person or persons entitled to do so under
the optionee's will or, if the optionee shall have failed to make testamentary
disposition of such option or shall have died intestate, by the optionee's legal
representative or representatives. Such person, persons, representative, or
representatives are hereinafter referred to as the "Successors of an Optionee."
8. VESTING. Options granted to a participant shall be exercisable in
accordance with the following schedule unless the Board of Directors otherwise
specifies at the time of grant:
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<TABLE>
<CAPTION>
Cumulative Percentage of Aggregate Number
of Shares of Stock Covered by an Option
Exercise Period which may be Exercised
--------------- ----------------------
<S> <C>
Beginning on the one year anniversary
date from date of grant 50%
Beginning on the second anniversary
date from date of grant 100%*
</TABLE>
*less the number of Shares, if any, previously purchased under the
option. Non-vested options shall be immediately forfeited upon the
termination of employment for any reason. Vested options shall be
forfeited upon the termination of employment as provided in paragraph 7
hereof.
Notwithstanding the foregoing, the Board of Directors or its designees shall
have the right to grant options with shorter vesting schedules or which are
immediately exercisable under the Plan.
9. EXERCISE OF OPTIONS. Subject to Plan restrictions and vesting, an
option may be exercised, and payment in full of the option price made, by an
optionee only by written notice (in the form prescribed by the Board of
Directors) to the Corporation specifying the number of Shares to be so
purchased. Such notice shall state that the option price will be paid in full in
cash (which in the discretion of the Board of Directors may be obtained through
a loan from the Corporation or from a third party and guaranteed by the
Corporation) or other property, in the discretion of the Corporation. If the
Corporation accepts a request to pay in stock of the Corporation in satisfaction
of the exercise price, the fair market value of said stock shall at least equal
the option price, and, in the case of incentive stock options, prior to such
acceptance the Corporation must be furnished with evidence that the acquisition
of said stock and its transfer in payment of the option price satisfies the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended and
other applicable law. As soon as practicable after receipt by the Corporation of
such notice and of payment in full of the option price of all the Shares with
respect to which an option has been exercised, a certificate or certificates
representing such Shares shall be registered (subject to the provisions of
paragraph 16 hereof) in the name of the optionee or the Successors of an
Optionee as defined under this Plan and delivered to the optionee or to the
Successors of an Optionee.
10. MERGER OR ASSET SALE. In the event of a merger of the Company with
or into another corporation or the sale of substantially all of the assets of
the Company, outstanding Options may be assumed or equivalent options may be
substituted by the successor corporation or a Parent or Subsidiary thereof (the
"Successor Corporation"). If an Option is assumed or substituted for, the Option
or equivalent option shall continue to be exercisable as provided in Section 7
hereof for so long as the Optionee serves as an employee of the Successor
Corporation. Following such assumption or substitution, if the Optionee's status
as an employee is terminated other than upon a voluntary resignation by the
Optionee, the Option shall become fully vested and exercisable in accordance
with Section 7 above.
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1. If the Successor Corporation does not assume an outstanding
Option or substitute for it an equivalent option, the Option shall
become fully vested and exercisable, including as to Shares for which
it would not otherwise be exercisable. In such event the Board shall
notify the Optionee that the Option shall be fully exercisable for a
period of thirty (30) days from the date of such notice, and upon the
expiration of such period the Option shall terminate.
. For the purposes of this Section 10, an Option shall be
considered assumed if, following the merger or sale of assets, the
Option confers the right to purchase or receive, for each Share of
Optioned Stock subject to the Option immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration,
the type of consideration chosen by the holders of a majority of the
outstanding Shares). If such consideration received in the merger or
sale of assets is not solely common stock of the successor corporation
or its Parent, the Board may, with the consent of the successor
corporation, provide for the consideration to be received upon the
exercise of the Option, for each Share of Optioned Stock subject to the
Option, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration
received by holders of Common Stock in the merger or sale of assets.
11. EMPLOYER WITHHOLDING. In the case of non-qualified stock options,
the Corporation shall be required to withhold additional income taxes
attributable to that amount which is considered compensation includible in the
optionee's gross income by reason of the exercise of such options. The
Corporation in its discretion shall determine the method and amount of
withholding.
12. EXERCISE BV SUCCESSORS AND PAYMENT IN FULL. An option may be
exercised, and payment in full of the option price made, by the Successors of an
Optionee only by written notice (in the form prescribed by the Board of
Directors) to the Corporation specifying the number of Shares to be purchased.
Such notice shall state that the option price will be paid in full in cash
(which in the discretion of the Board of Directors may be obtained through a
loan from the Corporation or from a third party and guaranteed by the
Corporation), property or stock of the Corporation in conformance with paragraph
9 hereof. As soon as practicable after receipt by the Corporation of such notice
and of payment in full of the option price of all the Shares with respect to
which an option has been exercised, a certificate or certificates representing
such Shares shall be registered (subject to the provisions of paragraph 16
hereof) in the name or names of such Successors of an Optionee and shall be
delivered to him.
13. NON-TRANSFERABILITY OF OPTION. Each option granted under the Plan
shall by its terms be nontransferable by the optionee except by will or the laws
of descent and distribution of the state wherein the optionee is domiciled at
the time of his death. If the Administrator makes an Option transferable, such
Option shall contain such additional terms and conditions, as the Administrator
deems appropriate.
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14. OTHER TERMS OF OPTION. Options granted pursuant to the Plan shall
contain such terms, provisions, and conditions not inconsistent herewith as
shall be determined by the Board of Directors.
15. REGISTRATION OF CERTIFICATES. Certificates representing Shares may
be registered either in the name of the Optionee or in the name or names of the
Successors of an Optionee. Designation of the appropriate form of registration
of certificates shall be made in the written notice given to the Corporation
upon exercise of an option.
16. LISTING AND REGISTRATION OF SHARES. If at any time the Board of
Directors of the Corporation shall determine, in its discretion, that the
listing, registration, or qualification of any of the Shares subject to options
under the Plan upon any securities exchange or under any state or federal law,
or the consent or approval of any governmental regulatory body is necessary or
desirable as a condition of or in connection with the granting of options or the
purchase or issue of Shares thereunder, no further options may be granted and
outstanding options may not be exercised in whole or in part unless and until
such listing, registration, qualification, consent, or approval shall have been
effected or obtained free of any conditions not acceptable to the Board of
Directors. The Board of Directors shall have the authority to cause the
Corporation at its expense to take any action related to the Plan which may be
required in connection with such listing, registration, qualification, consent,
or approval. The Board of Directors may require that any person exercising an
option hereunder shall make such representations and agreements and furnish such
information as it deems appropriate to assure compliance with the foregoing or
any other applicable legal requirement.
17. INTERPRETATION AND AMENDMENTS. The Board of Directors may make such
rules and regulations and establish such procedure for the administration of the
Plan as it deems ap propriate. In the event of any dispute or disagreements as
to the interpretation of this Plan or of any rule, regulation, or procedure, or
as to any question, right or obligation arising from or related to the Plan, the
decision of the Board of Directors shall be final and binding upon all persons.
The Board of Directors may amend this Plan as it shall deem advisable. However,
in no event shall any such amendment adversely affect the rights of an optionee
under any existing stock option agreement without the consent of such optionee.
In addition, no amendment may, without further approval of the shareholders of
the Company within twelve months before or after the date on which such
amendment was adopted, (a) increase the total number of shares which may be made
subject of options granted under the 1998 Plan, (b) change the manner of
determining the option price, (c) change the criteria of determining which
employees are eligible to receive options, (d) extend the period during which
options may be granted or exercised, or (e) withdraw the administration of the
1998 Plan from the Board of Directors.
18. INDEMNIFICATION AND EXCULPATION.
1. Each person who is or shall have been a member of the Board
of Directors shall be indemnified and held harmless by the Corporation
against and from any and all loss, cost, liability, or expense that may
be imposed upon or reasonably incurred by him in connection with or
resulting from any claim, action, suit, or proceeding to which he may
be or become a party or in which he may be or become involved by reason
of any action taken or failure to act under the Plan and against and
from any and all amounts paid by him in
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settlement thereof (with the Corporation's written approval) or paid by
him in satisfaction of a judgment in any such action, suit, or
proceeding, except a judgment in favor of the Corporation based upon a
finding of his lack of good faith; subject, however, to the condition
that upon the institution of any claim, action, suit, or proceeding
against him, he shall in writing give the Corporation an opportunity,
at its own expense, to handle and defend the same before he undertakes
to handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other right to which such
person may be entitled as a matter of law or otherwise, or any power
that the Corporation may have to indemnify him or hold him harmless.
2. Each member of the Board of Directors, and each officer and
employee of the Corporation shall be fully justified in relying or
acting in good faith upon any information furnished in connection with
the administration of the Plan by any appropriate person or persons
other than himself. In no event shall any person who is or shall have
been a member of the Board of Directors, or an officer or employee of
the Corporation be held liable for any determination made or other
action taken or any omission to act in reliance upon any such
information, or for any action (including the furnishing of
information) taken or any failure to act, if in good faith.
19. CHANGES IN CAPITAL STRUCTURE. In the event that a dividend shall be
declared upon the Shares payable in Shares, the number of shares then subject to
any option outstanding under the Plan and the number of Shares reserved for the
grant of options pursuant to the Plan but not yet subject to option shall be
adjusted by adding to each such Share the number of Shares which would be
distributable in respect thereof if such Shares had been outstanding on the date
fixed for determining the shareholders of the Corporation entitled to receive
such Share dividend. In the event that the outstanding Shares shall be changed
into or exchanged for a different number of Shares or other securities of the
Corporation or of another corporation, whether through reorganization,
recapitalization, split-up, combination of shares, merger, or consolidation,
then there shall be substituted for each Share subject to any such option and
for each Share reserved for the grant of options pursuant to the Plan but not
yet subject to option the number and kind of Shares or other securities into
which each outstanding Share shall have been so changed or for which each such
share shall have been exchanged. In the event there shall be any change, other
than as specified above in this paragraph, in the number or kind of outstanding
Shares or of any shares or other securities into which such Shares shall have
been changed or for which they shall have been exchanged, then if the Board of
Directors shall in its sole discretion determine that such change equitably
requires an adjustment in the number or kind of Shares theretofore reserved for
the grant of options pursuant to the Plan but not yet subject to option and of
the Shares then subject to an option or options. such adjustments shall be made
by the Board of Directors and shall be effective and binding for all purposes of
the Plan and of each option outstanding thereunder. In the case of any such
substitution or adjustment as provided for in this paragraph, the aggregate
option exercise price set forth for all outstanding options for all Shares
covered thereby prior to such substitution or adjustment will be the option
exercise price for all shares or other securities which shall have been adjusted
pursuant to this paragraph. No adjustment or substitution provided for in this
paragraph shall require the Corporation to sell a fractional Share, and the
total substitution or adjustment with
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respect to each outstanding option shall be limited accordingly. Upon any
adjustment made pursuant to this paragraph, the Corporation will, upon request,
deliver to the optionee or to his successors a certificate setting forth the
option price thereafter in effect and the number and kind of shares or other
securities thereafter purchasable on the exercise of the option.
20. NOTICES. All notices under the Plan shall be in writing, and if to
the Corporation, shall be delivered. to the Treasurer of the Corporation or
mailed to its principal office, addressed to the attention of the Treasurer; and
if to the optionee, shall be delivered personally or mailed to the optionee at
the address appearing in the payroll records of the Corporation. Such addresses
may be changed at any time by written notice to the other party.
21. CORPORATION'S OPTION. As of the date of the adoption of the Plan,
the Corporation intends to commence an initial public offering of shares of its
Common Stock. Until such time as such offering is completed, the Corporation
shall have the right to purchase from any optionee (or his or her successor,
assignee or transferee) shares of common stock issued upon the exercise of
options granted hereunder for a price per share equal to the exercise price per
share paid for such shares.
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NETSILICON, INC.
1998 DIRECTOR STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 1998 Director Stock Option
Plan are to attract and retain the best available personnel for service as
Outside Directors (as defined herein) of the Company, to provide additional
incentive to the Outside Directors of the Company to serve as Directors, and to
encourage their continued service on the Board.
All options granted hereunder shall be nonstatutory stock
options.
1. Definitions. As used herein, the following definitions
shall apply:
a. "Board" means the Board of Directors of the
Company.
b. "Code" means the Internal Revenue Code of 1986, as
amended.
c. "Common Stock" means the Common Stock of the
Company.
d. "Company" means NETsilicon, Inc., a Massachusetts
corporation.
e. "Director" means a member of the Board.
f. "Employee" means any person, including officers
and Directors, employed by the Company or any Parent or Subsidiary of the
Company. The payment of a Director's fee by the Company shall not be sufficient
in and of itself to constitute "employment" by the Company.
g. "Exchange Act" means the Securities Exchange Act
of 1934, as amended.
h. "Fair Market Value" means, as of any date, the
value of Common Stock determined as follows:
(i) If the Common Stock is listed on any
established stock exchange or a national market system, including without
limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The
Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted
by a recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the date of determination, as
reported in The Wall Street Journal or such other source as the Board deems
reliable, or;
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(iii) In the absence of an established market
for the Common Stock, the Fair Market Value thereof shall be determined in good
faith by the Board.
i. "Inside Director" means a Director who is an
Employee.
j. "Option" means a stock option granted pursuant to
the Plan.
k. "Optioned Stock" means the Common Stock subject to
an Option.
l. "Optionee" means a Director who holds an Option.
m. "Outside Director" means a Director who is not an
Employee.
n. "Parent" means a "parent corporation," whether now
or hereafter existing, as defined in Section 424(e) of the Code.
o. "Plan" means this 1998 Director Stock Option Plan.
p. "Share" means a share of the Common Stock, as
adjusted in accordance with Section 10 of the Plan.
q. "Subsidiary" means a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 424(f) of the Internal
Revenue Code of 1986.
2. Stock Subject to the Plan. Subject to the provisions of
Section 10 of the Plan, the maximum aggregate number of Shares which may be
optionized and sold under the Plan is 400,000 Shares of Common Stock (the
"Pool"). The Shares may be authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without
having been exercised in full, the unpurchased Shares which were subject thereto
shall become available for future grant or sale under the Plan (unless the Plan
has terminated). Shares that have actually been issued under the Plan shall not
be returned to the Plan and shall not become available for future distribution
under the Plan.
3. Administration and Grants of Options under the Plan.
a. Procedure for Grants. All grants of Options to
Outside Directors under this Plan shall be automatic and nondiscretionary and
shall be made strictly in accordance with the following provisions:
(i) No person shall have any discretion to
select which Outside Directors shall be granted Options or to determine the
number of Shares to be covered by Options granted to Outside Directors.
- 2 -
<PAGE>
<PAGE>
(ii) Each Outside Director shall be
automatically granted an Option to purchase 25,000 Shares on the effective date
of the Initial Public Offering of the Company's common stock or the date on
which such person first becomes an Outside Director, whether through election by
the shareholders of the Company or appointment by the Board to fill a vacancy;
provided, however, that an Inside Director who ceases to be an Inside Director
but who remains a Director shall not receive a First Option.
(iii) Each Outside Director shall be
automatically granted an Option to purchase 25,000 Shares on the day following
the date of the Company's annual stock holder's meeting each year, provided he
or she is then an Outside Director.
(iv) Notwithstanding the provisions of
subsections (ii) and (iii) hereof, any exercise of an Option granted before the
Company has obtained stockholder approval of the Plan in accordance with Section
16 hereof shall be conditioned upon obtaining such stockholder approval of the
Plan in accordance with Section 16 hereof.
(v) The terms of each Option granted
hereunder shall be as follows:
(a) the term of the Option shall be ten
(10) years.
(b) the exercise price per Share shall
be 100% of the Fair Market Value per Share on the date of grant of the Option.
In the event that the date of grant of the Option is not a trading day, the
exercise price per Share shall be the Fair Market Value on the next trading day
immediately following the date of grant of the Option.
(c) subject to Section 10 hereof, the
Option shall be six (6) months from the date of grant exercisable as to 50% of
the Shares subject thereto and shall become exercisable as to the balance of the
Shares subject thereto twelve (12) months from the date of grant, provided that
the Optionee continues to serve as a Director on such dates.
(vi) In the event that any Option granted
under the Plan would cause the number of Shares subject to outstanding Options
plus the number of Shares previously purchased under Options to exceed the Pool,
then the remaining Shares available for Option grant shall be granted under
Options to the Outside Directors on a pro rata basis. No further grants shall be
made until such time, if any, as additional Shares become available for grant
under the Plan through action of the Board or the stockholders to increase the
number of Shares which may be issued under the Plan or through cancellation or
expiration of Options previously granted hereunder.
4. Eligibility. Options may be granted only to Outside
Directors. All Options shall be automatically granted in accordance with the
terms set forth in Section 4 hereof.
The Plan shall not confer upon any Optionee any right with
respect to continuation of service as a Director or nomination to serve as a
Director, nor shall it interfere in any way with
- 3 -
<PAGE>
<PAGE>
any rights which the Director or the Company may have to terminate the
Director's relationship with the Company at any time.
5. Term of Plan. The Plan shall become effective upon the
earlier to occur of its adoption by the Board or its approval by the
stockholders of the Company as described in Section 16 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 11 of the Plan.
6. Form of Consideration. The consideration to be paid for
the Shares to be issued upon exercise of an Option, including the method of
payment, shall consist of (i) cash, (ii) check, (iii) other shares which (x) in
the case of Shares acquired upon exercise of an Option, have been owned by the
Optionee for more than six (6) months on the date of surrender, and (y) have a
Fair Market Value on the date of surrender equal to the aggregate exercise price
of the Shares as to which said Option shall be exercised, (iv) consideration
received by the Company under a cashless exercise program implemented by the
Company in connection with the Plan, or (v) any combination of the foregoing
methods of payment.
7. Exercise of Option.
a. Procedure for Exercise; Rights as a Stockholder.
Any Option granted hereunder shall be exercisable at such times as are set forth
in Section 4 hereof; provided, however, that no Options shall be exercisable
until stockholder approval of the Plan in accordance with Section 16 hereof has
been obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received by
the Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
b. Termination of Continuous Status as a Director.
Subject to Section 10 hereof, in the event an Optionee's status as a Director
terminates (other than upon the Optionee's
- 4 -
<PAGE>
<PAGE>
death or total and permanent disability (as defined in Section 22(e)(3) Of the
Code)), the Optionee may thereafter exercise his or her Option, but only to the
extent that the Optionee was entitled to exercise it on the date of such
termination (but in no event later than the expiration of its ten (10 ) year
term). To the extent that the Optionee was not entitled to exercise an Option on
the date of such termination, and to the extent that the Optionee does not
exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate.
c. Disability of Optionee. In the event Optionee's
status as a Director terminates as a result of total and permanent disability
(as defined in Section 22(e)(3) of the Code), the Optionee may thereafter
exercise his or her Option, but only to the extent that the Optionee was
entitled to exercise it on the date of such termination (but in no event later
than the expiration of its ten (10) year term). To the extent that the Optionee
was not entitled to exercise an Option on the date of termination, or if he or
she does not exercise such Option (to the extent otherwise so entitled) within
the time specified herein, the Option shall terminate.
d. Death of Optionee. In the event of an Optionee's
death, the Optionee's estate or a person who acquired the right to exercise the
Option by bequest or inheritance may exercise the Option, but only to the extent
that the Optionee was entitled to exercise it on the date of death (but in no
event later than the expiration of its ten (10) year term). To the extent that
the Optionee was not entitled to exercise an Option on the date of death, and to
the extent that the Optionee's estate or a person who acquired the right to
exercise such Option does not exercise such Option (to the extent otherwise to
entitled) within the time specified herein, the Option shall terminate.
8. Non-Transferability of Options. The Option may not be
sold pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee.
9. Adjustments Upon Changes in Capitalization,
Dissolution, Merger or Asset Sale.
a. Changes in Capitalization. Subject to any required
action by the stockholders of the Company, the number of Shares covered by each
Option, the number of Shares which have been authorized for issuance under the
Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per Share covered by each such outstanding Option, and the number of
Shares issuable pursuant to the automatic grant provisions of Section 4 hereof
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of Shares
subject to an Option.
- 5 -
<PAGE>
<PAGE>
b. Dissolution or Liquidation. In the event of the
proposed dissolution or liquidation of the Company, to the extent that an Option
has not been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
c. Merger or Asset Sale. In the event of a merger of
the Company with or into another corporation or the sale of substantially all of
the assets of the Company, outstanding Options may be assumed or equivalent
options may be substituted by the successor corporation or a Parent or
Subsidiary thereof (the "Successor Corporation"). If an Option is assumed or
substituted for, the Option or equivalent option shall continue to be
exercisable as provided in Section 4 hereof for so long as the Optionee serves
as a Director or a director of the Successor Corporation. Following such
assumption or substitution, if the Optionee's status as a Director or director
of the Successor Corporation, as applicable, is terminated other than upon a
voluntary resignation by the Optionee, the Option or option shall become fully
exercisable, including as to Shares for which it would not otherwise be
exercisable. Thereafter, the Option or option shall remain exercisable in
accordance with Section 8(c) through (d) above.
