<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1999.
REGISTRATION NO. 333-62231
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 3
TO
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 3674 04-2826579
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
</TABLE>
411 WAVERLEY OAKS ROAD,
SUITE 227
WALTHAM, MA 02454
(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 WAVERLEY OAKS ROAD, SUITE 227
WALTHAM, MA 02454
(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>
W. RAYMOND FELTON, ESQ. N. JEFFREY KLAUDER, ESQ.
GREENBAUM, ROWE, SMITH, RAVIN, DAVIS & HIMMEL LLP MORGAN, LEWIS & BOCKIUS LLP
P.O. BOX 5600 1701 MARKET STREET
WOODBRIDGE, NEW JERSEY 07095 PHILADELPHIA, PENNSYLVANIA 19103-6993
(732) 549-5600 (215) 963-5694
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of 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. [ ]
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>
<S> <C> <C> <C> <C>
PROPOSED MAXIMUM
ADDITIONAL PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
Common Stock, par value $0.01 per share..... 2,300,000 $10.00 $23,000,000 $6,394.00
</TABLE>
(1) Includes 300,000 shares which the underwriters have 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(o) under the Securities Act of 1933.
------------------------
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>
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
5,000,000 SHARES
[LOGO]
COMMON STOCK
$ PER SHARE
- --------------------------------------------------------------------------------
This is an initial public offering of voting common stock of NETsilicon, Inc. We
are offering 3,000,000 shares and Osicom Technologies, Inc., the sole
stockholder of NETsilicon, is selling 2,000,000 shares. We will not receive any
proceeds from the sale of shares by Osicom. Following the completion of this
offering, Osicom will own 8,000,000 shares of non-voting common stock or 61.5%
(7,500,000 shares of non-voting common stock or 56.6% if the underwriters'
over-allotment option is exercised in full) of the outstanding common stock of
NETsilicon.
We expect that the price to the public in the offering will be between $8.00 and
$10.00 per share. The market price of the shares after the offering may be
higher or lower than the offering price.
We have applied to include the common stock on the Nasdaq National Market under
the symbol 'NSIL.'
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE 'RISK FACTORS'
BEGINNING ON PAGE 7.
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- ----------------
<S> <C> <C>
Price to Public................................. $ $
Underwriting Discount...........................
Proceeds to NETsilicon..........................
Proceeds to Osicom..............................
</TABLE>
NETsilicon and Osicom have granted an over-allotment option to the underwriters.
Under this option, the underwriters may elect to purchase a maximum of 750,000
additional shares (250,000 from NETsilicon and 500,000 from Osicom) within
30 days following the date of this prospectus to cover over-allotments.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC WORLD MARKETS U.S. BANCORP PIPER JAFFRAY
The date of this prospectus is , 1999.
SUBJECT TO COMPLETION, DATED JULY 2, 1999
<PAGE>
[GRAPHIC]
Graphic titled NET+Works Technology Architecture setting forth both the
hardware and software components of the NET+ solution. The upper half of the
graphic shows a building block starting at the base with RTOS (pSOS+ or VxWorks)
and NET+ Drivers. Building upward NET+ Protocols are added first, then NET+
Services, followed by NET+ Industry Applications. The final addition at the top
of the block is Customer Developed Applications Programs. The lower half of the
graphic shows the hardware connections of Ethernet LAN, PHY-Physical Interface
to the NET+ARM chip and the connection of the NET+ARM chip to PCI, RAM, ROM and
Custom Hardware. NETsilicon, Inc.'s logo is located in the lower right hand
corner of the graphic.
<PAGE>
[GRAPHIC]
Graphic titled Bringing Internet Connectivity to a New World of Products.
The graphic depicts devices, processes or activities for which embedded
networking has an application. The text at the center of the graphic is as
follows:
"NET+Works'TM' Solutions. NETsilicon's NET+Works family of embedded
networking solutions, when coupled with the physical interface and memory
components, contains all the hardware and networking software necessary to
add Ethernet or Internet connectivity to virtually any electronic product
design.