If the Successor Corporation does not assume an
outstanding Option or substitute for it an equivalent option, the Option shall
become fully vested and exercisable, including as to Shares for which it would
not otherwise be exercisable. In such event the Board shall notify the Optionee
that the Option shall be fully exercisable for a period of thirty (30) days from
the date of such notice, and upon the expiration of such period the Option shall
terminate.
For the purposes of this Section 10(c), an Option shall
be considered assumed if, following the merger or sale of assets, the Option
confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares). If such consideration received in the merger or sale of
assets is not solely common stock of the successor corporation or its Parent,
the Board may, with the consent of the successor corporation, provide for the
consideration to be received upon the exercise of the Option, for each Share of
Optioned Stock subject to the Option, to be solely common stock of the successor
corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
10. Amendment and Termination of the Plan.
a. Amendment and Termination. The Board may at any
time amend, alter, suspend, or discontinue the Plan, but no amendment,
alteration, suspension, or discontinuation shall be made which would impair the
rights of any Optionee under any grant theretofore made, without his or her
consent. In addition, to the extent necessary and desirable to comply with any
applicable law, regulation or stock exchange rule, the Company shall obtain
stockholder approval of any Plan amendment in such a manner and to such a degree
as required.
- 6 -
<PAGE>
<PAGE>
b. Effect of Amendment or Termination. Any such
amendment or termination of the Plan shall not affect Options already granted
and such Options shall remain in full force and effect as if this Plan had not
been amended or terminated.
11. Time of Granting Options. The date of grant of an
Option shall, for all purposes, be the date determined in accordance with
Section 4 hereof.
12. Conditions Upon Issuance of Shares. Shares shall not be
issued pursuant to the exercise of an Option unless the exercise of such Option
and the issuance and delivery of such Shares pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the
Company may require the person exercising such Option to represent and warrant
at the time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares,
if, in the opinion of counsel for the Company, such a representation is required
by any of the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
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.
13. Reservation of Shares. The Company, during the term of
this Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan.
14. Option Agreement. Options shall be evidenced by written
option agreements in such form as the Board shall approve.
15. Stockholder Approval. Continuance of the Plan shall be
subject to approval by the stockholders of the Company at or prior to the first
annual meeting of stockholders held subsequent to the granting of an Option
hereunder. Such stockholder approval shall be obtained in the degree and manner
required under applicable state and federal law and any stock exchange rules.
- 7 -
<PAGE>
<PAGE>
SUPPLY AGREEMENT
This Agreement is dated as of May 1, 1998, by and between NETsilicon,
Inc., having an address at 411 Waverley Oaks Road, Waltham, MA ("NSI"), and
Osicom Technologies, Inc., having an address at 2800 28th Street, Santa Monica,
CA ("Osicom").
1. Term: The term of this Agreement shall be five (5) years from the
date set forth above, and may be terminated only upon the mutual consent of both
parties hereto.
2. Agreement to Supply: For as long as this Agreement or any renewal or
extension thereof is in effect, Osicom shall purchase from NSI, and NSI shall
sell to Osicom, the products identified on Schedule A attached hereto and as
revised by mutual agreement from time to time ("NSI Products"), for resale to
present and future customers of Osicom. For as long as this Agreement or any
renewal or extension thereof is in effect, Osicom (or any subsidiary of Osicom)
shall manufacture NSI Products on behalf of NSI as long as they as price
competitive.
3. Prices:
A. Osicom shall pay to NSI for all NSI Products delivered
hereunder an amount equal to the price as identified on Schedule A attached
hereto. The price for the NSI Product shall increase or decrease in proportion
to any increase or decrease, as the case may be, in NSI's Landed Costs, as
hereinafter defined, such that NSI shall maintain the same gross margin
percentage for each unit, provided, however, that NSI shall not offer to sell or
sell any NSI Product at a lower price or upon more favorable terms than the
price and terms offered to Osicom. "Landed Costs" shall be equal to costs to NSI
from their supplier.
B. NSI shall pay Osicom for all NSI Products manufactured
by Osicom for NSI at Osicom's best price, which will be determined by the
parties from time to time.
4. Invoicing and Payment: Each party shall invoice the other for their
respective products, indicating in each case a shipping date and billing date.
Payment shall be due on a net cash basis thirty (30) days from the billing date.
5. Delivery of Products: Each party will provide products in accordance
with their usual and customary methods. Orders will be received in accordance
with each party's usual and customary procedures for accepting orders, which
procedures have been communicated to by NSI to Osicom and by Osicom to NSI and
may change from time to time in either party's reasonable discretion. In the
event that either party orders any products in quantities substantially greater
or less than the quantities normally ordered, such order must be placed in time
as will reasonably permit the supplying party to fulfill that order (if greater)
or to dispose of any excess quantity of product (if lesser) which the supplying
party may have obtained.
6. Force Majeure: Each party shall not be liable for any failure to
deliver products if such failure has been occasioned by the occurrence of any
act of war, fire, accident, casualty, embargo, strike, civil commotion,
government prohibitions or pre-emptions, failure of any supplier to supply
necessary products or ingredients, labor difficulties, equipment malfunction,
shortages of ingredients, fuel or energy, or any other circumstance beyond such
party's control.
<PAGE>
<PAGE>
7. Miscellaneous:
7.1 Notices given under this Agreement shall be in writing, and shall
be deemed given when delivered by a recognized overnight service, or three (3)
days after deposit by certified mail, return receipt requested, addressed to a
party at the address given above, or to another address specified by a party.
7.2 Each party (the "Indemnifying Party") agrees to protect, indemnify,
and hold the other, its successors and assigns, harmless from and against any
and all losses, liabilities, claims damages and expenses, including attorney's
fees, which Indemnifying Party may hereinafter incur, suffer or be required to
pay, and which arise out of Indemnifying Party's negligence or willful
misconduct.
7.3 This Agreement shall be governed by Massachusetts law. The parties
consent to exclusive jurisdiction of courts sitting in Massachusetts for all
disputes arising under this Agreement. Service of process is effective if served
in the manner a notice may be given under this Agreement.
7.4 Neither NSI nor Osicom shall not assign this Agreement to any other
person or entity, without the prior written consent of the other party, which
consent shall not be unreasonably withheld, provided, however, that Osicom may
assign all or any part of this Agreement to any of its subsidiaries without the
prior consent of NSI.
7.5 This Agreement contains the entire understanding of the parties and
may be changed or waived only in writing. Waiver of a breach of this Agreement
shall not operate as a waiver of any other breach. This Agreement is binding
upon and inures to the benefit of the parties hereto and their successors and
assigns. Invalidity of any provision of this Agreement shall not affect other
provisions.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first set forth above.
Attest: NET SILICON, INC.
By: /s/ Cornelius Peterson
__________________________ _____________________________
Cornelius Peterson, President
OSICOM TECHNOLOGIES, INC.
By: /s/ Christopher E. Sue
__________________________ _____________________________
Christopher E. Sue,
Vice-President of Finance
<PAGE>
<PAGE>
Schedule A
Products
<TABLE>
<CAPTION>
PRODUCTS PRICE
--------------------------------------------------------------
<S> <C>
Osicom Purchases from NETsilicon
NET+ARM chips $19.00
Novell runtime licenses $3.50
</TABLE>
3
<PAGE>
<PAGE>
INTERCOMPANY AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of the 1st
day of May, 1998, by and between NETsilicon, Inc., having an address at 411
Waverley Oaks Road, Waltham, MA ("NSI") and Osicom Technologies, Inc., having an
address at 2800 28th Street, Santa Monica, CA ("Osicom").
W I T N E S S E T H:
WHEREAS, NSI is currently a wholly owned subsidiary of Osicom;
WHEREAS, NSI and Osicom are in the process of registering NSI's common
shares with the U.S. Securities and Exchange Commission for the purposes of
selling rights to purchase NSI's common shares to the public (the "Rights
Offering");
WHEREAS, after the Offering, Osicom will continue to be a substantial
stockholder of NSI;
WHEREAS, the parties deem it advisable at this time to provide for the
terms and conditions of the business relationship between the parties after the
Rights Offering;
NOW, THEREFORE, in consideration of the premises and mutual
undertakings herein, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged by each of the parties hereto,
the undersigned parties hereby agree as follows:
1. NSI hereby assigns, and Osicom hereby accepts the assignment of, the
right to manufacture and market those products, commonly referred to by
the parties as commercial products, listed on Schedule A attached
hereto (the "Assigned Products").
2. NSI hereby assigns all of its right, title and interest in the
following assets to Osicom:
a. The names, addresses, phone numbers, principal contacts and sales
history for the period through the close of the month immediately
preceding the Closing Date with respect to all of NSI's
commercial customers and all of NSI's sales leads and prospect
lists together with copies of all relevant documents such as
customer contracts, sales records, agreements, and the like;
b. All accounts receivable with respect to the Assigned Products
accruing after July 31, 1998;
c. NSI's inventory of Assigned Products. Osicom shall have the
option to purchase from NSI all of NSI inventory of Assigned
Products existing on July 31, 1998 at a price equal to NSI's cost
of manufacturing, developing and shipping such Assigned Products.
NSI shall ship such Assigned Products inventory to Osicom at such
a location as Osicom shall designate in such quantities and at
such time as shall be requested by Osicom. Osicom will pay NSI on
terms available to its most favored customers within thirty (30)
days after the end of each calendar month for those Assigned
Products which have been shipped to Osicom by NSI during such
previous calendar month. No later than nine (9) months after the
effective date of this
<PAGE>
<PAGE>
Agreement, both parties will reconcile any remaining monies owed
to NSI by Osicom, and Osicom will pay NSI any balance due.
d. Furniture, fixtures, equipment and computer software as set forth
on the attached Schedule B.
3. Osicom hereby assigns, and NSI hereby assumes, all of Osicom's right,
title and interest in and to the trademark "NET+ARM", including, but
not limited to those rights arising from a Trademark License Agreement
dated July 14, 1998 by and between Osicom and ARM Limited. Osicom shall
use its best efforts to obtain ARM Limited's consent to assignment of
the Trademark Licensing Agreement prior to the commencement of the
Rights Offering.
4. The parties acknowledge that Osicom is owed by NSI the approximate sum
of $4,100,000 arising from the parties prior parent/subsidiary
relationship. NSI agrees to pay all indebtedness in full to Osicom upon
completion of the Rights Offering .
5. During the term of this Agreement, NSI shall provide to Osicom
manufacturing and engineering support with respect to the Assigned
Products on an "as needed" basis. Osicom will pay NSI for such support
at a rate of one hundred and ten percent (110%) of the actual labor
costs to NSI. The costs of any materials provided to Osicom by NSI with
respect to manufacturing support provided by NSI shall be reimbursed by
Osicom at a rate of one-hundred and ten (110%) of the actual cost of
material incurred by NSI. NSI will invoice Osicom quarterly for NSI
support and materials. Payment shall be due from Osicom to NSI on a net
cash basis thirty (30) days from the billing date.
6. The parties acknowledge that in connection with the assignment of the
Assigned Products, certain mutually agreeable employees will cease
performing services for NSI and shall thereafter perform services for
Osicom (the "Transferred Employees"). Transferred Employees shall be
transferred to Osicom's payroll as of July 31, 1998. However,
Transferred Employees shall remain on NSI's health insurance plan. NSI
will forward an invoice each month to Osicom which shall indicate the
amount of premium payment made by NSI with respect to such Transferred
Employees as well as documentation of their continued coverage under
NSI's health plan. Payment shall be due from Osicom to NSI on a net
cash basis thirty (30) days from the billing date. Notwithstanding
anything to the contrary in this Agreement, the terms of this Section 5
shall survive the termination of this Agreement.
7. Osicom shall provide to NSI certain MIS computer services at NSI place
of business at Waltham, Massachusetts, including, without limitation,
the maintenance of data lines. In consideration for such services, NSI
shall pay to Osicom the sum of one thousand dollars ($1,000) per month,
payable on the first day of each calendar month as long as NSI requires
such services.
8. Osicom and NSI agree that Osicom shall have co-ownership of the
intellectual property listed on Schedule C attached hereto (the
"Intellectual Property"), completed as of the commencement of the
Rights Offering, for Osicom's product development needs, provided,
however, that the Intellectual Property shall become a part of a
value-added Osicom product provided, further that Osicom shall not
resell, license, transfer or assign to any third party all or any part
of the Intellectual Property or any derivative thereof.
9. The term of this Agreement shall be for a period of twelve (12) months
from the date set forth above. This Agreement may be sooner terminated
only upon the written agreement of both parties hereto.
<PAGE>
<PAGE>
10. The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provisions
of this Agreement, which shall remain in full force and effect.
11. Notices given under this Agreement shall be in writing, and shall be
deemed given when delivered by a recognized overnight service, or three
(3) days after deposit by certified mail, return receipt requested,
addressed to a party at the address given above, or to another address
specified by a party.
12. This Agreement shall be governed by Massachusetts law. The parties
consent to exclusive jurisdiction of courts sitting in Massachusetts
for all disputes arising under this Agreement. Service of process is
effective if served in the manner a notice may be given under this
Agreement.
13. Neither NSI nor Osicom shall assign this Agreement to any other person
or entity, without the prior written consent of the other party,
provided, however, that Osicom may assign all or part of this Agreement
to any of its subsidiaries without the prior consent of NSI.
14. This Agreement contains the entire understanding of the parties and may
be changed or waived only in writing. Waiver of a breach of this
Agreement shall not operate as a waiver of any other breach. This
Agreement is binding upon and inures to the benefit of the parties
hereto and their successors and assigns. Invalidity of any provision of
this Agreement shall not affect other provisions.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first set forth above
Attest: NET SILICON, INC.
By: /s/ Cornelius Peterson
__________________________ _________________________________
Cornelius Peterson, President
OSICOM TECHNOLOGIES, INC.
By: /s/ Christopher E. Sue
__________________________ _____________________________
Christopher E. Sue,
Vice-President of Finance
<PAGE>
<PAGE>
Schedule A
Commercial Products assigned to Osicom
ALL MODELS OF THE FOLLOWING
NETPrint
JETXPrint
Netcommuter
<PAGE>
<PAGE>
Schedule B
Furniture, fixtures and equipment assigned to Osicom-leased or owned.
All such equipment whether owned by NSI or leased located in Suite 241 now
occupied by Osicom commercial sales at 411 Waverley Oaks Park.
All software currently in use in Suite 241 as NSI has title therein.
<PAGE>
<PAGE>
Schedule C
NSI Intellectual Property available for Osicom use
All designs of products of NSI as of the date of commencement of the Rights
Offering.
The deliverables for hardware products of NSI are verilog design
models, CAD drawings for artwork, schematics for logic design, and
bills of materials.
The deliverables for software products are source code relating to
software and firmware.
All other hardware, software, firmware, documentation, bills of
material, test plans necessary for Osicom to either design, modify or
manufacture the components produced or to be produced by NSI.
<PAGE>
<PAGE>
AGREEMENT OF SUBLEASE
Agreement of Sublease ("Sublease") made this 1st day of August, 1999
between NETsilicon, Inc., having an office at 411 Waverly Oaks Road, Waltham, MA
("Sublessor") and Osicom Technologies, Inc., having an office at 2800 28th
Street, Santa Monica, CA ("Sublessee").
W I T N E S S E T H:
WHEREAS, Sublessor represents and warrants that it has leased 36,000
square feet of the building located at 411 Waverly Oaks Road, Waltham, MA
("Premises") pursuant to a Lease dated July 1991 and Amendment to Commercial
Lease dated August 8, 1997 between Sublessor, as tenant, and Duffy Bros.
Construction, Inc. as lessor ("Lessor"), a copy of which lease as amended
("Lease") has been reviewed by Sublessee and is annexed hereto as Exhibit "A";
and
WHEREAS, Sublessee desires to sublease from Sublessor 6,000 square feet
of space within the Premises ("Subleased Premises"); and
NOW, THEREFORE, in consideration of the Premises and other good and
valuable consideration, it is hereby mutually covenanted and agreed as follows:
1. Term.
(a) Sublessor hereby subleases the Subleased Premises to
Sublessee and Sublessee hereby subleases the Subleased Premises from Sublessor
upon and subject to the terms, covenants, rentals
<PAGE>
<PAGE>
and conditions herein set forth for a term commencing on August 1, 1998 and
expiring on August 1, 1999 provided, however, if the Lease shall expire prior
to said date for any reason then this Sublease shall expire on the date that the
Lease shall expire.
(b) Sublessor hereby grants to Sublessee an option to extend the
term of this Sublease for successive one year terms as long as the Lease shall
be in effect. The option must be exercised in writing delivered to Sublessor by
certified mail, return receipt requested, not less than one month before the
expiration of the term of this Sublease. Time is of the essence with respect to
this requirement. The exercise of the option is conditional in that it will be
deemed waived in the event that Sublessee defaults in the performance of any
Lease obligation between the exercise of the option and the commencement of the
extended term. All of the terms and conditions of the Lease shall apply during
the extended term or terms.
2. Rent.
(a) The annual minimum rent reserved under this Sublease for the
term hereof shall be in the amount of Eighty-Eight Thousand ($88,000.00) Dollars
which shall be due and payable on October 1, 1998, January 1, 1999, April 1,
1999, and July 1, 1999 in installments of Twenty-Two Thousand ($22,000.00)
Dollars each.
(b) The parties acknowledge that the Sublessor shall be
responsible, at its sole cost and expense, to pay all sums due and payable by
Tenant to Lessor under the Lease including but not limited to annual minimum
rent, real estate taxes, utilities, common area maintenance, insurance and
common water and sewer. Sublessee agrees at its sole cost and expense to have
all utilities which are
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separately metered to the Subleased Premises placed in its own name and to
timely pay all bills rendered by such utility company.
(c) All annual minimum rent, additional rent and other charges
shall be paid to Sublessor at its office first above written or such other place
as Sublessor shall designate.
3. Use. Sublessee shall use and occupy the Subleased Premises for
general office purposes.
4. Incorporation of Lease and Terms.
(a) Except as herein otherwise expressly provided, all of the
terms of the Lease as they pertain to the Premises are hereby incorporated into
and made a part of this Sublease as if stated at length herein, and Sublessee
accepts this Sublease subject to, and hereby agrees to be bound by all of the
terms, covenants, conditions, provisions and agreements contained in the Lease
with respect to the Premises to be performed or observed by Sublessor
thereunder. The parties hereto agree that subject to the provisions of this
Sublease, wherever the words "Demised Premises" or words of similar import
appear in the Lease, the same shall be deemed to mean the Subleased Premises and
wherever the words "Lessor" and "Lessee" appear in the Lease, the words shall be
deemed to refer to Sublessor and Sublessee respectively only with respect to the
Subleased Premises, so that, subject to the provisions of this Sublease,
Sublessor shall have the rights and powers of Lessor under the Lease only with
respect to the Leased Premises, and Sublessee shall have and does hereby agree
to be bound by and accepts all the rights, powers, duties and obligations of the
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Lessee under the Lease, provided, however, that notwithstanding the foregoing,
Sublessor shall have no obligation to perform or furnish any of the work,
services, repairs or maintenance undertaken to be made by Lessor under the
Lease, or any other term, covenant or condition required to be performed by
Lessor under the Lease. Sublessee covenants and agrees that it shall do nothing
which shall have the effect of creating a breach, of any of the terms, covenants
and conditions of the Lease. To the extent applicable to the Subleased Premises,
Sublessee shall have the benefit of each and every covenant and agreement made
by Lessor to Sublessor under the Lease. In the event that Lessor shall fail or
refuse to comply with any of the respective provisions of the Lease, Sublessor
shall have no liability on account of any such failure or refusal, provided that
the Sublessee shall have the right to exercise in the name of the Sublessor all
the rights to enforce compliance on the part of Lessor as are available to the
Sublessor with respect to the Premises. Sublessor hereby agrees to cooperate
with and execute, all at Sublessee's expense, all instruments and supply
information reasonably required by Sublessee in order to enforce such
compliance. Sublessee hereby agrees to indemnify and hold Sublessor harmless of
and from any and all damages, liabilities, obligations, costs, claims, losses,
demands, expenses and injuries, including reasonable attorneys' fees and
expenses which may be incurred by Sublessor in or as a result of such
cooperation and execution. In amplification and not in limitation of the
foregoing and without any allowance to Sublessee or other reduction or
adjustment of rent, Sublessor shall not be responsible for furnishing
electrical, heating, air conditioning, cleaning, window washing, or other
services, nor for any maintenance or repairs in
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or to the Subleased Premises or any of the facilities or equipment
therein.
(b) Sublessor, as Tenant, covenants and agrees to remain liable
as a primary obligor for the due performance of all of the covenants,
agreements, terms, provisions and conditions of the Lease on the part of the
Tenant to be performed or observed.
5. Delivery of Notice. Sublessor shall promptly transmit to
Lessor any notice or demands received from Sublessee and shall promptly transmit
to Sublessee any notice or demands received from Lessor. Sublessee shall
promptly transmit to Sublessor any notice or demands received from Lessor or any
other party having an interest to which this Sublease is subordinate.
6. Time for Notices. Solely for the purpose of this Sublease,
wherever in the Lease a time is specified for the giving of any notice or the
making of any demand by Lessee thereunder, such time is hereby changed (for the
purpose of this Sublease only) by adding five (5) days thereto, and wherever in
the Lease a time is specified for the giving of any notice or the making of any
demand by the Lessor thereunder, such time is hereby changed (for the purpose of
this Sublease only) by subtracting five (5) days therefrom. Wherever in the
Lease a time is specified within which the Lessee thereunder must give notice or
make a demand following an event, or within which Lessee must respond to any
notice, request or demand previously given or made by Lessor thereunder, or to
comply with an obligation on Lessee's part thereunder, such time is hereby
changed (for the purpose of this Sublease only) by subtracting five (5)
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days therefrom. Wherever in the Lease a time is specified within which Lessor
thereunder must give notice or make a demand following an event, or within which
Lessee must respond to any notice, request or demand previously given or made by
Lessee thereunder, or to comply with any obligation on Lessor's part thereunder,
such time is hereby changed (for the purpose of this Sublease only) by adding
five (5) days thereto. It is the purpose and intent of the foregoing provisions
to provide Sublessor with time within which to transmit to Lessor any notice or
demands received from the Sublessee and to transmit to Sublessee any notice or
demands received from the Lessor.
7. Required Consent of Lessor. Sublessee agrees that in any
case where the provisions of this Sublease require the consent or approval of
Sublessor prior to the taking of any action, it shall be a condition precedent
to the taking of such action that the prior consent or approval of Lessor shall
have been obtained if Lessor's consent must be obtained under the Lease in such
cases. In the event Lessor's consent is so obtained, Sublessor agrees that its
consent shall not be unreasonably withheld or delayed. Sublessee agrees that
Sublessor shall not have any duty or responsibility with respect to obtaining
the consent or approval of Lessor when the same is required under the terms of
the Lease, other than the transmission by Sublessor to Lessor of Sublessee's
request for such consent or approval.
8. Cure of Breach. Sublessee shall not do or suffer or permit
anything to be done which would cause the Lease to be terminated or forfeited by
virtue of any rights of termination or for-
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feiture reserved or vested in Lessor. If Sublessor makes any expenditures or
incurs any obligation for the payment of money in connection therewith, such
sums paid or obligations incurred shall be deemed to be additional rent
hereunder and shall be paid to it by Sublessee on demand.
9. Brokers. The parties hereto represent and warrant to each
other and to Lessor that they have not dealt with any broker in connection with
this Sublease.
10. Assignment and Subletting. Sublessee shall not assign,
mortgage or encumber this Sublease, nor underlet, nor suffer or permit the
Subleased Premises or any part thereof to be used by others except with the
prior written consent of Sublessor. In no event shall any assignment or
subletting consented to by Sublessor relieve Sublessee of its primary liability
and responsibility to Sublessor under this Sublease or to Lessor under the Lease
in the absence of any express written agreement by Sublessor or Lessor, as the
case may be, to that effect.
11. Condemnation and Casualty. In the event of any taking by
eminent domain or damage by fire or other casualty to the Subleased Premises
thereby rendering the Subleased Premises wholly or in part untenantable,
Sublessee shall acquiesce in and be bound by any action taken by or agreement
entered into between Lessor and Sublessor with respect thereto. Notwithstanding
the foregoing, Sublessor agrees to act reasonably and in good faith taking into
account Sublessee's interest in the Subleased Premises.
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12. Security Deposit. Sublessee has deposited with Sublessor the sum
of Five Thousand ($5,000.00) Dollars as security for the faithful performance
and observance by Sublessee of the terms, provisions and conditions of this
Sublease. It is agreed that in the event Sublessee defaults in respect of any of
the terms, provisions and conditions of this Sublease including, but not limited
to, the payment of the annual minimum rent and/or additional rent or charges,
Sublessor may use, apply or retain the whole or any part of the security so
deposited to the extent required for the payment of any installment of annual
minimum rent and/or additional rent or charges or any other sum as to which
Sublessee is in default or for any sum which Sublessor may expend or may be
required to expend by reason of Sublessee's default in respect of any of the
terms, covenants and conditions of this Sublease; including, but not limited to,
any damages or deficiency in the reletting of the Subleased Premises, whether
such damages or deficiency accrue before or after summary dispossess proceedings
or other re-entry by Sublessor. In the event that Sublessee shall fully and
faithfully comply with all of the terms, provisions, covenants and conditions of
this Sublease, the security deposit without interest shall be returned to
Sublessee within thirty (30) days after the date fixed as the expiration of this
Sublease.
13. Notices. All notices or demands under this Sublease shall be in
writing and shall be sent by registered or certified mail, return receipt
requested, to Sublessor at its address set forth above, and to Sublessee at its
address first above written prior to the commencement of the term and thereafter
to Sublessee at the address for the Subleased Premises, or such other address or
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person as either of the parties may designate by written notice.
14. Sublessor Representations. Sublessor represents to Sublessee that
(i) Exhibit "A" attached hereto constitutes the Lease in its entirety.
15. Subleased Premises Acknowledged "As Is". Sublessee acknowledges
that it has inspected the Subleased Premises and the improvements therein, or
has caused an inspection thereof to be made, and is fully familiar and satisfied
therewith and no representations have been made or responsibility assumed by
Sublessor as to the condition, value or suitability of the Subleased Premises or
any improvements thereon. Sublessee agrees that Sublessor shall not be required
to do any work to make the Subleased Premises ready for occupancy by Sublessee.
16. Alterations. Sublessee covenants at all times during the term of
this Sublease not to make any alterations, improvements or additions to the
Subleased Premises of any nature whatsoever without the prior written consent of
Sublessor.
17. Insurance. Sublessee agrees to name the Sublessor as an
additional insured on insurance policies under which the Lessor is required to
be named as an additional insured as set forth in the Lease. Any indemnity
required to be given by Sublessee pursuant to any Article of the Lease as
incorporated herein shall be given to both the Sublessor and Lessor.
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18. Sublessor's Liability for Loss of Property. Sublessor shall not
be liable in any way for any loss of property owned by Sublessee, or anyone
claiming by, through or in connection with Sublessee from any cause whatsoever,
including but not limited to, theft or burglary from the Subleased Premises and
Sublessee covenants and agrees, on behalf of itself and anyone who may make
claim by, through or in connection with Sublessee, to make no claim for any such
loss at any time.
19. Sublessor's Personal Liability. There shall be absolutely no
personal liability on the part of the Sublessor, its successors or assigns with
respect to any of the terms, covenants and conditions of this Sublease and
Sublessee shall take into consideration the Sublessor's interest in the
Subleased Premises for the satisfaction of each and every remedy of Sublessee in
the event of any breach by Sublessor of any of the terms, covenants and
conditions of this Sublease to be performed by Sublessor. In such event, such
exculpation of liability shall be absolute and without any exceptions
whatsoever.
20. Termination.
(a) Upon the expiration or other termination of the term of this
Sublease, Sublessee covenants to quit and surrender to Sublessor the Subleased
Premises, broom clean, in good order and condition, ordinary wear and tear
excepted, and at Sublessee's expense to remove all property of Sublessee. Any
property not so removed shall be deemed to have been abandoned by Sublessee and
may be retained or disposed of at Sublessee's expense by Sublessor, as Sublessor
shall desire. If the last day of the term of this Sublease
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falls on Sunday, the term of this Sublease shall expire on the business day
immediately preceding. Sublessee's obligation to observe or perform this
covenant shall survive the expiration or earlier termination of the term of this
Sublease. Immediately upon the failure of Sublessee to perform any covenant of
this Paragraph 20, Sublessor may, upon notice to Sublessee, do so and shall be
entitled to receive from Sublessee as liquidated damages the then cost of
performance of such covenant, such damages to be paid in addition to and
separate and independently from damages accruing by reason of any other covenant
of this Sublease.
(b) The terms and conditions of Paragraph 20(a) shall be void
and not of any force and effect in the event Lessor and Sublessee (prior to the
expiration of this Sublease) enter into a direct lease for the continued
occupancy of the Subleased Premises by Sublessee upon expiration of the term of
the Sublease. In such event, Sublessor shall not be responsible for the
condition of the Subleased Premises at the expiration of this Sublease.
21. Lessor Consent. The consent of the Lessor to Sublease is set
forth in the agreement between the parties of even date ("Lessor's Consent"), a
copy of which is attached hereto as Exhibit "B".
IN WITNESS WHEREOF, the parties hereto have duly executed this
instrument the day and year first above written.
ATTEST: OSICOM TECHNOLOGIES, INC., Sublessor
By: /s/ Christopher E. Sue
_______________________ _______________________
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ATTEST: NET SILICON, INC., Sublessee
By: /s/ Cornelius Peterson
_______________________ _______________________
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COAST
Loan and Security Agreement
Borrower: Digital Products, Inc., a Massachusetts corporation
Address: 2800 28th Street, Suite 100
Santa Monica, California 90405
Date: October 11, 1996
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST
BUSINESS CREDIT, a division of Southern Pacific Thrift & Loan Association
("Coast"), a California corporation, with offices at 12121 Wilshire Boulevard,
Suite 1111, Los Angeles, California 90025, and the borrower named above
("Borrower"), whose chief executive office is located at the above address
("Borrower's Address"). The Schedule to this Agreement (the "Schedule") shall
for all purposes be deemed to be a part of this Agreement, and the same is an
integral part of this Agreement. (Definitions of certain terms used in this
Agreement are set forth in Section 8 below.)
1. LOANS.
1.1 LOANS. Coast will make loans to Borrower (the "Loans"),
in amounts determined by Coast in its sole discretion, up to the amounts (the
"Credit Limit") shown on the Schedule, provided no Default or Event of Default
has occurred and is continuing.
1.2 INTEREST. All Loans and all other monetary Obligations
shall bear interest at the rate shown on the Schedule, except where expressly
set forth to the contrary in this Agreement. Interest shall be payable monthly,
on the last day of the month. Interest may, in Coast's discretion, be charged to
Borrower's loan account, and the same shall thereafter bear interest at the same
rate as the other Loans. Regardless of the amount of Obligations that may be
outstanding from time to time, Borrower shall pay Coast minimum monthly interest
during the term of this Agreement with respect to the Receivable Loans and the
Inventory Loans in the amount set forth on the Schedule (the "Minimum Monthly
Interest").
1.3 FEES. Borrower shall pay Coast the fee(s) shown on the
Schedule, which are in addition to all interest and other sums payable to Coast
and are not refundable.
2. SECURITY INTEREST.
2.1 SECURITY INTEREST. To secure the payment and
performance of all of the Obligations when due, Borrower hereby grants to Coast
a security interest in all of Borrower's interest in the following, whether now
owned or hereafter acquired, and wherever located: All Receivables, Inventory,
Equipment, and General Intangibles, including, without limitation, all of
Borrower's Deposit Accounts, and all money, and all property now or at any time
in the future in Coast's possession (including claims and credit balances), and
all proceeds of any of the foregoing (including proceeds of any insurance
policies, proceeds of proceeds, and claims against third parties), all products
of any of the foregoing, and all books and records related to any of the
foregoing (all of the foregoing, together with all other property in which Coast
may now or in the future be granted a lien or security interest, is referred to
herein, collectively, as the "Collateral").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Coast to enter into this Agreement and to
make Loans, Borrower represents and
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warrants to Coast as follows, and Borrower covenants that the following
representations will continue to be true, and that Borrower will at all times
comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a
corporation, is and will continue to be, duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation. Borrower
is and will continue to be qualified and licensed to do business in all
jurisdictions in which any failure to do so would have a material adverse effect
on Borrower. The execution, delivery and performance by Borrower of this
Agreement, and all other documents contemplated hereby (i) have been duly and
validly authorized, (ii) are enforceable against Borrower in accordance with
their terms (except as enforcement may be limited by equitable principles and by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
creditors' rights generally), and (iii) do not violate Borrower's articles or
certificate of incorporation, or Borrower's by-laws, or any law or any material
agreement or instrument which is binding upon Borrower or its property, and (iv)
do not constitute grounds for acceleration of any material indebtedness or
obligation under any material agreement or instrument which is binding upon
Borrower or its property.
3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set
forth in the heading to this Agreement is its correct name. Listed on the
Schedule are all prior names of Borrower and all of Borrower's present and prior
trade names. Borrower shall give Coast 10 days' prior written notice before
changing its name or doing business under any other name. Borrower has complied,
and will in the future comply, with all laws relating to the conduct of
business under a fictitious business name.
3.3 PLACE OF BUSINESS, LOCATION OF COLLATERAL. The address
set forth in the heading to this Agreement is Borrower's chief executive office.
In addition, Borrower has places of business and Collateral is located only at
the locations set forth on the Schedule. Borrower will give Coast at least 30
days prior written notice before opening any additional place of business,
changing its chief executive office, or moving any of the Collateral to a
location other than Borrower's Address or one of the locations set forth on the
Schedule.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now,
and will at all times in the future be, the sole owner of all the Collateral,
except for items of Equipment which are leased by Borrower. The Collateral now
is and will remain free and clear of any and all liens, charges, security
interests, encumbrances and adverse claims, except for Permitted Liens. Coast
now has, and will continue to have, a first-priority perfected and enforceable
security interest in all of the Collateral, subject only to the Permitted Liens,
and Borrower will at all times defend Coast and the Collateral against all
claims of others. None of the Collateral now is or will be affixed to any real
property in such a manner, or with such intent, as to become a fixture. Borrower
is not and will not become a lessee under any real property lease pursuant to
which the lessor may obtain any rights in any of the Collateral and no such
lease now prohibits, restrains, impairs or will prohibit, restrain or impair
Borrower's right to remove any Collateral from the leased premises. Whenever any
Collateral is located upon premises in which any third party has an interest
(whether as owner, mortgagee, beneficiary under a deed of trust, lien or
otherwise), Borrower shall, whenever requested by Coast, use its best efforts to
cause such third party to execute and deliver to Coast, in form acceptable to
Coast, such waivers and subordinations as Coast shall specify, so as to ensure
that Coast's rights in the Collateral are, and will continue to be, superior to
the rights of any such third party. Borrower will keep in full force and effect,
and will comply with all the terms of, any lease of real property where any of
the Collateral now or in the future may be located.
3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the
Collateral in good working condition, and Borrower will not use the Collateral
for any unlawful purpose. Borrower will immediately advise Coast in writing of
any material loss or damage to the Collateral.
3.6 BOOKS AND RECORDS. Borrower has maintained and will
maintain at Borrower's Address complete and accurate books and records,
comprising an accounting system in accordance with generally accepted accounting
principles.
3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All
financial statements now or in the future delivered by Borrower to Coast have
been, and will be, prepared in conformity with generally accepted accounting
principles (except, in the case of unaudited financial statements, for the
absence of footnotes and subject to normal year-end adjustments) and now and in
the future will fairly reflect the financial condition of Borrower, at the times
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and for the periods therein stated. Between the last date covered by any such
statement provided to Coast and the date hereof, there has been no material
adverse change in the financial condition or business of Borrower. Borrower is
now and will continue to be solvent.
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS.
Borrower has timely filed, and will timely file, all tax returns and reports
required by foreign, federal, state and local law, and Borrower has timely paid,
and will timely pay, all foreign, federal, state and local taxes, assessments,
deposits and contributions now or in the future owed by Borrower. Borrower may,
however, defer payment of any contested taxes, provided that Borrower (i) in
good faith contests Borrower's obligation to pay the taxes by appropriate
proceedings promptly and diligently instituted and conducted, (ii) notifies
Coast in writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or takes any other steps required to keep the
contested taxes from becoming a lien upon any of the Collateral. As of the date
hereof, Borrower is unaware of any claims or adjustments proposed for any of
Borrower's prior tax years which could result in additional taxes becoming due
and payable by Borrower. Borrower has paid, and shall continue to pay all
amounts necessary to fund all present and future pension, profit sharing and
deferred compensation plans in accordance with their terms, and Borrower has not
and will not withdraw from participation in, permit partial or complete
termination of, or permit the occurrence of any other event with respect to, any
such plan which could result in any liability of Borrower, including any
liability to the Pension Benefit Guaranty Corporation or its successors or any
other governmental agency.
3.9 COMPLIANCE WITH LAW. Borrower has complied, and will
comply, in all material respects, with all provisions of all material foreign,
federal, state and local laws and regulations relating to Borrower, including,
but not limited to, those relating to Borrower's ownership of real or personal
property, the conduct and licensing of Borrower's business, and environmental
matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there
is no claim, suit, litigation, proceeding or investigation pending or (to best
of Borrower's knowledge) threatened by or against or affecting Borrower in any
court or before any governmental agency (or any basis therefor known to
Borrower) which may result, either separately or in the aggregate, in any
material adverse change in the financial condition or business of Borrower, or
in any material impairment in the ability of Borrower to carry on its business
in substantially the same manner as it is now being conducted. Borrower will
promptly inform Coast in writing of any claim, proceeding, litigation or
investigation in the future threatened or instituted by or against Borrower
involving any single claim of $50,000.00 or more, or involving $100,000.00 or
more in the aggregate.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be
used solely for lawful business purposes. Borrower is not purchasing or carrying
any "margin stock" (as defined in Regulation G of the Board of Governors of the
Federal Reserve System) and no part of the proceeds of any Loan will be used to
purchase or carry any "margin stock" or to extend credit to others for the
purpose of purchasing or carrying any "margin stock."
4. RECEIVABLES.
SEE "OTHER PROVISIONS" ON SCHEDULE.
4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower
represents and warrants to Coast as follows: Each Receivable with respect to
which Loans are requested by Borrower shall, on the date each Loan is requested
and made, represent an undisputed bona fide existing unconditional obligation of
the Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business.
4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL
COMPLIANCE. Borrower represents and warrants to Coast as follows: All statements
made and all unpaid balances appearing in all invoices, instruments and other
documents evidencing the Receivables are and shall be true and correct and all
such invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be.
All sales and other transactions underlying or giving rise to each Receivable
shall fully comply with all applicable laws and governmental rules and
regulations. All signatures and endorsements on all documents, instruments, and
agreements relating to all Receivables are and shall be genuine, and all such
documents, instruments and agreements are and shall be legally enforceable in
accordance with their
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terms.
4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES.
Borrower shall deliver to Coast transaction reports and loan requests, schedules
of Receivables, and schedules of collections, all on Coast's standard forms;
provided, however, that Borrower's failure to execute and deliver the same shall
not affect or limit Coast's security interest and other rights in all of
Borrower's Receivables, nor shall Coast's failure to advance or lend against a
specific Receivable affect or limit Coast's security interest and other rights
therein. Loan requests received after 10:30 AM (Pacific Time) will not be
considered by Coast until the next Business Day. Together with each such
schedule, or later if requested by Coast, Borrower shall furnish Coast with
copies (or, at Coast's request, originals) of all contracts, orders, invoices,
and other similar documents, and all original shipping instructions, delivery
receipts, bills of lading, and other evidence of delivery, for any goods the
sale or disposition of which gave rise to such Receivables, and Borrower
warrants the genuineness of all of the foregoing. Borrower shall also furnish to
Coast an aged accounts receivable trial balance in such form and at such
intervals as Coast shall request. In addition, Borrower shall deliver to Coast
the originals of all instruments, chattel paper, security agreements, guarantees
and other documents and property evidencing or securing any Receivables, upon
receipt thereof and in the same form as received, with all necessary
endorsements, all of which shall be with recourse. Borrower shall also provide
Coast with copies of all credit memos as and when requested by Coast.
4.4 COLLECTION OF RECEIVABLES. Borrower shall have the
right to collect all Receivables, unless and until an Event of Default has
occurred. Borrower shall hold all payments on, and proceeds of, Receivables in
trust for Coast, and Borrower shall deliver all such payments and proceeds to
Coast within one Business Day after receipt by Borrower, in their original form,
duly endorsed to Coast, to be applied to the Obligations in such order as Coast
shall determine. Coast may, in its discretion, require that all proceeds of
Collateral be deposited by Borrower into a lockbox account, or such other
"blocked account" as Coast may specify, pursuant to a blocked account agreement
in such form as Coast may specify. Coast or its designee may, at any time,
notify Account Debtors that Coast has been granted a security interest in the
Receivables.
4.5. REMITTANCE OF PROCEEDS. All proceeds arising from the
disposition of any Collateral shall be delivered to Coast within one Business
Day after receipt by Borrower, in their original form, duly endorsed to Coast,
to be applied to the Obligations in such order as Coast shall determine.
Borrower agrees that it will not commingle proceeds of Collateral with any of
Borrower's other funds or property, but will hold such proceeds separate and
apart from such other funds and property and in an express trust for Coast.
Nothing in this Section limits the restrictions on disposition of Collateral set
forth elsewhere in this Agreement.
4.6 DISPUTES. Borrower shall notify Coast promptly of all
material disputes or claims relating to Receivables. Borrower shall not forgive
(completely or partially), compromise or settle any Receivable for less than
payment in full, or agree to do any of the foregoing, except that Borrower may
do so, provided that: (i) Borrower does so in good faith, in a commercially
reasonable manner, in the ordinary course of business, and in arm's length
transactions, which are reported to Coast on the regular reports provided to
Coast; (ii) no Default or Event of Default has occurred and is continuing; and
(iii) taking into account all such discounts settlements and forgiveness, the
total outstanding Loans will not exceed the Credit Limit. Coast may, at any time
after the occurrence of an Event of Default, settle or adjust disputes or claims
directly with Account Debtors for amounts and upon terms which Coast considers
advisable in its reasonable credit judgment and, in all cases, Coast shall
credit Borrower's Loan account with only the net amounts received by Coast in
payment of any Receivables.
4.7 RETURNS. Provided no Event of Default has occurred and
is continuing, if any Account Debtor returns any Inventory to Borrower in the
ordinary course of its business, Borrower shall promptly determine the reason
for such return and promptly issue a credit memorandum to the Account Debtor in
the appropriate amount. In the event any attempted return occurs after the
occurrence of any Event of Default, Borrower shall (i) hold the returned
Inventory in trust for Coast, (ii) segregate all returned Inventory from all of
Borrower's other property, (iii) conspicuously label the returned Inventory as
subject to Coast's security interest, and (iv) immediately notify Coast of the
return of any Inventory, specifying the reason for such return, the location and
condition of the returned Inventory, and on Coast's request deliver such
returned Inventory to Coast.
4.8 VERIFICATION. Coast may, from time to time, verify
directly with the respective Account
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Debtors the validity, amount and other matters relating to the Receivables, by
means of mail, telephone or otherwise, either in the name of Borrower or Coast
or such other name as Coast may choose.
4.9 NO LIABILITY. Coast shall not under any circumstances
be responsible or liable for any shortage or discrepancy in, damage to, or loss
or destruction of, any goods, the sale or other disposition of which gives rise
to a Receivable, or for any error, act, omission, or delay of any kind occurring
in the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Coast be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable. Nothing herein shall, however, relieve Coast from liability for its
own gross negligence or willful misconduct.
4.10 SEE SCHEDULE.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all
times comply with the financial and other covenants set forth in the Schedule.
5.2 INSURANCE. Borrower shall, at all times insure all of
the tangible personal property Collateral and carry such other business
insurance, with insurers reasonably acceptable to Coast, in such form and
amounts as Coast may reasonably require, and Borrower shall provide evidence of
such insurance to Coast, so that Coast is satisfied that such insurance is, at
all times, in full force and effect. All liability insurance policies of
Borrower shall name Coast as an additional insured, and all property casualty
and related insurance policies of Borrower shall name Coast as a loss payee
thereon and Borrower shall cause a lenders loss payee endorsement in form
reasonably acceptable to Coast. Upon receipt of the proceeds of any such
insurance, Coast shall apply such proceeds in reduction of the Obligations as
Coast shall determine in its sole discretion, except that, provided no Default
or Event of Default has occurred and is continuing, Coast shall release to
Borrower insurance proceeds with respect to Equipment totaling less than
$25,000.00, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Coast may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Coast may, but is
not obligated to, obtain the same at Borrower's expense. Borrower shall promptly
deliver to Coast copies of all reports made to insurance companies.
5.3 REPORTS. Borrower, at its expense, shall provide Coast
with the written reports set forth in the Schedule, and such other written
reports with respect to Borrower (including budgets, sales projections,
operating plans and other financial documentation), as Coast shall from time to
time reasonably specify.
5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable
times, and on one Business Day's notice, Coast, or its agents, shall have the
right to inspect, audit and copy Borrower's books and records and the Collateral
(the "Audits"). Coast shall take reasonable steps to keep confidential all
confidential information obtained in any Audit, but Coast shall have the right
to disclose any such information to its auditors, regulatory agencies, and
attorneys, and pursuant to any subpoena or other legal process. The Audits shall
be at Borrower's expense. The charge for the Audits shall be $550.00 per person
per day (or such higher amount as shall represent Coast's then current standard
charge for the same) not to exceed $3,500 per quarter, plus reasonable out of
pocket expenses. Borrower will not enter into any agreement with any accounting
firm, service bureau or third party to store Borrower's books or records at any
location other than Borrower's Address, without first notifying Coast of the
same and obtaining the written agreement from such accounting firm, service
bureau or other third party to give Coast the same rights with respect to access
to books and records and related rights as Coast has under this Loan Agreement.
5.5 NEGATIVE COVENANTS. Borrower shall not, without Coast's
prior written consent, do any of the following:
(i) merge or consolidate with another corporation or entity, except in a
transaction in which (A) the shareholders of the Borrower hold at least 50% of
the common stock and all other capital stock of the surviving corporation
immediately after such merger or consolidation, and (B) the Borrower is the
surviving corporation;
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(ii) acquire any assets, except (A) in the ordinary course of business, or
(B) in a transaction or a series of transactions not involving the payment of an
aggregate amount in excess of $100,000.00.
(iii) enter into any other transaction outside the ordinary course of
business;
(iv) sell or transfer any Collateral, except for the sale of finished
Inventory in the ordinary course of Borrower's business, and except for the sale
of obsolete or unneeded Equipment in the ordinary course of business;
(v) store any inventory or other Collateral with any warehouseman or other
third party;
(vi) sell any Inventory on a sale-or-return, guaranteed sale, consignment,
or other contingent basis; if Inventory is sold on such basis, such sales shall
be reported to Coast and the receivables therefrom shall not be deemed "Eligible
Receivables". Collection of such Inventory and Receivables shall, when
collected, be applied to the Obligations;
(vii) make any loans of any money or other assets, except (A) advances to
customers or suppliers in the ordinary course of business, (B) travel advances,
employee relocation loans and other employee loans and advances in the ordinary
course of business, and (C) loans to employees, officers and directors for the
purpose of purchasing equity securities of the Borrower in excess of
$100,000.00;
(viii) incur any debts, outside the ordinary course of business, which
would have a material, adverse effect on Borrower or on the prospect of
repayment of the Obligations;
(ix) guarantee or otherwise become liable with respect to the obligations
of another party or entity;
(x) pay or declare any dividends on Borrower's stock (except for dividends
payable solely in stock of Borrower);
(xi) redeem, retire, purchase or otherwise acquire, directly or
indirectly, any of Borrower's stock, except that Borrower may repurchase stock
owned by employees, directors and consultants of Borrower pursuant to terms of
employment, consulting or other stock restriction agreements at such time as any
such employee, director or consultant terminates his or her affiliation with the
Borrower, for an aggregate purchase price not to exceed $ 100,000 in any fiscal
year;
(xii) Make any change in Borrower's capital structure which would have a
material adverse effect on Borrower or on the prospect of repayment of the
Obligations; or
(xiii) dissolve or elect to dissolve.
Transactions permitted by the foregoing provisions of this Section are only
permitted if no Default or Event of Default would occur as a result of such
transaction.
5.6 LITIGATION COOPERATION. Should any third-party suit or
proceeding be instituted by or against Coast with respect to any Collateral or
relating to Borrower, Borrower shall, without expense to Coast, make available
Borrower and its officers, employees and agents and Borrower's books and
records, to the extent that Coast may deem them reasonably necessary in order to
prosecute or defend any such suit or proceeding.
5.7 INDEMNITY. Borrower hereby agrees to indemnify Coast
and hold Coast harmless from and against any and all claims, debts, liabilities,
demands, obligations, actions, causes of action, penalties, reasonable costs and
expenses (including reasonable attorneys' fees), of every nature, character and
description, which Coast may sustain or incur based upon or arising out of any
of the Obligations, any actual or alleged failure to collect and pay over any
withholding or other tax relating to Borrower or its employees, any relationship
or agreement between Coast and Borrower, any actual or alleged failure of Coast
to comply with any writ of attachment or other legal process relating to
Borrower or any of its property, or any other matter, cause or thing whatsoever
occurred, done, omitted or suffered to be done by Coast relating to Borrower or
the Obligations (except any such amounts sustained or incurred as the result of
the gross negligence or willful misconduct of
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Coast). Notwithstanding any provision in this Agreement to the contrary, the
indemnity agreement set forth in this Section shall survive any termination of
this Agreement and shall for all purposes continue in full force and effect.
5.8 FURTHER ASSURANCES. Borrower agrees, at its expense, on
request by Coast, to execute all documents and take all actions, as Coast, may
deem reasonably necessary or useful in order to perfect and maintain Coast's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
6. TERM.
6.1 MATURITY DATE. This Agreement shall continue in effect
until the maturity date set forth on the Schedule (the "Maiurity Date");
provided that the Maturity date shall automatically be extended, and this
Agreement shall automatically and continuously renew, for successive additional
terms of one year each, unless one party gives written notice to the other, not
less than sixty days prior to the next Maturity Date, that such party elects to
terminate this Agreement effective on the next Maturity Date.
6.2 EARLY TERMINATION. This Agreement may be terminated
prior to the Maturity Date as follows: (i) by Borrower, effective three Business
Days after written notice of termination is given to Coast; or (ii) by Coast at
any time after the occurrence of an Event of Default, effective immediately. If
this Agreement is terminated by Borrower under this Section 6.2, Borrower shall
pay to Coast a termination fee (the "Early Termination Fee") in the amount shown
on the Schedule. The Early Termination Fee shall be due and payable on the
effective date of termination.
6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any
earlier effective date of termination, Borrower shall pay and perform in full
all Obligations, whether evidenced by installment notes or otherwise, and
whether or not all or any part of such Obligations are otherwise then due and
payable. Without limiting the generality of the foregoing, if on the Maturity
Date, or on any earlier effective date of termination, there are any outstanding
Letters of Credit issued by Coast or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Coast,
then on such date Borrower shall provide to Coast cash collateral in an amount
equal to the face amount of all such Letters of Credit plus all interest, fees
and cost due or to become due in connection therewith, to secure all of the
Obligations relating to said Letters of Credit, pursuant to Coast's then
standard form cash pledge agreement. Notwithstanding any termination of this
Agreement, all of Coast's security interests in all of the Collateral and all of
the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the discretion of
Coast, Coast may, in its sole discretion, refuse to make any further Loans after
termination. No termination shall in any way affect or impair any right or
remedy of Coast, nor shall any such termination relieve Borrower of any
Obligation to Coast, until all of the Obligations have been paid and performed
in full. Upon payment and performance in full of all the Obligations and
termination of this Agreement, Coast shall promptly deliver to Borrower
termination statements, requests for reconveyances and such other documents as
may be required to fully terminate Coast's security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 EVENTS OF DEFAULT. The occurrence of any of the
following events shall constitute an "Event of Default" under this Agreement,
and Borrower shall give Coast immediate written notice thereof: (a) Any material
warranty, representation, statement, report or certificate made or delivered to
Coast by Borrower or any of Borrower's officers, employees or agents, now or in
the future, shall be untrue or misleading in a material respect; or (b) Borrower
shall fail to pay within 5 days after the due date of any Loan or any interest
thereon or any other monetary Obligation; or (c) the total Loans and other
Obligations outstanding at any time shall exceed the Credit Limit and such
excess is not fully paid within 5 days; or (d) Borrower shall fail to deliver
the proceeds of Collateral to Coast as provided in Section 4.5 above, or shall
fail to give Coast access to its books and records or Collateral as provided in
Section 5.4 above, or shall breach any negative covenant set forth in Section
5.5 above; or (e) Borrower shall fail to comply with the financial covenants (if
any) set forth in the Schedule or shall fail to perform any other non-monetary
Obligation which by its nature cannot be cured; or (f) Borrower shall fail to
perform any other non-monetary Obligation, which failure is not cured within 5
Business Days after the date due; or (g) Any levy, assessment, attachment,
seizure, lien or encumbrance (other than a Permitted Lien) is made
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on all or any part of the Collateral which is not cured within 10 days after the
occurrence of the same; or (h) any default or event of default occurs under any
obligation secured by a Permitted Lien, which is not cured within any applicable
cure period or waived in writing by the holder of the Permitted Lien; or (i)
Borrower breaches any material contract or obligation, which has or may
reasonably be expected to have a material adverse effect on Borrower's business
or financial condition which is not cured within any applicable cure period or
waived in writing by the other party to the contract or to whom the obligation
is owing; or (j) Dissolution, termination of existence, insolvency or business
failure of Borrower; or appointment of a receiver, trustee or custodian, for all
or any part of the property of, assignment for the benefit of creditors by, or
the commencement of any proceeding by Borrower under any reorganization,
bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, now or in the future in effect;
or (k) the commencement of any proceeding against Borrower or any guarantor of
any of the Obligations under any reorganization, bankruptcy, insolvency,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, now or in the future in effect, which is not cured by the
dismissal thereof within 30 days after the date commenced; or (l) revocation or
termination of, or limitation or denial of liability upon, any guaranty of the
Obligations or any attempt to do any of the foregoing, or commencement of
proceedings by any guarantor of any of the Obligations under any bankruptcy or
insolvency law; or (m) revocation or termination of, or limitation or denial of
liability upon, any pledge of any certificate of deposit, securities or other
property or asset of any kind pledged by any third party to secure any or all of
the Obligations, or any attempt to do any of the foregoing, or commencement of
proceedings by or against any such third party under any bankruptcy or
insolvency law; or (n) Borrower makes any payment on account of any indebtedness
or obligation which has been subordinated to the Obligations, other than as
permitted in the applicable subordination agreement, or if any Person who has
subordinated such indebtedness or obligations terminates or in any way limits
his subordination agreement; or (o) there shall be a change in the record or
beneficial ownership of an aggregate of more than 20% of the outstanding shares
of stock of Borrower, in one or more transactions, compared to the ownership of
outstanding shares of stock of Borrower in effect on the date hereof, without
the prior written consent of Coast; or (p) Borrower shall generally not pay its
debts as they become due, or Borrower shall conceal, remove or transfer any part
of its property, with intent to hinder, delay or defraud its creditors, or make
or suffer any transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar law; or (q) there shall be a
material adverse change in Borrower's business or financial condition. Coast may
cease making any Loans hereunder during any of the above cure periods, and
thereafter if an Event of Default has occurred.
7.2 REMEDIES. Upon the occurrence, and during the
continuance, of any Event of Default, Coast, at its option, and without notice
or demand of any kind (all of which are hereby expressly waived by Borrower),
may do any one or more of the following: (a) Cease making Loans or otherwise
extending credit to Borrower under this Agreement or any other document or
agreement; (b) Accelerate and declare all or any part of the Obligations to be
immediately due, payable, and performable, notwithstanding any deferred or
installment payments allowed by any instrument evidencing or relating to any
Obligation; (c) Take possession of any or all of the Collateral wherever it may
be found, and for that purpose Borrower hereby authorizes Coast without judicial
process to enter onto any of Borrower's premises without interference to search
for, take possession of, keep, store, or remove any of the Collateral, and
remain on the premises or cause a custodian to remain on the premises in
exclusive control thereof, without charge for so long as Coast deems it
reasonably necessary in order to complete the enforcement of its rights under
this Agreement or any other agreement; provided, however, that should Coast seek
to take possession of any of the Collateral by Court process, Borrower hereby
irrevocably waives: (i) any bond and any surety or security relating thereto
required by any statute, court rule or otherwise as an incident to such
possession thereof; (ii) any demand for possession prior to the commencement of
any suit or action to recover possession thereof, and (iii) any requirement that
Coast retain possession of, and not dispose of, any such Collateral until after
trial or final judgment; (d) Require Borrower to assemble any or all of the
Collateral and make it available to Coast at places designated by Coast which
are reasonably convenient to Coast and Borrower, and to remove the Collateral
to such locations as Coast may deem advisable; (e) Complete the processing,
manufacturing or repair of any Collateral prior to a disposition thereof and,
for such purpose and for the purpose of removal, Coast shall have the right to
use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all
other property without charge; (f) Sell, lease or otherwise dispose of any of
the Collateral, in its condition at the time Coast obtains possession of it or
after further manufacturing, processing or repair, at one or more public and/or
private sales, in lots or in bulk, for cash, exchange or other property, or on
credit, and to adjourn any such sale from time to time without notice other than
oral announcement at the time scheduled for sale. Coast shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Coast deems reasonable, or on Coast's premises, or elsewhere and the
Collateral need not be located at the
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place of disposition. Coast may directly or through any affiliated company
purchase or lease any Collateral at any such public disposition, and if
permissible under applicable law, at any private disposition. Any sale or other
disposition of Collateral shall not relieve Borrower of any liability Borrower
may have if any Collateral is defective as to title or physical condition or
otherwise at the time of sale; (g) Demand payment of, and collect any
Receivables and General Intangibles comprising Collateral and, in connection
therewith, Borrower irrevocably authorizes Coast to endorse or sign Borrower's
name on all collections, receipts, instruments and other documents, to take
possession of and open mail addressed to Borrower and remove therefrom payments
made with respect to any item of the Collateral or proceeds thereof, and, in
Coast's sole discretion, to grant extensions of time to pay, compromise claims
and settle Receivables and the like for less than face value; (h) Offset against
any sums in any of Borrower's general, special or other Deposit Accounts with
Coast; and (i) Demand and receive possession of any of Borrower's federal and
state income tax returns and the books and records utilized in the preparation
thereof or referring thereto. All reasonable attorneys' fees, expenses, costs,
liabilities and obligations incurred by Coast with respect to the foregoing
shall be due from the Borrower to Coast on demand. Coast may charge the same to
Borrower's loan account, and the same shall thereafter bear interest at the same
rate as is applicable to the Receivable Loans. Without limiting any of Coast's
rights and remedies, from and after the occurrence of any Event of Default, the
interest rate applicable to the Obligations shall be increased by an additional
three percent per annum.
7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS.
Borrower and Coast agree that a sale or other disposition (collectively, "sale")
of any Collateral which complies with the following standards will conclusively
be deemed to be commercially reasonable: (i) Notice of the sale is given to
Borrower at least seven days prior to the sale, and, in the case of a public
sale, notice of the sale is published at least seven days before the sale in a
newspaper of general circulation in the county where the sale is to be
conducted; (ii) Notice of the sale describes the collateral in general,
non-specific terms; (iii) The sale is conducted at a place designated by Coast,
with or without the Collateral being present; (iv) The sale commences at any
time between 8:00 a.m. and 6:00 p.m (the time being that of the location of the
sale); (v) Payment of the purchase price in cash or by cashier's check or wire
transfer is required; (vi) With respect to any sale of any of the Collateral,
Coast may (but is not obligated to) direct any prospective purchaser to
ascertain directly from Borrower any and all information concerning the same.
Coast shall be free to employ other methods of noticing and selling the
Collateral, in its discretion, if they are commercially reasonable.
7.4 POWER OF ATTORNEY. Upon the occurrence, and during the
continuance, of any Event of Default, without limiting Coast's other rights and
remedies, Borrower grants to Coast an irrevocable power of attorney coupled with
an interest, authorizing and permitting Coast (acting through any of its
employees, attorneys or agents) at any time, at its option, but without
obligation, with or without notice to Borrower, and at Borrower's expense, to do
any or all of the following, in Borrower's name or otherwise, but Coast agrees
to exercise the following powers in a commercially reasonable manner: (a)
Execute on behalf of Borrower any documents that Coast may, in its sole
discretion, deem advisable in order to perfect and maintain Coast's security
interest in the Collateral, or in order to exercise a right of Borrower or
Coast, or in order to fully consummate all the transactions contemplated under
this Agreement, and all other present and future agreements; (b) Execute on
behalf of Borrower any document exercising, transferring or assigning any option
to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any
real or personal property which is part of Coast's Collateral or in which Coast
has an interest; (c) Execute on behalf of Borrower, any invoices relating to any
Receivable, any draft against any Account Debtor and any notice to any Account
Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of
mechanic's, materialman's or other lien, or assignment or satisfaction of
mechanic's, materialman's or other lien; (d) Take control in any manner of any
cash or non-cash items of payment or proceeds of Collateral; endorse the name of
Borrower upon any instruments, or documents, evidence of payment or Collateral
that may come into Coast's possession; (e) Endorse all checks and other forms of
remittances received by Coast; (f) Pay, contest or settle any lien, charge,
encumbrance, security interest and adverse claim in or to any of the Collateral,
or any judgment based thereon, or otherwise take any action to terminate or
discharge the same; (g) Grant extensions of time to pay, compromise claims and
settle Receivables and General Intangibles for less than face value and execute
all releases and other documents in connection therewith; (h) Pay any sums
required on account of Borrower's taxes or to secure the release of any liens
therefor, or both; (i) Settle and adjust, and give releases of, any insurance
claim that relates to any of the Collateral and obtain payment therefor; (j)
Instruct any third party having custody or control of any books or records
belonging or relating to, Borrower to give Coast the same rights of access and
other rights with respect thereto as Coast has under this Agreement; and (k)
Take any action or pay any sum required of Borrower pursuant to this Agreement
and any other present or future agreements. Any and all reasonable sums paid and
any and all reasonable costs, expenses, liabilities, obligations and attorneys'
fees incurred by Coast with respect to the foregoing shall be added to and
become part of the Obligations,
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and shall be payable on demand. Coast may charge the foregoing to Borrower's
loan account and the foregoing shall thereafter bear interest at the same rate
applicable to the Receivable Loans. In no event shall Coast's rights under the
foregoing power of attorney or any of Coast's other rights under this Agreement
be deemed to indicate that Coast is in control of the business, management or
properties of Borrower.
7.5. APPLICATION OF PROCEEDS. All proceeds realized as the
result of any sale of the Collateral shall be applied by Coast first to the
reasonable costs, expenses, liabilities, obligations and attorneys' fees
incurred by Coast in the exercise of its rights under this Agreement, second to
the interest due upon any of the Obligations, and third to the principal of the
Obligations, in such order as Coast shall determine in its sole discretion. Any
surplus shall be paid to Borrower or other persons legally entitled thereto;
Borrower shall remain liable to Coast for any deficiency. If, Coast, in its sole
discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale of Collateral, Coast shall
have the option, exercisable at any time, in its sole discretion, of either
reducing the Obligations by the principal amount of purchase price or deferring
the reduction of the Obligations until the actual receipt by Coast of the cash
therefor.
7.6 REMEDIES CUMULATIVE. In addition to the rights and
remedies set forth in this Agreement, Coast shall have all the other rights and
remedies accorded a secured party under the California Uniform Commercial Code
and under all other applicable laws, and under any other instrument or agreement
now or in the future entered into between Coast and Borrower, and all of such
rights and remedies arc cumulative and none is exclusive. Exercise or partial
exercise by Coast of one or more of its rights or remedies shall not be deemed
an election, nor bar Coast from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Coast to exercise any rights
or remedies shall not operate as a waiver thereof, but all rights and remedies
shall continue in full force and effect until all of the Obligations have been
fully paid and performed.
8. DEFINITIONS. AS USED IN THIS AGREEMENT, THE FOLLOHING TERMS HAVE THE FOLLOWNG
MEANINGS.
"Account Debtor" means the obligor on Receivable.
"Affiliate" means, with respect to any Person, a relative,
partner, shareholder, director, officer, or employee of such Person, or any
parent or subsidiary of such Person, or any Person controlling, controlled by or
under common control with such Person.
"Business Day" means a day on which Coast is open for business.
"Code" means the Uniform Commercial Code as adopted and in
effect in the State of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
"Default" means any event which with notice or passage of time
or both, would constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of
the Code.
"Eligible Inventory" means Inventory which Coast, in its sole
judgment, deems eligible for borrowing, based on such considerations as Coast
may from time to time deem appropriate. Without limiting the fact that the
determination of which Inventory is eligible for borrowing is a matter of
Coast's discretion, Inventory which does not meet the following requirements
will not be deemed to be Eligible Inventory: Inventory which (i) consists of
finished goods, in good, new and salable condition which is not perishable, not
obsolete or unmerchantable, and is not comprised of raw materials, work in
process, packaging materials or supplies; (ii) meets all applicable governmental
standards; (iii) has been manufactured in compliance with the Fair Labor
Standards Act; (iv) conforms in all respects to the warranties and
representations set forth in this Agreement; (v) is at all times subject to
Coast's duly perfected, first priority security interest; and (vi) is situated
at a one of the locations set forth on the Schedule.
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"Eligible Receivables" means Receivables arising in the ordinary
course of Borrower's business from the sale of goods or rendition of services,
which Coast, in its good faith business judgment, shall deem eligible for
borrowing, based on such considerations as Coast may from time to time deem
appropriate. Without limiting the generality of the foregoing, Eligible
Receivables shall exclude (a) Receivables that remain unpaid more than 90 days
past invoice date, (b) Receivables from the federal, state and local
governments, governmental agencies, governmental units, and subdivisions thereof
where the required documents and papers pursuant to applicable law, rule,
regulation or policy (including, but not limited to, the Federal Claims Act) is
not provided, (c) foreign Receivables other than foreign Receivables (i) that
are backed by letters of credit in form, content and amount and issued by
financial institutions acceptable to Coast in its sole discretion, or (ii) where
the Account Debtors have verifiable credit histories over a 6 to 12 month period
that are acceptable to Coast in its sole discretion, or (iii) where the Account
Debtors are foreign subsidiaries or divisions of U.S. companies that Coast, in
its sole discretion deems creditworthy, or (iv) where the Account Debtors have
credit insurance acceptable to Coast in its sole discretion.
"Equipment" means all of Borrower's present and hereafter
acquired machinery, molds, machine tools, motors, furniture, equipment,
furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs,
goods and other tangible personal property (other than Inventory) of every kind
and description used in Borrower's operations or owned by Borrower and any
interest in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.
"Event of Default" means any of the events set forth in Section
7.1 of this Agreement.
"General Intangibles" means all general intangibles of Borrower,
whether now owned or hereafter created or acquired by Borrower, including,
without limitation, all choses in action, causes of action, corporate or other
business records, Deposit Accounts, inventions, designs, drawings, blueprints,
patents, patent applications, trademarks and the goodwill of the business
symbolized thereby, names, trade names, trade secrets, goodwill, copyrights,
registrations, licenses, franchises, customer lists, security and other
deposits, rights in all litigation presently or hereafter pending for any cause
or claim (whether in contract, tort or otherwise), and all judgments now or
hereafter arising therefrom, all claims of Borrower against Coast, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation life
insurance, key man insurance, credit insurance, liability insurance, property
insurance and other insurance), tax refunds and claims, computer programs,
discs, tapes and tape files, claims under guaranties, security interests or
other security held by or granted to Borrower, all rights to indemnification and
all other intangible property of every kind and nature (other than Receivables)
and, without limiting the generality of the foregoing, the trademarks and
patents listed on Exhibit "A" to the Schedule.
"Inventory" means all of Borrower's now owned and hereafter
acquired goods, merchandise or other personal property, wherever located, to be
furnished under any contract of service or held for sale or lease (including
without limitation all raw materials, work in process, finished goods and goods
in transit, and including without limitation all farm products), and all
materials and supplies of every kind, nature and description which are or might
be used or consumed in Borrower's business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such goods,
merchandise or other personal property, and all warehouse receipts, documents of
title and other documents representing any of the foregoing.
"Maximum Dollar Amount" has the meaning set forth in Section 1
of the Schedule.
"Obligations" means the Pre-Existing Obligations, all present
and future Loans, advances, debts, liabilities, obligations, guaranties,
covenants, duties and indebtedness at any time owing by Borrower to Coast,
whether evidenced by this Agreement or any note or other instrument or document,
whether arising from an extension of credit, opening of a letter of credit,
banker's acceptance, loan, guaranty, indemnification or otherwise, whether
direct or indirect (including, without limitation, those acquired by assignment
and any participation by Coast in Borrower's debts owing to others), absolute or
contingent, due or to become due, including, without limitation, all interest,
charges, expenses, fees, attorney's fees, expert witness fees, audit fees,
letter of credit fees, collateral monitoring fees, closing fees, facility fees,
termination fees, minimum interest charges and any other sums chargeable to
Borrower under this Agreement or under any other present or future instrument or
agreement
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between Borrower and Coast.
"Permitted Liens" means the following: (i) purchase money
security interests in specific items of Equipment; (ii) leases of specific items
of Equipment; (iii) liens for taxes not yet payable; (iv) additional security
interests and liens consented to in writing by Coast, which consent shall not be
unreasonably withheld; (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, or other similar liens arising in the ordinary course of
business and securing obligations which are not delinquent; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods. Coast will have the
right to require, as a condition to its consent under subparagraph (iv) above,
that the holder of the additional security interest or lien sign an
intercreditor agreement on Coast's then standard form, acknowledge that the
security interest is subordinate to the security interest in favor of Coast, and
agree not to take any action to enforce its subordinate security interest so
long as any Obligations remain outstanding, and that Borrower agree that any
uncured default in any obligation secured by the subordinate security interest
shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Receivables" means all of Borrower's now owned and hereafter
acquired accounts (whether or not earned by performance), letters of credit,
contract rights, chattel paper, instruments, securities, documents and all other
forms of obligations at any time owing to Borrower, all guaranties and other
security therefor, all merchandise returned to or repossessed by Borrower, and
all rights of stoppage in transit and all other rights or remedies of an unpaid
vendor, lienor or secured part.
Other Terms. All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with generally accepted accounting principles, consistently applied. All other
terms contained in this Agreement, unless otherwise indicated, shall have the
meanings provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 INTEREST COMPUTATION. In computing interest on the
Obligations, all checks, wire transfers and other items of payment received by
Coast (including proceeds of Receivables and payment of the Obligations in full)
shall be deemed applied by, Coast on account of the Obligations three Business
Days after receipt by Coast of immediately available funds, and, for purposes of
the foregoing, any such funds received after 10:30 AM on any day shall be deemed
received on the next Business Day. Coast shall not, however, be required to
credit Borrower's account for the amount of any item of payment which is
unsatisfactory to Coast in its sole discretion, and Coast may charge Borrower's
loan account for the amount of any item of payment which is returned to Coast
unpaid.
9.2 APPLICATION OF PAYMENTS. All payments with respect to
the Obligations may be applied, and in Coast's sole discretion reversed and
re-applied, to the Obligations, in such order and manner as Coast shall
determine in its sole discretion.
9.3 CHARGES TO ACCOUNTS. Coast may, in its discretion,
require that Borrower pay monetary Obligations in cash to Coast, or charge them
to Borrower's Loan account, in which event they will bear interest at the same
rate applicable to the Loans. Coast may also, in its discretion, charge any
monetary Obligations to Borrower's Deposit Accounts maintained with Coast.
9.4 MONTHLY ACCOUNTINGS. Coast shall provide Borrower
monthly with an account of advances, charges, expenses and payments made
pursuant to this Agreement. Such account shall be deemed correct, accurate and
binding on Borrower and an account stated (except for reverses and
reapplications of
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payments made and corrections of errors discovered by Coast), unless Borrower
notifies Coast in writing to the contrary within ninety days after each account
is rendered, describing the nature of any alleged errors or omissions.
9.5 NOTICES. All notices to be given under this Agreement
shall be in writing and shall be given either personally or by reputable private
delivery service or by regular first-class mail, or certified mail return
receipt requested, addressed to Coast or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Coast shall be directed to the Commercial
Finance Division, to the attention of the Division Manager or the Division
Credit Manager. All notices shall be deemed to have been given upon delivery in
the case of notices personally delivered, or at the expiration of one Business
Day following delivery to the private delivery service, or two Business Days
following the deposit thereof in the United States mail, with postage prepaid.
9.6 SEVERABILITY. Should any provision of this Agreement be
held by any court of competent jurisdiction to be void or unenforceable, such
defect shall not affect the remainder of this Agreement, which shall continue in
full force and effect.
9.7 INTEGRATION. This Agreement and such other written
agreements, documents and instruments as may be executed in connection herewith
are the final, entire and complete agreement between Borrower and Coast and
supersede all prior and contemporaneous negotiations and oral representations
and agreements, all of which are merged and integrated in this Agreement. There
are no oral understandings, representations or agreements between the parties
which are not set forth in this Agreement or in other written agreements signed
by the parties in connection herewith.
9.8 WAIVERS. The failure of Coast at any time or times to
require Borrower to strictly comply with any of the provisions of this Agreement
or any other present or future agreement between Borrower and Coast shall not
waive or diminish any right of Coast later to demand and receive strict
compliance therewith. Any waiver of any default shall not waive or affect any
other default, whether prior or subsequent, and whether or not similar. None of
the provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Coast shall be deemed to have been waived
by any act or knowledge of Coast or its agents or employees, but only by a
specific written waiver signed by an authorized officer of Coast and delivered
to Borrower. Borrower waives demand, protest, notice of protest and notice of
default or dishonor, notice of payment and nonpayment, release, compromise,
settlement, extension or renewal of any commercial paper, instrument, account,
General Intangible, document or guaranty at any time held by Coast on which
Borrower is or may in any way be liable, and notice of any action taken by
Coast, unless expressly required by this Agreement.
9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Coast,
nor any of its Directors, officers, employees, agents, attorneys or any other
Person affiliated with or representing Coast shall be liable for any claims,
demands, losses or damages, of any kind whatsoever, made, claimed, incurred or
suffered by Borrower or any other party through the ordinary negligence of
Coast, or any of its directors, officers, employees, agents, attorneys or any
other Person affiliated with or representing Coast, but nothing herein shall
relieve Coast from liability for its own gross negligence or willful misconduct.
9.10 AMENDMENT. The terms and provisions of this Agreement
may not be waived or amended, except in a writing executed by Borrower and a
duly authorized officer of Coast.
9.11 TIME OF ESSENCE. Time is of the essence in the
performance by Borrower of each and every obligation under this Agreement.
9.12 ATTORNEYS FEES, COSTS AND CHARGES. Borrower shall
reimburse Coast for all reasonable attorneys' fees and all filing, recording,
search, title insurance, appraisal, audit, and other reasonable costs incurred
by Coast, pursuant to, or in connection with, or relating to this Agreement
(whether or not a lawsuit is filed), including, but not limited to, any
reasonable attorneys' fees and costs Coast incurs in order to do the following:
prepare and negotiate this Agreement and the documents relating to this
Agreement; obtain legal advice in connection with this Agreement or Borrower;
enforce, or seek to enforce, any of its rights; prosecute actions against, or
defend actions by, Account Debtors; commence, intervene in, or defend any action
or proceeding; initiate any complaint to be relieved
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of the automatic stay in bankruptcy; file or prosecute any probate claim,
bankruptcy claim, third party claim, or other claim; examine, audit, copy, and
inspect any of the Collateral or any of Borrower's books and records; protect,
obtain possession of, lease, dispose of, or otherwise enforce Coast's security
interest in, the Collateral; and otherwise represent Coast in any litigation
relating to Borrower. If either Coast or Borrower files any lawsuit against the
other predicated on a breach of this Agreement, the prevailing party in such
action shall be entitled to recover its reasonable costs and attorneys' fees,
including (but not limited to) reasonable attorneys' fees and costs incurred in
the enforcement of, execution upon or defense of any order, decree, award or
judgment. Borrower shall also pay Coast's standard charges for returned checks
and for wire transfers, in effect from time to time. All attorneys' fees, costs
and charges to which Coast may be entitled pursuant to this Paragraph may be
charged by Coast to Borrower's loan account and shall thereafter bear interest
at the same rate as the Receivable Loans.
9.13 BENEFIT OF AGREEMENT. The provisions of this Agreeement
shall be binding upon and inure to the benefit of the respective successors,
assigns, heirs, beneficiaries and representatives of Borrower and Coast;
provided, however, that Borrower may not assign or transfer any of its rights
under this Agreement without the prior written consent of Coast, and any
prohibited assignment shall be void. No consent by Coast to any assignment shall
release Borrower from its liability for the Obligations.
9.14 PUBLICITY. Subject to Borrower's prior written consent,
Coast is hereby authorized, at its expense, to issue appropriate press releases
and to cause a tombstone to be published announcing the consummation of this
transaction and the aggregate amount thereof.
9.15 JOINT AND SEVERAL LIABILITY. If Borrower consists of
more than one Person, their liability shall be joint and several, and the
compromise of any claim with, or the release of, any Borrower shall not
constitute a compromise with, or a release of, any other Borrower.
9.16 LIMITATION OF ACTIONS. Any claim or cause of action by
Borrower against Coast, its directors, officers, employees, agents, accountants
or attorneys, based upon, arising from, or relating to this Loan Agreement, or
any other present or future document or agreement, or any other transaction
contemplated hereby or thereby or relating hereto or thereto, or any other
matter, cause or thing whatsoever, occurred, done, omitted or suffered to be
done by Coast, its directors, officers, employees, agents, accountants or
attorneys, shall be barred unless asserted by Borrower by the commencement of an
action or proceeding in a court of competent jurisdiction by the filing of a
complaint within one year after the first act, occurrence or omission upon which
such claim or cause of action, or any part thereof, is based, and the service of
a summons and complaint on an officer of Coast, or on any other person
authorized to accept service on behalf of Coast, within thirty (30) days
thereafter. Borrower agrees that such one-year period is a reasonable and
sufficient time for Borrower to investigate and act upon any such claim or cause
of action. The one-year period provided herein shall not be waived, tolled, or
extended except by the written consent of Coast in its sole discretion. This
provision shall survive any termination of this Loan Agreement or any other
present or future agreement.
9.17 PARAGRAPH HEADINGS, CONSTRUCTION. Paragraph headings
are only used in this Agreement for convenience. Borrower and Coast acknowledge
that the headings may not describe completely the subject matter of the
applicable paragraph, and the headings shall not be used in any manner to
construe, limit, define or interpret any term or provision of' this Agreement.
The term "including", whenever used in this Agreement, shall mean "including
(but not limited to)". This Agreement has been fully reviewed and negotiated
between the parties and no uncertainty or ambiguity in any term or provision of
this Agreement shall be construed strictly against Coast or Borrower under any
rule of construction or otherwise.
9.18 GOVERNING LAW, JURISDICTION; VENUE. This Agreement and
all acts and transactions hereunder and all rights and obligations of Coast and
Borrower shall be governed by the laws of the State of California. As a material
part of the consideration to Coast to enter into this Agreement, Borrower (i)
agrees that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Coast's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Los Angeles County;
(ii) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by personal delivery or any
other method permitted by law, and (iii) waives any and all rights Borrower may
have to object to the jurisdiction of any such court, or to transfer or change
the venue of any such action or proceeding.
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9.19 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND COAST EACH
HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON,
ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT
OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT,
ACTS OR OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR
BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR
OTHERWISE.
BORROWER:
DIGITAL PRODUCTS, INC., A MASSACHUSETTS CORPORATION
/s/ Christopher E. Sue
BY:___________________________
Treasurer
TITLE: _________________________
COAST:
COAST BUSINESS CREDIT, A DIVISION OF
SOUTHERN PACIFIC THRIFT & LOAN ASSOCIATION
/s/ Barbara Nitkin
BY: _______________________
Vice President
TITLE: _______________________
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COAST
Schedule to
Loan and Security Agreement
Borrower: Digital Products, Inc., a Massachusetts corporation
Address: 2800 28th Street, Suite 100
Santa Monica, California 90405
Date: October 11, 1996
This Schedule forms an integral part of the Loan and Security Agreement between
Coast Business Credit, a division of Southern Pacific Thrift & Loan Association,
and the above-borrower of even date.
1. CREDIT LIMIT
(Section 1.1): Loans in a total amount at any time outstanding
not to exceed the lesser of a total of $3,000,000
at any one time outstanding (the "Maximum Dollar
Amount"), or the sum of (a) and (b) below:
(a)Loans (the "Receivable Loans") in an
amount not to exceed 80% of the amount of
Borrower's Eligible Receivables (as
defined in Section 8 above), plus
(b) Loans (the "Inventory Loans") in an
amount not to exceed the lesser of:
(1) 30% of the value of
Borrower's Eligible Inventory
(as defined in Section 8 above),
calculated at the lower of cost
or market value and determined
on a first-in, first-out basis,
or
(2) $500,000.00.
2. INTEREST.
INTEREST RATE
(Section 1.2): A rate equal to the "Prime Rate" plus
2-1/2% per annum, calculated on the
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basis of a 360-day year for the actual
number of days elapsed. The interest rate
applicable to all Loans shall be adjusted
monthly as of the first day of each
month, and the interest to be charged for
each month shall be based on the highest
"Prime Rate" in effect during said month,
but in no event shall the rate of
interest charged on any Loans in any
month be less than 8% per annum. "Prime
Rate" means the actual "Reference Rate"
or the substitute therefor of the Bank of
America NT & SA whether or not that rate
is the lowest interest rate charged by
said bank. If the Prime Rate, as defined,
is unavailable, "Prime Rate" shall mean
the highest of the prime rates published
in the Wall Street Journal on the first
business day of the month, as the base
rate on corporate loans at large U.S.
money center commercial banks.
MINIMUM MONTHLY
INTEREST (Section 1.2): An amount not less than the interest that would be
payable based upon a daily Loan balance of
$1,000,000.00.
3. FEES (Section 1.3):
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Loan Fee: $30,000.00 -payable concurrently herewith.
Facility Fee: $ 3,500.00 -per calendar quarter, payable in advance (pro rated for
any partial month at the beginning of the term of this
Agreement).
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4. MATURITY DATE
(Section 6.1): 2/l/99 subject to automatic renewal as
provided in Section 6.1 above, and early
termination as provided in Section 6.2
above.
EARLY TERMINATION FEE
(Section 6.2): An amount equal to 2% of the Maximum
Dollar Amount (as defined in the
Schedule), if termination occurs on or
before the first anniversary of the date
of this Agreement; 1% of the Maximum
Dollar Amount, if termination occurs
after the first anniversary and on or
before the second anniversary of the
date of this Agreement; and 1/2% of the
Maximum Dollar Amount, if termination
occurs after the second anniversary and
on or before the third anniversary of
the date of this Agreement.
5. REPORTING:
(Section 5.3): Borrower shall provide Coast with the following:
1. Monthly Receivable agings, aged by
invoice date, within ten days after the
end of each month. The Receivable
reports to also provide breakdown
between domestic commercial Receivables,
foreign commercial Receivables, and
government receivables (including
identity of governmental agency).
2. Monthly accounts payable agings, aged by
invoice date, and outstanding or held
check registers within ten days after
the end of each month. From and after
funding, no accounts payable shall be
over 60 days from invoice date.
3. Monthly perpetual inventory reports for
the Inventory valued on a first-in,
first-out basis at the lower of cost or
market (in accordance with generally
accepted
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accounting principles) or such other
inventory reports as are reasonably
requested by Coast, all within ten days
after the end of each month. Such
inventory reports shall contain a
breakdown of raw materials, work in
process and finished goods.
4. All annual 10K'S, quarterly 10Q'S, and
all other filings, reports and notices
for Osicom Technologies, Inc., Builders
Warehouse Association, Inc. and
affiliates filed with the Securities and
Exchange Commission ("Filings"). All
Filings required by applicable law, rule
or regulation shall be made prior to
delinquency. Copies of all such Filings
shall be provided to Coast not later
than 5 days after the same are filed
with the Securities and Exchange
Commission. Internally prepared
consolidating quarterly and year end
statements shall be provided as soon as
available but in no event later than 45
days after the end of the quarter and 90
days after year end.
5. Updated lists of all of Borrower's
customers including customer names,
addresses, and phone numbers. Such lists
shall be provided to Coast within 5 days
after request is made by Coast for such
lists. If not specifically requested,
such lists shall be provided to Coast no
later than 5 days after the end of each
fiscal quarter of Borrower.
6. (A) Annual financial statements, as soon
as available, but in no event later than
90 days following the end of Borrower's
fiscal year, certified by independent
certified public accountants acceptable
to Coast.
(B) Monthly and quarterly internal
financial statements for Borrower and
its affiliates as soon as available, but
in no event later than 30 days and 45
days after the end of the applicable
monthly and quarterly accounting
periods, respectively. The monthly,
internally prepared financial statements
need only be in such form and contain
such information as is supplied to
management. The quarterly, internally
prepared financial statements shall
include or be accompanied by appropriate
disclosures of material changes in the
financial condition or financial
performance and/or explanation of
significant matters of an accounting or
management nature.
7. Proof of payment of all income taxes,
penalties and interest for fiscal years
ended April, 1993 and April, 1994.
8. The existing lockbox arrangement with
Fremont Financial to be switched to
Coast.
6. BORROWER INFORMATION:
PRIOR NAMES OF
BORROWER
(Section 3.2):
TRADE NAMES OF BORROWER
(Section 3.2): None
OTHER LOCATIONS AND
ADDRESSES (SECTION 3.3): 411 Waverly Oaks Road
Waltham, MA 02154
WAREHOUSE LOCATIONS: 1245 California Ave.
Brockville Ontario K6V546
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Yemns Corp.
Middebury Ind. Park
111 Exchange Street
Middlebury VT 05753
Fleet Bank 75 State Street
Waltham, MA
Acct: 05-0032-2903; 05-0032-2657;
05-0032-2644; 05-0119-9627
INTELLECTUAL PROPERTY COLLATERAL:
Without limiting the generality of
the description of collateral
securing the Borrower's Obligations,
attached hereto are lists of various
intangible properties and interests
which are granted hereby to Coast. To
the extent Borrower is requested by
Coast to execute such other and
further documents as Coast deems
necessary, appropriate or desirable
in order to further perfect and
maintain perfection of its liens and
security interests in the property
and interests listed in the exhibit
attached hereto, Borrower shall
promptly take all steps reasonably
requested by Coast.
LITIGATION (Section 3.10): None.
7. OTHER PROVISIONS:
A. All Obligations of Borrower to Coast
shall be guarantied by Osicom
Technologies, Inc.
B. Concurrent with funding, Osicom shall
make a cash contribution to Borrower
of at least $750,000.00 or such
higher amount to cover the current
deficit tangible net worth of
Borrower.
C. All obligations of Borrower to
Fremont Financial and the
Massachusetts Business Development
Corporation must be fully satisfied
at funding and all liens, security
interests and other pledges granted
to Fremont and the MBDC shall be
terminated, released or otherwise
eliminated in a manner and with
evidence satisfactory to
Coast.
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Borrower: Coast:
DIGITAL PRODUCTS, INC., COAST BUSINESS CREDIT, a
a Massachusetts corporation division of Southern Pacific
Thrift & Loan Association
/s/ Christopher E. Sue /s/ Barbara Nitkin
BY____________________________ BY________________________
Treasurer Vice President
Title _________________________ Title _____________________
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COAST
AMENDMENT #1 TO
LOAN AND SECURITY AGREEMENT
BORROWER: DIGITAL PRODUCTS, INC., A MASSACHUSETTS CORPORATION
ADDRESS: 2800 28TH STREET, SUITE 100 SANTA MONICA, CALIFORNIA 90405
DATE: FEBRUARY 12, 1998
This Amendment #1 to Loan and Security Agreement (the "Amendment") is entered
into by and between Coast Business Credit'r', a division of Southern Pacific
Bank (fka Southern Pacific Thrift & Loan Association) ("Coast"), and the
above-referenced borrower. This Amendment principally amends the Schedule (the
"Schedule") to the Loan and Security Agreement dated October 11, 1996. The
Schedule, as modified by this Amendment, shall for all purposes be deemed to be,
and the same shall constitute an integral part of the Loan and Security
Agreement. (Definitions and certain terms used in this Amendment shall have the
meanings set forth in the Loan and Security Agreement, the Schedule and all
other documents and agreements executed in connection therewith or in
furtherance thereof).
For good and valuable consideration, receipt of which is hereby
acknowledged, the Schedule is hereby amended in the following respects by this
Amendment and by reason thereof the Loan and Security Agreement, to the extent
governed or impacted by the Schedule, is also amended to the extent that
modifications of the Schedule result in modifications to the Loan and Security
Agreement.
SECTION 1 OF THE SCHEDULE (DEALING WITH THE CREDIT LIMIT) IS AMENDED TO READ AS
FOLLOWS:
1. CREDIT LIMIT
(Section 1.1): Loans in a total amount at any time outstanding not to
exceed the lesser of a total of $5,000,000 (the
"Maximum Dollar Amount"), or the sum of (a) and (b)
below:
Except as expressly modified herein, all other terms and conditions of
Section 1 of the
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Schedule remain unchanged.
SECTION 3 OF THE SCHEDULE (DEALING WITH FEES) IS AMENDED TO READ AS FOLLOWS:
3. FEES (Section 1.3):
Loan Fee: $50,000.00 - of which $30,000.00 was paid at funding,
$10,000.00 is due and payable on the date hereof, and
$10,000.00 shall be due and payable on August 11, 1998;
Facility Fee: $3,500.00 per calendar quarter for all periods prior to
the date hereof and increasing to $4,500.00 per calendar quarter for all periods
from and after the date hereof. All facility fees are payable in advance, and
prorated for any period that is less than a full calendar quarter.
Except as expressly modified herein, all other terms and conditions of
the Schedule, including the remaining provisions of Sections 1 and 3, remain
unchanged.
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Borrower: Coast:
DIGITAL PRODUCTS, INC., COAST BUSINESS CREDIT, a division of
a Massachusetts corporation Southern Pacific Bank, f/k/a Southern Pacific
Thrift & Loan Association
/s/ Christopher E. Sue /s/ Maged Ghebrial
By___________________________ By_____________________________
Treasurer Vice President
Title_________________________ Title___________________________
</TABLE>
The undersigned, having executed and delivered to Coast, a Subordination
Agreement dated as of October 11, 1996, and a Continuing Guaranty also dated as
of October 11, 1996, hereby (a) consents to the foregoing Amendment #1 to Loan
and Security Agreement, (b) reaffirms that the Subordination Agreement and the
Continuing Guaranty are in full force and effect and (c) acknowledges that the
Subordination Agreement and Continuing Guaranty shall, to the extent applicable,
be deemed to include the modifications provided in Amendment #1 to Loan and
Security Agreement.
Osicom Technologies, Inc.
/s/ Christopher E. Sue
By:_________________________
Vice President - Finance
Title:________________________
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COAST
SUBORDINATION AGREEMENT
Borrower: Digital Products, Inc.,
a Massachusetts corporation
Address: 2800 28th Street, Suite 100
Santa Monica, CA 90405
Creditor/Investor: Osicom Technologies, Inc.,
a New Jersey corporation
2800 28th Street, Suite 100
Santa Monica, California 90405
Date: October 11, 1996
THIS SUBORDINATION AGREEMENT is executed by the above-named
Subordinating Creditor. ("Subordinating Creditor") in favor of Coast Business
Credit, a division of Southern Pacific Thrift & Loan Association ("Coast"),
whose address is 12121 Wilshire Blvd., Los Angeles, California, with respect to
the above-named Borrower ("Borrower"). In order to induce Coast to extend or
continue to extend financing to the Borrower (but without obligation on Coast's
part to do so), the Subordinating Creditor hereby agrees as follows:
1. SUBORDINATION OF DEBT AND CAPITAL Subordinating Creditor hereby subordinates
payment by the Borrower of any and all indebtedness, liabilities, guarantees and
other obligations of the Borrower to Subordinating Creditor and return of
Capital or Distributions now existing or hereafter arising (collectively, the
"Subordinated Amounts"), to the payment to Coast, in full in cash, of all
indebtedness, liabilities, guarantees and other obligations of the Borrower to
Coast, now existing or hereafter arising (including without limitation any
interest, charges and other sums accruing after the filing of a petition by or
against Borrower under the Bankruptcy Code) (the "Coast Debt").
Subordinating Creditor represents and warrants that it has not transferred or
assigned the Subordinated Amounts or given any other subordination agreement in
respect thereof, and that it will not do so without prior written notice to
Coast and without making such transfer or assignment or subordination expressly
subject to this Agreement. Subordinating Creditor agrees not to ask for, demand,
sue for, take or receive all or any part of the Subordinated Amounts nor any
security therefor unless and until all of the Coast Debt has been paid and
performed in full, in cash; provided that, so long as no Event of Default and no
event which, with notice or passage of time or both, would constitute an Event
of Default under any present or future document, instrument or agreement
evidencing, securing or relating to the Coast Debt, both before and after giving
effect to the following payments, Subordinated Creditor may accept payment of
the following amounts on the Subordinated Amounts: Subordinating Creditor may
accept dividends declared by Borrower and repayment of all or part of the
Subordinated Amounts provided (a) such payments constitute ordinary course of
business transactions, (b) such payments would not constitute an event of
default and no event which, with notice or passage of time or both, would
constitute an event of default under any present or future document, instrument
or agreement between Borrower, Subordinating Creditor or any affiliate, on the
one hand and a party other than Coast on the other hand, (c) all such payments
are reported to Coast on a monthly basis, or more frequently if requested by
Coast, and (d) Coast has not given notice to Subordinating Creditor that Coast
has revoked
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the authorization of Subordinating Creditor to accept such dividends or
repayments of the Subordinated Amounts, which revocation may be made by Coast if
Coast in good faith believes that revocation is or may be necessary to avoid or
reduce the risk of a material adverse change or impairment of Coast's rights or
financial interests. Coast may further limit or condition dividends or
repayments of the Subordinated Amounts upon such terms as Coast, in its sole
discretion, deems appropriate, including, but not limited to, imposing dollar
limits and requiring advance notice to Coast of proposed dividends and
repayments in amounts which Coast, in its sole discretion, deems material.
Notwithstanding the foregoing, no portion of the $750,000.00 or higher cash
contribution required by Section 7B of the Schedule to the Loan and Security
Agreement shall be withdrawn by or for the benefit of Subordinating Creditor
until all Obligations to Coast have been paid in full or until Coast gives its
written consent to such withdrawal, whichever first occurs.
Subordinating Creditor further agrees that upon any distribution of the assets
or readjustment of the indebtedness of the Borrower whether by reason of
liquidation, composition, bankruptcy, arrangement, receivership, assignment for
the benefit of creditors or any other action or proceeding involving the
readjustment of all or any of the Subordinated Amounts, or the application of
the assets of the Borrower to the payment or liquidation thereof, Coast shall be
entitled to receive payment in full in cash of all of the Coast Debt prior to
the payment of all or any part of the Subordinated Amounts, and in order to
enable Coast to enforce its rights hereunder in any such action or proceeding,
Coast is hereby irrevocably authorized and empowered in its discretion (but
without any obligation on its part) to make and present for and on behalf of
Subordinating Creditor such proofs of claim and proofs of interest against the
Borrower on account of the Subordinated Amounts as Coast may deem expedient or
proper and to vote such proofs of claim and proofs of interest in any such
proceeding and to receive and collcct any and all dividends or other payments or
disbursements made thereon in whatever form the same may be paid or issued and
to apply same on account of the Coast Debt. Subordinating Creditor further
agrees to execute and deliver to Coast such assignments or other instruments as
may be required by Coast in order to enable Coast to enforce any and all such
claims and to collect any and all dividends or other payments or disbursements
which may be made at any time on account of all and any of the Subordinated
Amounts. Subordinating Creditor shall endorse all notes and other written
evidence of the Subordinated Amounts with a statement that they are subordinated
to the Coast Debt pursuant to the terms of this agreement, in such form as Coast
shall require, and Subordinating Creditor will exhibit the originals of such
notes and other written evidence of the Subordinated Amounts to Coast so that
Coast can confirm that such endorsement has been made, but this Subordination
Agreement shall be fully effective, even if no such endorsement is made.
2. MODIFICATIONS TO COAST DEBT; WAIVERS. Until Coast have received payment in
full of all Coast Debt, the Subordinating Creditor agrees that, in addition to
any other rights that Coast may have at law or in equity, Coast may at any time,
and from time to time, without the Subordinating Creditor's consent and without
notice to the Subordinating Creditor, renew, extend or increase any of the Coast
Debt or that of any other person at any time directly or indirectly liable for
the payment of any Coast Debt, accept partial payments of the Coast Debt,
settle, release (by operation of law or otherwise), compound, compromise,
collect or liquidate any of the Coast Debt, make loans or advances to the
Borrower secured in whole or in part by the any present or future assets
securing any or all of the Coast Debt (the "Collateral") or refrain from making
any loans or advances to the Borrower, change, waive, alter or vary the interest
charge on, or any other terms or provisions of the Coast Debt or any present or
future instrument, document or agreement between Coast and the Borrower,
release, exchange, fail to perfect, delay the perfection of, fail to resort to,
or realize upon any Collateral, and take any other action or omit to take any
other action with respect to the Coast Debt or the Collateral as Coast deems
necessary or advisable in Coast's sole discretion. Subordinating Creditor waives
any right to require Coast to marshal any assets in favor of the Subordinating
Creditor or against or in payment of any or all of the Coast Debt. Subordinating
Creditor further waives any defense arising by reason of any claim or defense
based upon an election of remedies by Coast which in any manner impairs,
affects, reduces, releases, destroys and/or extinguishes the Subordinating
Creditor' subrogation rights, rights to proceed against the Borrower for
reimbursement, and/or any other rights of the Subordinating Creditor. In the
event of any financing of the Borrower by Coast during any bankruptcy,
arrangement, or reorganization of the Borrower, the Subordinating Creditor
agrees that the term "Coast Debt" shall include without limitation all
indebtedness, liabilities and obligations incurred in any such proceeding, and
the Subordinated Amounts shall continue to remain subordinate to the Coast Debt,
and the Subordinating Creditor agrees to take such actions and execute such
documents in such proceedings as may be required in order to continue such
subordination.
3. DEFAULT. The Subordinating Creditor shall promptly give Coast written notice
of any default or
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event of default under any document, instrument or agreement evidencing,
securing or relating to any of the Subordinated Amounts, and, until the Coast
Debt has been paid and performed in full, the Subordinating Creditor shall not
exercise any rights or remedies with respect to, the Subordinated Amounts,
judicially or nonjudicially, or attempt to do any of the foregoing.
4. NO COMMITMENT. It is understood and agreed that this Agreement shall in no
way be construed as a commitment or agreement by Coast to continue financing
arrangements with the Borrower and that Coast may terminate such arrangements at
any time, in accordance with Coast's agreements with the Borrower.
5. NO CONTEST. Subordinating Creditor agrees not to contest the validity,
perfection, priority or enforceability of Coast' security interest in the
Collateral or the Coast Debt.
6. FINANCIAL CONDITION OF BORROWER. The Subordinating Creditor is presently
informed of the financial condition of the Borrower and of all other
circumstances which a diligent inquiry would reveal and which bear upon the risk
of non-payment of the Coast Debt and the Subordinated Amounts. The Subordinating
Creditor covenants that it will continue to keep itself informed as to the
Borrower's financial condition and all other circumstances which bear upon the
risk of nonpayment of the Coast Debt and the Subordinated Amounts. The
Subordinating Creditor waives any right to require Coast to disclose to it any
information which Coast may now or hereafter acquire concerning the Borrower.
7. REVIVOR. If, after payment of the Coast Debt, the Borrower thereafter becomes
liable to Coast on account of the Coast Debt, as a result of any payment made on
the Coast Debt for any reason being returned by Coast or being reversed, set
aside, or recovered by the Borrower or any trustee or assignee for the Borrower,
this Agreement shall thereupon in all respects become effective with respect to
such subsequent or reinstated Coast Debt, without the necessity of any further
act or agreement between Coast and the Subordinating Creditor.
8. GENERAL. The Subordinating Creditor agrees, upon Coast's request, to execute
all such documents and instruments and take all such actions as Coast shall deem
necessary or advisable in order to carry out the purposes of this Agreement. The
word "indebtedness" is used in this agreement in its most comprehensive sense
and includes without limitation any and all present and future loans, advances,
credit, debts, obligations, liabilities, representations, warranties, and
guarantees, of any kind and nature, absolute or contingent, liquidated or
unliquidated, and individual or joint. Subordinating Creditor represents and
warrants that it has not heretofore transferred or assigned the Subordinated
Amounts, and that it will not do so without prior written notice to Coast and
without making such transfer or assignment expressly subject to this Agreement.
This Agreement is solely for the benefit of Coast and Coast's successors and
assigns, and neither the Borrower nor any other person shall have any right,
benefit, priority or interest under, or because of the existence of, this
Agreement. All of Coast's rights and remedies hereunder and under applicable law
are cumulative and not exclusive. This Agreement sets forth in full the terms of
agreement between the parties with respect to the subject matter hereof, and may
not be modified or amended, nor may any rights hereunder be waived, except in a
writing signed by Coast and the Subordinating Creditor. The Subordinating
Creditor agrees to reimburse Coast, upon demand, for all costs and expenses
(including reasonable attorneys' fees) incurred by Coast in enforcing this
Agreement against Subordinating Creditor, whether or not suit be brought. In the
event of any litigation between the parties based upon or arising out of this
Agreement, the prevailing party shall be entitled to recover all of its costs
and expenses (including without limitation attorneys fees) from the
non-prevailing party. This Agreement shall be construed in accordance with, and
governed by, the laws of the State of California. As a material part of the
consideration to the parties for entering into this Agreement, each party (i)
agrees that all actions and proceedings based upon, arising out of or relating
in any way directly or indirectly to, this Agreement shall be litigated
exclusively in courts located within Los Angeles County, California, (ii)
consents to the jurisdiction of any such court and consents to the service of
process in any such action or proceeding by personal delivery, first-class mail,
or any other method permitted by law, and (iii) waives any and all rights to
transfer or change the venue of any such action or proceeding to any court
located outside Los Angeles County, California. This Agreement shall be binding
upon the Subordinating Creditor and its successors and assigns and shall inure
to the benefit of Coast and Coast's successors and assigns.
9. MUTUAL WAIVER OF JURY TRIAL. SUBORDINATING CREDITOR AND COAST EACH HEREBY
WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING
OUT OF, OR IN ANY WAY RELATING TO: (i) THIS AGREEMENT; OR (ii) ANY OTHER PRESENT
OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN SUBORDINATING CREDITOR AND COAST; OR
(iii)
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ANY CONDUCT, ACTS OR OMISSIONS OF SUBORDINATING CREDITOR OR COAST OR ANY OF
THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS
AFFILIATED WITH SUBORDINATING CREDITOR OR COAST; IN EACH OF THE FOREGOING CASES,
WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
"SUBORDINATING CREDITOR:"
OSICOM TECHNOLOGIES, INC..
/s/ Christopher E. Sue
BY:_________________________________
Chief Financial Officer
TITLE:_______________________________
CONSENT AND AGREEMENT OF BORROWER
The undersigned Borrower hereby approves of, agrees to and
consents to all of the terms and provisions of the foregoing Subordination
Agreement and agrees to be bound thereby and further agrees that any default or
event of default by the Borrower under any present or future instrument or
agreement between the Borrower and the Subordinating Creditor shall constitute
an immediate default and event of default under all present and future
instruments and agreements between the Borrower and Coast. Borrower further
agrees that, at any time and from time to time, the foregoing Agreement may be
altered, modified or amended by Coast and the Subordinating Creditor without
notice to or the consent of Borrower.
BORROWER:
DIGITAL PRODUCTS, INC.,
A MASSACHUSETTS CORPORATION
/s/ Christopher E. Sue
BY:_________________________________
Treasurer
TITLE:_______________________________
ACCEPTED:
COAST:
COAST BUSINESS CREDIT, A DIVISION OF
SOUTHERN PACIFIC THRIFT & LOAN ASSOCIATION
/s/ Barbara Nitkin
BY:_________________________________
Vice President
TITLE:_______________________________
<PAGE>
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COAST
Continuing Guaranty
Guarantor: Osicom Technologies, Inc., a New Jersey corporation
Address: 2800 28th Street, Suite 100
Santa Monica, California 90405
Borrower: Digital Products, Inc., a Massachusetts corporation
Address: 2800 28th Street
Santa Monica, California 90405
Date: October 11, 1996
THIS CONTINUING GUARANTY is executed by the above-named guarantor ("Guarantor"),
as of the above date, in favor of COAST BUSINESS CREDIT, a division of Southern
Pacific Thrift & Loan Association ("Coast"), a California corporation, with
offices at 12121 Wilshire Boulevard, Suite 1111, Los Angeles, California 90025,
with respect to the Indebtedness of Cray Communications, Inc., a Delaware
corporation ("Borrower").
1. CONTINUING GUARANTY. Guarantor hereby unconditionally guarantees and promises
to pay on demand to Coast, at the address indicated above, or at such other
address as Coast may direct, in lawful money of the United States, and to
perform for the benefit of Coast, all Indebtedness of Borrower now or hereafter
owing to or held by Coast. As used herein, the term "Indebtedness" is used in
its most comprehensive sense and shall mean and include without limitation: (a)
any and all debts, duties, obligations, liabilities, representations, warranties
and guaranties of Borrower or any one or more of them, heretofore, now, or
hereafter made, incurred, or created, whether directly to Coast or acquired by
Coast by assignment or otherwise, or held by Coast on behalf of others, however
arising, whether voluntary or involuntary, due or not due, absolute or
contingent, liquidated or unliquidated, certain or uncertain, determined or
undetermined, monetary or nonmonetary, written or oral, and whether Borrower may
be liable individually or jointly with others, and regardless of whether
recovery thereon may be or hereafter become barred by any statute of
limitations, discharged or uncollectible in any bankruptcy, insolvency or other
proceeding, or otherwise unenforceable; and (b) any and all amendments,
modifications, renewals and extensions of any or all of the foregoing, including
without limitation amendments, modifications, renewals and extensions which are
evidenced by any new or additional instrument, document or agreement; and (c)
any and all attorneys' fees, court costs, and collection charges incurred in
endeavoring to collect or enforce any of the foregoing against Borrower,
Guarantor, or any other person liable thereon (whether or not suit be brought)
and any other expenses of, for or incidental to collection thereof. As used
herein, the term "Borrower" shall include any successor to the business and
assets of Borrower, and shall also include Borrower in its capacity as a debtor
or debtor in possession under the federal Bankruptcy Code, and any trustee,
custodian or receiver for Borrower or any of its assets, should Borrower
hereafter become the subject of any bankruptcy or insolvency proceeding,
voluntary or involuntary; and all indebtedness, liabilities and obligations
incurred by any such person shall be included in the Indebtedness guaranteed
hereby. This Guaranty is given in consideration for credit and other financial
accommodations which may, from time to time, be given by Coast to Borrower in
Coast's sole discretion, but Guarantor acknowledges and agrees that acceptance
by Coast of this Guaranty shall not constitute a commitment of any kind by Coast
to extend such credit or other financial accommodation to Borrower or to permit
Borrower to incur Indebtedness to Coast. All sums due under this Guaranty shall
bear interest from the date due until the date paid at the highest rate charged
with respect to any of the Indebtedness.
2. WAIVERS. Guarantor hereby waives: (a) presentment for payment, notice of
dishonor, protest, and notice
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thereof as to any instrument, and all other notices and demands to which
Guarantor might be entitled, including without limitation notice of all of the
following: the acceptance hereof; the creation, existence, or acquisition of any
Indebtedness; the amount of the Indebtedness from time to time outstanding;
disposition of any property which secures any or all of the Indebtedness or
which secures the obligations of any other guarantor of any or all of the
Indebtedness; any adverse change in Borrower's financial position; any other
fact which might increase Guarantor's risk; any default, partial payment or
non-payment of all or any part of the Indebtedness; any and all agreements and
arrangements between Coast and Borrower and any changes, modifications, or
extensions thereof, and any revocation, modification or release of any guaranty
of any or all of the Indebtedness by any person (including without limitation
any other person signing this Guaranty); (b) any right to require Coast to
institute suit against, or to exhaust its rights and remedies against, Borrower
or any other person, or to proceed against any property of any kind which
secures all or any part of the Indebtedness, or to exercise any right of offset
or other right with respect to any reserves, credits or deposit accounts held by
or maintained with Coast or any indebtedness of Coast to Borrower, or to
exercise any other right or power, or pursue any other remedy Coast may have;
(c) any defense arising by reason of any disability or other defense of Borrower
or any other guarantor or any endorser, co-maker or other person, or by reason
of the cessation from any cause whatsoever of any liability of Borrower or any
other guarantor or any endorser, co-maker or other person, with respect to all
or any part of the Indebtedness, or by reason of any act or omission of Coast or
others which directly or indirectly results in the discharge or release of
Borrower or any other guarantor or any other person or any Indebtedness or any
security therefor, whether by operation of law or otherwise; (d) any defense
arising by reason of any failure of Coast to obtain, perfect, maintain or keep
in force any security interest in, or lien or encumbrance upon, any property of
Borrower or any other person; (e) any defense based upon any failure of Coast to
give Guarantor notice of any sale or other disposition of any property securing
any or all of the Indebtedness, or any defects in any such notice that may be
given, or any failure of Coast to comply with any provision of applicable law in
enforcing any security interest in or lien upon any property securing any or all
of the Indebtedness including, but not limited to, any failure by Coast to
dispose of any property securing any or all of the Indebtedness in a
commercially reasonable manner; (f) any defense based upon or arising out of any
bankruptcy, insolvency, reorganization, arrangement, readjustment of debt,
liquidation or dissolution proceeding commenced by or against Borrower or any
other guarantor or any endorser, co-maker or other person, including without
limitation any discharge of, or bar against collecting, any of the Indebtedness
(including without limitation any interest thereon), in or as a result of any
such proceeding; and (g) the benefit of any and all statutes of limitation with
respect to any action based upon, arising out of or related to this Guaranty.
Until all of the Indebtedness has been paid, performed, and discharged in full,
nothing shall discharge or satisfy the liability of Guarantor hereunder except
the full performance and payment of all of the Indebtedness. If any claim is
ever made upon Coast for repayment or recovery of any amount or amounts received
by Coast in payment of or on account of any of the Indebtedness, because of any
claim that any such payment constituted a preferential transfer or fraudulent
conveyance, or for any other reason whatsoever, and Coast repays all or part of
said amount by reason of any judgment, decree or order of any court or
administrative body having jurisdiction over Coast or any of its property, or by
reason of any settlement or compromise of any such claim effected by Coast with
any such claimant (including without limitation the Borrower), then and in any
such event, Guarantor agrees that any such judgment, decree, order, settlement
and compromise shall be binding upon Guarantor, notwithstanding any revocation
or release of this Guaranty or the cancellation of any note or other instrument
evidencing any of the Indebtedness, or any release of any of the Indebtedness,
and the Guarantor shall be and remain liable to Coast under this Guaranty for
the amount so repaid or recovered, to the same extent as if such amount had
never originally been received by Coast, and the provisions of this sentence
shall survive, and continue in effect, notwithstanding any revocation or release
of this Guaranty. Until all of the Indebtedness has been irrevocably paid and
performed in full, Guarantor hereby expressly and unconditionally waives all
rights of subrogation, reimbursement and indemnity of every kind against
Borrower, and all rights of recourse to any assets or property of Borrower, and
all rights to any collateral or security held for the payment and performance of
any Indebtedness, including (but not limited to) any of the foregoing rights
which Guarantor may have under any present or future document or agreement with
any Borrower or other person, and including (but not limited to) any of the
foregoing rights which Guarantor may have under any equitable doctrine of
subrogation, implied contract, or unjust enrichment, or any other equitable or
legal doctrine. Neither Coast, nor any of its directors, officers, employees,
agents, attorneys or any other person affiliated with or representing Coast
shall be liable for any claims, demands, losses or damages, of any kind
whatsoever, made, claimed, incurred or suffered by Guarantor or any other party
through the ordinary negligence of Coast, or any of its directors, officers,
employees, agents, attorneys or any other person affiliated with or representing
Coast.
3. CONSENTS. Guarantor hereby consents and agrees that, without notice to or by
Guarantor and without
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affecting or impairing in any way the obligations or liability of Guarantor
hereunder, Coast may, from time to time before or after revocation of this
Guaranty, do any one or more of the following in Coast's sole and absolute
discretion: (a) accelerate, accept partial payments of, compromise or settle,
renew, extend the time for the payment, discharge, or performance of, refuse to
enforce, and release all or any parties to, any or all of the Indebtedness; (b)
grant any other indulgence to Borrower or any other person in respect of any or
all of the Indebtedness or any other matter; (c) accept, release, waive,
surrender, enforce, exchange, modify, impair, or extend the time for the
performance, discharge, or payment of, any and all property of any kind securing
any or all of the Indebtedness or any guaranty of any or all of the
Indebtedness, or on which Coast at any time may have a lien, or refuse to
enforce its rights or make any compromise or settlement or agreement therefor in
respect of any or all of such property; (d) substitute or add, or take any
action or omit to take any action which results in the release of, any one or
more endorsers or guarantors of all or any part of the Indebtedness, including,
without limitation one or more parties to this Guaranty, regardless of any
destruction or impairment of any right of contribution or other right of
Guarantor; (e) amend, alter or change in any respect whatsoever any term or
provision relating to any or all of the Indebtedness, including the rate of
interest thereon; (f) apply any sums received from Borrower, any other
guarantor, endorser, or co-signer, or from the disposition of any collateral or
security, to any indebtedness whatsoever owing from such person or secured by
such collateral or security, in such manner and order as Coast determines in its
sole discretion, and regardless of whether such indebtedness is part of the
Indebtedness, is secured, or is due and payable; (g) apply any sums received
from Guarantor or from the disposition of any collateral or security securing
the obligations of Guarantor, to any of the Indebtedness in such manner and
order as Coast determines in its sole discretion, regardless of whether or not
such Indebtedness is secured or is due and payable. Guarantor consents and
agrees that Coast shall be under no obligation to marshal any assets in favor of
Guarantor, or against or in payment of any or all of the Indebtedness. Guarantor
further consents and agrees that Coast shall have no duties or responsibilities
whatsoever with respect to any property securing any or all of the Indebtedness.
Without limiting the generality of the foregoing, Coast shall have no obligation
to monitor, verify, audit, examine, or obtain or maintain any insurance with
respect to, any property securing any or all of the Indebtedness.
4. ACCOUNT STATED. Coast's books and records showing the account between it and
the Borrower shall be admissible in evidence in any action or proceeding as
prima facie proof of the items therein set forth. Coast's monthly statements
rendered to the Borrower shall be binding upon the Guarantor (whether or not the
Guarantor receives copies thereof), and shall constitute an account stated
between Coast and the Borrower, unless Coast receives a written statement of the
Borrower's exceptions within 30 days after the statement was mailed to the
Borrower. The Guarantor assumes full responsibility for obtaining copies of such
monthly statements from the Borrower, if the Guarantor desires such copies.
5. EXERCISE OF RIGHTS AND REMEDIES; FORECLOSURE OF TRUST DEEDS. Guarantor
consents and agrees that, without notice to or by Guarantor and without
affecting or impairing in any way the obligations or liability of Guarantor
hereunder, Coast may, from time to time, before or after revocation of this
Guaranty, exercise any right or remedy it may have with respect to any or all of
the Indebtedness or any property securing any or all of the Indebtedness or any
guaranty thereof, including without limitation judicial foreclosure, nonjudicial
foreclosure, exercise of a power of sale, and taking a deed, assignment or
transfer in lieu of foreclosure as to any such property, and Guarantor expressly
waives any defense based upon the exercise of any such right or remedy,
notwithstanding the effect thereof upon any of Guarantor's rights, including
without limitation, any destruction of Guarantor's right of subrogation against
Borrower and any destruction of Guarantor's right of contribution or other right
against any other guarantor of any or all of the Indebtedness or against any
other person, whether by operation of Sections 580a, 580d or 726 of the
California Code of Civil Procedure, or any comparable provisions of the laws of
any other jurisdiction, or any other statutes or rules of law now or hereafter
in effect, or otherwise. Without limiting the generality of the foregoing, (a)
Guarantor waives all rights and defenses arising out of an election of remedies
by Coast, even though that election of remedies, such as a nonjudicial
foreclosure with respect to security for any of the Indebtedness, has destroyed
the guarantor's rights of subrogation and reimbursement against the principal by
the operation of Section 580d of the Code of Civil Procedure or otherwise. (b)
Guarantor further waives all rights and defenses arising out of an election of
remedies by Coast, even though that election of remedies, such as a nonjudicial
foreclosure with respect to security for any of the Indebtedness, has destroyed
the guarantor's rights of subrogation, reimbursement and contribution against
any other guarantor of the guaranteed obligation, by the operation of Section
580d of the Code of Civil Procedure or otherwise. (c) Guarantor understands that
if Coast forecloses any present or future trust deed, which secures any or all
of the Indebtedness or which secures any other guaranty of any or all of the
Indebtedness, by
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<PAGE>
nonjudicial foreclosure, Guarantor may, as a result, have a complete defense to
liability under this Guaranty, based on the legal doctrine of estoppel and
Sections 580a, 580d or 726 of the California Code of Civil Procedure, and
Guarantor hereby expressly waives all such defenses. (d) Guarantor understands
and agrees that, in the event Coast in its sole discretion forecloses any trust
deed now or hereafter securing any or all of the Indebtedness, by nonjudicial
foreclosure, Guarantor will remain liable to Coast for any deficiency, even
though Guarantor will lose his right of subrogation against the Borrower, and
even though Guarantor will be unable to recover from the Borrower the amount of
the deficiency for which Guarantor is liable, and even though Guarantor may have
retained his right of subrogation against Borrower if Coast had foreclosed said
trust deed by judicial foreclosure as opposed to nonjudicial foreclosure, and
even though absent the waivers set forth herein Guarantor may have had a
complete defense to any liability for any deficiency hereunder. (e) Guarantor
understands and agrees that, in the event Coast in its sole discretion
forecloses any trust deed now or hereafter securing any other guaranty of any or
all of the Indebtedness, by nonjudicial foreclosure, Guarantor will remain
liable to Coast for any deficiency, even though Guarantor will lose his right of
subrogation or contribution against the other guarantor, and even though
Guarantor will be unable to recover from the other guarantor any part of the
deficiency for which Guarantor is liable, and even though Guarantor may have
retained his right of subrogation or contribution against the other guarantor if
Coast had foreclosed said trust deed by judicial foreclosure as opposed to
nonjudicial foreclosure, and even though absent the waivers set forth herein
Guarantor may have had a complete defense to any liability for any deficiency
hereunder.
6. ACCELERATION. Notwithstanding the terms of all or any part of the
Indebtedness, the obligations of the Guarantor hereunder to pay and perform all
of the Indebtedness shall, at the option of Coast, immediately become due and
payable, without notice, and without regard to the expressed maturity of any of
the Indebtedness, in the event: (a) any warranty, representation, statement,
report, or certificate made or delivered to Coast by Borrower or Guarantor, or
any of their respective officers, partners, employees, or agents, is incorrect,
false, untrue, or misleading when given in any material respect; or (b) Borrower
or Guarantor shall fail to pay or perform when due all or any part of the
Indebtedness; or (c) Guarantor shall fail to pay or perform within 5 days after
the same is due any indebtedness or obligation of Guarantor to Coast or to any
parent, subsidiary or corporate affiliate of Coast, whether under this Guaranty
or any other instrument, document, or agreement heretofore or hereafter entered
into; or (d) there occurs in Coast's judgment a material impairment of the
prospect of payment or performance of any or all of the Indebtedness; or (e) any
event shall occur which does result in the acceleration of the maturity of any
indebtedness of Borrower or Guarantor to others (regardless of any requirement
of notice, opportunity to cure or other condition prior to the exercise of any
right of acceleration); or (f) Borrower or Guarantor shall fail promptly to
perform or comply with any term or condition of any agreement with any third
party which does or may result in a material adverse effect on the business of
Borrower or Guarantor unless timely cured or waived in writing by such third
party; or (g) there shall be made or exist any levy, assessment, attachment,
seizure, lien, or encumbrance for any cause or reason whatsoever upon all or any
part of the property of Borrower or Guarantor (unless discharged by payment,
release or bond not more than ten days after such event has occurred); or (h)
there shall occur the dissolution, termination of existence, insolvency, or
business failure of Borrower or Guarantor, or the appointment of a receivers
trustee or custodian for Borrower or Guarantor or all or any part of the
property of either of them, or the assignment for the benefit of creditors by
Borrower or Guarantor, or the commencement of any proceeding by or against
Borrower or Guarantor under any reorganization, bankruptcy, insolvency,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, now or hereafter in effect; or (i) Borrower or Guarantor shall
be deceased or declared incompetent by any court or a guardian or conservator
shall be appointed for either of them or for the property of either of them; or
(j) Guarantor or Borrower shall generally not pay their respective debts as they
become due or shall enter into any agreement (whether written or oral), or offer
to enter into any such agreement, with all or a significant number of its
creditors regarding any moratorium or other indulgence with respect to its debts
or the participation of such creditors or their representatives in the
supervision, management, or control of the business of either of them; or (k)
Borrower or Guarantor shall conceal, remove or permit to be concealed or removed
any part of its property, with intent to hinder, delay or defraud its creditors,
or make or suffer any transfer of any of its property which may be fraudulent
under any bankruptcy, fraudulent conveyance or similar law, or shall make any
transfer of its property to or for the benefit of any creditor at a time when
other creditors similarly situated have not been paid; or (l) the board of
directors or shareholders of Borrower or Guarantor shall adopt any resolution or
plan for its dissolution or the liquidation of all or substantially all of its
assets; or (m) Guarantor shall revoke this Guaranty or contest or deny liability
under this Guaranty. All of the foregoing are hereinafter referred to as "Events
of Default".
7. RIGHT TO ATTACHMENT REMEDY. Guarantor agrees that, notwithstanding the
existence of any property securing any or all of the Indebtedness, Coast shall
have all of the rights of an unsecured creditor of Guarantor,
<PAGE>
<PAGE>
including without limitation the right to obtain a temporary protective order
and writ of attachment against Guarantor with respect to any sums due under this
Guaranty. Guarantor further agrees that in the event any property secures the
obligations of Guarantor under this Guaranty, to the extent that Coast, in its
sole and absolute discretion, determines prior to the disposition of such
property that the amount to be realized by Coast therefrom may be less than the
indebtedness of the Guarantor under this Guaranty, Coast shall have all the
rights of an unsecured creditor against Guarantor, including without limitation
the right of Coast, prior to the disposition of said property, to obtain a
temporary protective order and writ of attachment against Guarantor. Guarantor
waives the benefit of Section 483.010(b) of the California Code of Civil
Procedure and of any and all other statutes and rules of law now or hereafter in
effect requiring Coast to first resort to or exhaust all such collateral before
seeking or obtaining any attachment remedy against Guarantor. Coast shall have
no liability to Guarantor as a result thereof, whether or not the actual
deficiency realized by Coast is less than the anticipated deficiency on the
basis of which Coast obtains a temporary protective order or writ of attachment.
8. INDEMNITY. Guarantor hereby agrees to indemnify Coast and hold Coast harmless
from and against any and all claims, debts, liabilities, demands, obligations,
actions, causes of action, penalties, costs and expenses (including without
limitation attorneys' fees), of every nature, character and description, which
Coast may sustain or incur based upon or arising out of any of the Indebtedness,
any actual or alleged failure to collect and pay over any withholding or other
tax relating to Borrower or its employees, any relationship or agreement between
Coast and Borrower, any actual or alleged failure of Coast to comply with any
writ of attachment or other legal process relating to Borrower or any of its
property, or any other matter, cause or thing whatsoever occurred, done, omitted
or suffered to be done by Coast relating in any way to Borrower or the
Indebtedness (except any such amounts sustained or incurred as the result of the
gross negligence or willful misconduct of Coast or any of its directors,
officers, employees, agents, attorneys, or any other person affiliated with or
representing Coast). Notwithstanding any provision in this Guaranty to the
contrary, the indemnity agreement set forth in this Section shall survive any
termination or revocation of this Guaranty and shall for all purposes continue
in full force and effect.
9. SUBORDINATION. Any and all debts, liabilities and obligations owing from
Borrower to Guarantor including any security for and guaranties of any such
obligations, whether now existing or hereafter arising, are hereby subordinated
in right of payment to the prior payment in full of all of the Indebtedness.
Except as permitted in that certain Subordination Agreement between Guarantor
and Coast dated as of October, 1996, and any written amendments thereto, no
payment in respect of any such subordinated obligations shall at any time be
made to or accepted by Guarantor if at the time of such payment any Indebtedness
is outstanding unless Coast, in its sole discretion, agrees to such payment in
writing. The agreement by Coast to a payment on account of subordinated debt
shall not constitute an agreement to the payment of any other subordinated. If
any Event of Default has occurred, all debts, liabilities and obligations owing
from Borrower to Guarantor shall be subordinated, Borrower and any assignee,
trustee in bankruptcy, receiver, or any other person having custody or control
over any or all of Borrower's property are hereby authorized and directed to pay
to Coast the entire unpaid balance of the Indebtedness before making any
payments whatsoever to Guarantor, whether as a creditor, shareholder, or
otherwise; and insofar as may be necessary for that purposes Guarantor hereby
assigns and transfers to Coast all rights to any and all debts, liabilities and
obligations owing from Borrower to Guarantor, including any security for and
guaranties of any such obligations, whether now existing or hereafter arising,
including without limitation any payments, dividends or distributions out of the
business or assets of Borrower. Any amounts received by Guarantor in violation
of the foregoing provisions shall be received and held as trustee for the
benefit of Coast and shall forthwith be paid over to Coast to be applied to the
Indebtedness in such order and sequence as Coast shall in its sole discretion
determine, without limiting or affecting any other right or remedy which Coast
may have hereunder or otherwise and without otherwise affecting the liability of
Guarantor hereunder. Guarantor hereby expressly waives any right to set-off or
assert any counterclaim against Borrower.
10. REVOCATION. This is a Continuing Guaranty relating to all of the
Indebtedness, including Indebtedness arising under successive transactions which
from time to time continue the Indebtedness or renew it after it has been
satisfied. Guarantor waives all benefits of California Civil Code Section 2815,
and agrees that the obligations of Guarantor hereunder may not be terminated or
revoked in any manner except by giving written notice of revocation to Coast at
its address above by registered first-class U.S. mail, postage prepaid, return
receipt requested, and only as to new loans made by Coast to Borrower after
actual receipt of such written notice by Coast. No termination or revocation of
this Guaranty shall be effective until actual receipt of said written notice of
revocation by Coast. Notwithstanding such written notice of revocation or any
other act of Guarantor or any other event or circumstance, Guarantor agrees that
<PAGE>
<PAGE>
this Guaranty and all consents, waivers and other provisions hereof shall
continue in full force and effect as to any and all Indebtedness which is
outstanding on or before the day following actual receipt of said written notice
of revocation by Coast, and all extensions, renewals and modifications of said
Indebtedness (including without limitation amendments, extensions, renewals and
modifications which are evidenced by new or additional instruments, documents or
agreements executed before receipt of revocation, and all attorneys' fees, court
costs and collection charges, incurred before or after receipt of revocation, in
endeavoring to collect or enforce any of the foregoing against Borrower,
Guarantor or any other person liable thereon (whether or not suit be brought)
and any other expenses of, for or incidental to collection thereof.
11. INDEPENDENT LIABILITY. Guarantor hereby agrees that one or more successive
or concurrent actions may be brought hereon against Guarantor, in the same
action in which Borrower may be sued or in separate actions, as often as deemed
advisable by Coast. The liability of Guarantor hereunder is exclusive and
independent of any other guaranty of any or all of the Indebtedness whether
executed by Guarantor or by any other guarantor (including without limitation
any other persons signing this Guaranty). The liability of Guarantor hereunder
shall not be affected, revoked, impaired, or reduced by any one or more of the
following: (a) the fact that the Indebtedness exceeds the maximum amount of
Guarantor's liability, if any, specified herein or elsewhere (and no agreement
specifying a maximum amount of Guarantor's liability shall be enforceable unless
set forth in a writing signed by Coast or set forth in this Guaranty); or (b)
any direction as to the application of payment by Borrower or by any other
party; or (c) any other continuing or restrictive guaranty or undertaking or any
limitation on the liability of any other guarantor (whether under this Guaranty
or under any other agreement); or (d) any payment on or reduction of any such
other guaranty or undertaking; or (e) any revocation, amendment, Modification or
release of any such other guaranty or undertaking; or (f) any dissolution or
termination of, or increase, decrease, or change in membership of any Guarantor
which is a partnership. Guarantor hereby expressly represents that he was not
induced to give this Guaranty by the fact that there are or may be other
guarantors either under this Guaranty or otherwise, and Guarantor agrees that
any release of any one or more of such other guarantors shall not release
Guarantor from his obligations hereunder either in full or to any lesser extent.
If Guarantor is a married person, Guarantor hereby expressly agrees that
recourse may be had against his or her separate property for all of his or her
obligations hereunder.
12. FINANCIAL CONDITION OF BORROWER. Guarantor is full aware of the financial
condition of Borrower and is executing and delivering this Guaranty at
Borrower's request and based solely upon his own independent investigation of
all matters pertinent hereto, and Guarantor is not relying in any manner upon
any representation or statement of Coast with respect thereto. Guarantor
represents and warrants that he is in a position to obtain, and Guarantor hereby
assumes full responsibility for obtaining, any additional information concerning
Borrower's financial condition and any other matter pertinent hereto as
Guarantor may desire, and Guarantor is not relying upon or expecting Coast to
furnish to him any information now or hereafter in Coast's possession concerning
the same or any other matter. By executing this Guaranty, Guarantor knowingly
accepts the full range of risks encompassed within a contract of continuing
guaranty, which risks Guarantor acknowledges include without limitation the
possibility that Borrower will incur additional Indebtedness for which Guarantor
will be liable hereunder after Borrower's financial condition or ability to pay
such Indebtedness has deteriorated and/or after bankruptcy or insolvency
proceedings have been commenced by or against Borrower. Guarantor shall have no
right to require Coast to obtain or disclose any information with respect to the
Indebtedness, the financial condition or character of Borrower, the existence of
any collateral or security for any or all of the Indebtedness, the filing by or
against Borrower of any bankruptcy or insolvency proceeding, the existence of
any other guaranties of all or any part of the Indebtedness, any action or
non-action on the part of Coast, Borrower, or any other person, or any other
matter, fact, or occurrence.
13. REPORTS AND FINANCIAL STATEMENTS OF GUARANTOR. Guarantor shall, at its sole
cost and expense, at any time and from time to time, prepare or cause to be
prepared, and provide to Coast upon Coast's request (i) such financial
statements and reports concerning Guarantor for such periods of time as Coast
may designate, (ii) any other information concerning Guarantor's business,
financial condition or affairs as Coast may request, and (iii) copies of any and
all foreign, federal, state and local tax returns and reports of or relating to
Guarantor as Coast may from time to time request. Guarantor hereby intentionally
and knowingly waives any and all rights and privileges it may have not to
divulge or deliver said tax returns, reports and other information which are
requested by Coast hereunder or in any litigation in which Coast may be involved
relating directly or indirectly to Borrower or to Guarantor. Guarantor further
agrees immediately to give written notice to Coast of any adverse change in
Guarantor's financial condition and of any condition or event which constitutes
an Event of Default under this Guaranty. All reports and information furnished
to Coast hereunder shall be complete, accurate and correct in all respects.
Whenever requested, Guarantor
<PAGE>
<PAGE>
shall further deliver to Coast a certificate signed by Guarantor (and, if
Guarantor is a partnership, by all general partners of Guarantor, in their
individual capacities, and, if Guarantor is a corporation, by the president and
secretary of Guarantor, in their individual capacities) warranting and
representing that all reports, financial statements and other documents and
information delivered or caused to be delivered to Coast under this Guaranty,
are complete, correct and thoroughly and accurately present the financial
condition of Guarantor, and that there exists on the date of delivery of said
certificate to Coast no condition or event which constitutes an Event of Default
under this Guaranty.
14. REPRESENTATIONS AND WARRANTIES. Guarantor hereby represents and warrants
that (i) it is in Guarantor's direct interest to assist Borrower in procuring
credit, because Borrower is an affiliate of Guarantor, furnishes goods or
services to Guarantor, purchases or acquires goods or services from Guarantor,
and/or otherwise has a direct or indirect corporate or business relationship
with Guarantor, (ii) this Guaranty has been duly and validly authorized,
executed and delivered and constitutes the valid and binding obligation of
Guarantor, enforceable in accordance with its terms, and (iii) the execution and
delivery of this Guaranty does not violate or constitute a default under (with
or without the giving of notice, the passage of time, or both) any order,
judgment, decree, instrument or agreement to which Guarantor is a party or by
which it or its assets are affected or bound.
15. COSTS. Whether or not suit be instituted, Guarantor agrees to reimburse
Coast on demand for all reasonable attorneys' fees and all other reasonable
costs and expenses incurred by Coast in enforcing this Guaranty, or arising out
of or relating in any way to this Guaranty, or in enforcing any of the
Indebtedness against Borrower, Guarantor, or any other person, or in connection
with any property of any kind securing all or any part of the Indebtedness.
Without limiting the generality of the foregoing, and in addition thereto,
Guarantor shall reimburse Coast on demand for all reasonable attorneys' fees and
costs Coast incurs in any way relating to Guarantor, Borrower or the
Indebtedness, in order to: obtain legal advice; enforce or seek to enforce any
of its rights; commence, intervene in, respond to, or defend any action or
proceeding; file, prosecute or defend any claim or cause of action in any action
or proceeding (including without limitation any probate claim, bankruptcy claim,
third-party claim, secured creditor claim, reclamation complaint, and complaint
for relief from any stay under the Bankruptcy Code or otherwise); protect,
obtain possession of, sell, lease, dispose of or otherwise enforce any security
interest ran or lien on any property of any kind securing any or all of the
Indebtedness; or represent Coast in any litigation with respect to Borrower's or
Guarantor's affairs. In the event either Coast or Guarantor files any lawsuit
against the other predicated on a breach of this Guaranty, the prevailing party
in such action shall be entitled to recover its attorneys' fees and costs of
suit from the non-prevailing party.
16. NOTICES. Any notice which a party shall be required or shall desire to give
to the other hereunder (except for notice of revocation, which shall be governed
by Section 10 of this Guaranty) shall be given by personal delivery or by
telecopier or by depositing the same in the United States mail, first class
postage prepaid, addressed to Coast at its address set forth in the heading of
this Guaranty and to Guarantor at his address set forth under his signature
hereon, and such notices shall be deemed duly given on the date of personal
delivery or one day after the date telecopied or 3 business days after the date
of mailing as aforesaid. Coast and Guarantor may change their address for
purposes of receiving notices hereunder by giving written notice thereof to the
other party in accordance herewith. Guarantor shall give Coast immediate written
notice of any change in his address.
17. CLAIMS. Guarantor agrees that any claim or cause of action by Guarantor
against Coast, or any of Coast's directors, officers, employees, agents,
accountants or attorneys, based upon, arising from, or relating to this
Guaranty, or any other present or future agreement between Coast and Guarantor
or between Coast and Borrower, or any other transaction contemplated hereby or
thereby or relating hereto or thereto, or any other matter, cause or thing
whatsoever, whether or not relating hereto or thereto, occurred, done, omitted
or suffered to be done by Coast, or by Coast's directors, officers, employees,
agents, accountants or attorneys, whether sounding in contract or in tort or
otherwise, shall be barred unless asserted by Guarantor by the commencement of
an action or proceeding in a court of competent jurisdiction within Los Angeles
County, California, by the filing of a complaint within one year after the first
act, occurrence or omission upon which such claim or cause of action, or any
part thereof, is based and service of a summons and complaint on an officer of
Coast or any other person authorized to accept service of process on behalf of
Coast, within 30 days thereafter. Guarantor agrees that such one year period is
a reasonable and sufficient time for Guarantor to investigate and act upon any
such claim or cause of action. The one year period provided herein shall not be
waived, tolled, or extended except by a specific written agreement of Coast.
This provision shall survive any termination of this Guaranty or any other
agreement.
<PAGE>
<PAGE>
18. CONSTRUCTION; SEVERABILITY. If more than one person has executed this
Guaranty, the term "Guarantor" as used herein shall be deemed to refer to all
and any one or more such persons and their obligations hereunder shall be joint
and several. Without limiting the generality of the foregoing, if more than one
person has executed this Guaranty, this Guaranty shall in all respects be
interpreted as though each person signing this Guaranty had signed a separate
Guaranty, and references herein to "other guarantors" or words of similar effect
shall include without limitation other persons signing this Guaranty. As used in
this Guaranty, the term "property" is used in its most comprehensive sense and
shall mean all property of every kind and nature whatsoever, including without
limitation real property, personal property, mixed property, tangible property
and intangible property. Words used herein in the masculine gender shall include
the neuter and feminine gender, words used herein in the neuter gender shall
include the masculine and feminine, words used herein in the singular shall
include the plural and words used in the plural shall include the singular,
wherever the context so reasonably requires. If any provision of this Guaranty
or the application thereof to any party or circumstance is held invalid, void,
inoperative or unenforceable, the remainder of this Guaranty and the application
of such provision to other parties or circumstances shall not be affected
thereby, the provisions of this Guaranty being severable in any such instance.
19. GENERAL PROVISIONS. Coast shall have the right to seek recourse against
Guarantor to the full extent provided for herein and in any other instrument or
agreement evidencing obligations of Guarantor to Coast, and against Borrower to
the full extent of the Indebtedness. No election in one form of action or
proceeding, or against any party, or on any obligation, shall constitute a
waiver of Coast's right to proceed in any other form of action or proceeding or
against any other party. The failure of Coast to enforce any of the provisions
of this Guaranty at any time or for any period of time shall not be construed to
be a waiver of any such provision or the right thereafter to enforce the same.
All remedies hereunder shall be cumulative and shall be in addition to all
rights, powers and remedies given to Coast by law or under any other instrument
or agreement. Time is of the essence in the performance by Guarantor of each and
every obligation under this Guaranty. If Borrower is a corporation, partnership
or other entity, Guarantor hereby agrees that Coast shall have no obligation to
inquire into the power or authority of Borrower or any of its officers,
directors, partners, or agents acting or purporting to act on its behalf, and
any Indebtedness made or created in reliance upon the professed exercise of any
such power or authority shall be included in the Indebtedness guaranteed hereby.
This Guaranty is the entire and only agreement between Guarantor and Coast with
respect to the guaranty of the Indebtedness of Borrower by Guarantor, and all
representations, warranties, agreements, or undertakings heretofore or
contemporaneously made, which are not set forth herein, are superseded hereby.
No course of dealings between the parties, no usage of the trade, and no parol
or extrinsic evidence of any nature shall be used or be relevant to supplement
or explain or modify any term or provision of this Guaranty. There are no
conditions to the full effectiveness of this Guaranty. The terms and provisions
hereof may not be waived, altered, modified, or amended except in a writing
executed by Guarantor and a duly authorized officer of Coast. All rights,
benefits and privileges hereunder shall inure to the benefit of and be
enforceable by Coast and its successors and assigns and shall be binding upon
Guarantor and his heirs, executors, administrators, personal representatives,
successors and assigns. Neither the death of Guarantor nor notice thereof to
Coast shall terminate this Guaranty as to his estate, and, notwithstanding the
death of Guarantor or notice thereof to Coast, this Guaranty shall continue in
full force and effect with respect to all Indebtedness, including without
limitation Indebtedness incurred or created after the death of Guarantor and
notice thereof to Coast. Section headings are used herein for convenience only.
Guarantor acknowledges that the same may not describe completely the subject
matter of the applicable Section, and the same shall not be used in any manner
to construe, limit, define or interpret any term or provision hereof.
20. GOVERNING LAW; VENUE AND JURISDICTION. This instrument and all acts and
transactions pursuant or relating hereto and all rights and obligations of the
parties hereto shall be governed, construed, and interpreted in accordance with
the internal laws of the State of California. In order to induce Coast to accept
this Guaranty, and as a material part of the consideration therefor, Guarantor
(i) agrees that all actions or proceedings relating directly or indirectly
hereto shall, at the option of Coast, be litigated in courts located within Los
Angeles County, California, (ii) consents to the jurisdiction of any such court
and consents to the service of process in any such action or proceeding by
personal delivery or any other method permitted by law; and (iii) waives any and
all rights Guarantor may have to transfer or change the venue of any such action
or proceeding.
21. MUTUAL WAIVER OF RIGHT TO JURY TRIAL. COAST AND GUARANTOR HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION, CLAIM, LAWSUIT OR PROCEEDING BASED UPON,
ARISING OUT OF, OR IN ANY WAY RELATING TO: (i) THIS GUARANTEE OR ANY SUPPLEMENT
OR AMENDMENT THERETO; OR (ii) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR
<PAGE>
<PAGE>
AGREEMENT BETWEEN COAST AND GUARANTOR; OR (iii) ANY BREACH, CONDUCT, ACTS OR
OMISSIONS OF COAST OR GUARANTOR OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSON AFFILIATED WITH OR REPRESENTING
COAST OR GUARANTOR; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT
OR TORT OR OTHERWISE.
22. RECEIPT OF COPY. Guarantor acknowledges receipt of a copy of this Guaranty.
OSICOM TECHNOLOGIES, INC.,
NEW JERSEY CORPORATION
/s/ Christopher E. Sue
BY:____________________________
Chief Financial Officer
TITLE:__________________________
STATE OF CALIFORNIA
COUNTY OF Los Angeles
On October 11,1996 before me, Victoria Jirikow, Notary Public, personally
appeared Christopher E. Sue, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person whose name is subscribed to the
within instrument and acknowledged to me that he executed the same in his
authorized capacity and that by his signature on the instrument the person, or
the entity upon behalf of which the person(x) acted, executed the instrument.
Witness my hand and official seal,
(Seal) ___________________________
VICTORTA JIMKOW
COMM. # 1039844
NOTARY PUBLIC - CALIFORNIA
LOS ANGELES COUNTY
MY COMM. EXPIRES SEP 26,1998
-10-
<PAGE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
NETsilicon, Inc.
Waltham, Massachusetts
We hereby consent to the inclusion in the Prospectus constituting a part of
this Registration Statement on Form S-1 of our report dated June 26, 1998,
except as for Notes A, I, J and Q which are as of August 24, 1998 accompanying
the financial statements of NETsilicon, Inc. (the 'Company'), as of January 31,
1998 and 1997, and for each of the years then ended and to the reference to us
under the heading 'Experts' in the Prospectus which is part of such Registration
Statement.
BDO SEIDMAN, LLP
Los Angeles, California
August 26, 1998
<PAGE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
NETsilicon, Inc.
Waltham, Massachusetts
We hereby consent to the inclusion in the Prospectus constituting a part of
this Registration Statement on Form S-1 of our report dated April 28, 1997,
accompanying the financial statements of NETsilicon, Inc. (the 'Company') for
the year ended January 31, 1996 and to the reference to us under the heading
'Experts' in the Prospectus which is part of such Registration Statement.
WEINBAUM & YALAMANCHI
Los Angeles, California
August 26, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
BALANCE SHEET, AUDITED STATEMENT OF OPERATIONS AND AUDITED STATEMENT OF CASH
FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH AUDITED FINANCIAL
STATEMENTS FOR THE YEAR ENDED JANUARY 31, 1998 AND THE UNAUDITED BALANCE SHEET,
UNAUDITED STATEMENT OF OPERATIONS AND UNAUDITED STATEMENT OF CASH FLOWS FOR THE
SIX MONTHS ENDED JULY 31, 1998
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> JAN-31-1999 JAN-31-1998
<PERIOD-START> FEB-01-1998 FEB-01-1997
<PERIOD-END> JUL-31-1998 JAN-31-1998
<CASH> 571,600 185,100
<SECURITIES> 0 0
<RECEIVABLES> 4,046,500 3,612,400
<ALLOWANCES> 70,400 17,100
<INVENTORY> 4,128,400 2,799,400
<CURRENT-ASSETS> 8,961,100 6,560,400
<PP&E> 3,616,400 3,384,500
<DEPRECIATION> 2,777,600 2,610,600
<TOTAL-ASSETS> 10,045,600 7,933,400
<CURRENT-LIABILITIES> 10,059,300 7,347,300
<BONDS> 0 0
<COMMON> 33,200 33,200
0 0
0 0
<OTHER-SE> 2,529,800 2,529,800
<TOTAL-LIABILITY-AND-EQUITY> 10,045,600 7,933,400
<SALES> 5,383,900 7,920,300
<TOTAL-REVENUES> 5,383,900 7,920,300
<CGS> 2,534,400 4,060,200
<TOTAL-COSTS> 3,001,500 5,087,600
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 136,900 118,500
<INCOME-PRETAX> (288,900) (1,346,000)
<INCOME-TAX> (131,000) (493,000)
<INCOME-CONTINUING> (419,900) (853,000)
<DISCONTINUED> (179,900) 676,600
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (599,800) (176,400)
<EPS-PRIMARY> (0.18) (0.06)
<EPS-DILUTED> 0 0
</TABLE>