The NET+Works solution is designed to enable manufacturers to reduce
the cost and improve the time to market of their end products that
incorporate embedded networking capability."
Above the text are two rows of white boxes with the following markets in
which the Company has achieved a NET+Design Win: From the left, first row:
Imaging; Industrial Automation and Process Control; Internet Communications
Devices; Building Controls and Security. From the left, second row: SOHO;
Utility Monitoring; Test and Laboratory; Telephony. Each box details various
possible applications in each of these markets. Below the text is a row of
four gray boxes. The gray boxes indicate future target markets. In the center
of the row, and larger than the gray boxes, is a depiction of the NETsilicon
chip. The two boxes to the left of the chip are, from the left: Distribution
and Inventory; Medical. The two boxes to the right of the chip are, from the
left: Travel and Transportation; Retail/POS/Data Collection. These gray boxes
detail possible applications in each of these areas.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 7
The Company................................................. 21
Forward-Looking Statements.................................. 21
Use of Proceeds............................................. 22
Dividend Policy............................................. 22
Capitalization.............................................. 23
Dilution.................................................... 24
Selected Financial Data..................................... 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Business.................................................... 36
Management.................................................. 49
Principal and Selling Stockholders.......................... 57
Certain Relationships and Related Party Transactions........ 58
Description of Capital Stock................................ 59
Shares Eligible for Future Sale............................. 61
Underwriting................................................ 63
Legal Matters............................................... 65
Experts..................................................... 65
Where You Can Find More Information......................... 65
Index to Financial Statements............................... F-1
</TABLE>
------------------------------------
NETsilicon's executive office is located at 411 Waverley Oaks Road, Suite 227,
Waltham, Massachusetts 02454 and its telephone number is (781) 647-1234.
Information contained on NETsilicon's website, www.netsilicon.com, does not
constitute a part of this Prospectus.
Unless otherwise indicated, the information in this prospectus (i) assumes no
exercise of the underwriters' over-allotment option, (ii) assumes an initial
offering price of $9.00 per share, and (iii) assumes a 100,000-for-one stock
split of the Company's Common Stock which occurred on June 30, 1999. Unless the
context otherwise requires, NETsilicon, Inc. is referred to herein as
'NETsilicon' or the 'Company.' All references in this prospectus to common stock
refer to both voting and non-voting common stock.
'NET+ARM' is a trademark of ARM Limited and is exclusively licensed to the
Company. All other product names referred to herein are the property of their
respective owners.
The underwriters are offering the shares subject to various conditions and may
reject all or part of any order.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained in other parts of this prospectus.
Because it is a summary, it does not contain all of the information that you
should consider before investing in the shares. You should read the entire
prospectus carefully.
THE COMPANY
NETsilicon, Inc. develops and markets semiconductor devices and software
solutions designed to meet the networking requirements of embedded systems. The
Company's products are incorporated into the design of embedded systems to
provide them with the ability to communicate over standards-based local area
networks, wide-area networks and the Internet, enabling the development of new
embedded systems applications. The Company believes that it offers the first
comprehensive solution that, in conjunction with the physical interface and
memory, encompasses all of the hardware and software necessary to network enable
embedded systems. The Company's technology is designed to have broad
applicability and therefore may add network functionality to many embedded
systems.
The Company's products are currently contained in a broad array of imaging
products, including printers, scanners, fax machines, copiers and multi-function
peripherals manufactured by 22 OEMs, or original equipment manufacturers, such
as Minolta Corporation, NEC Corporation, Ricoh Company, Ltd., Sharp Corporation
and Xerox Corporation. The Company's products are also in various stages of
being incorporated into the design of products in additional markets, such as
industrial automation equipment, communication devices, data acquisition and
test equipment, Internet devices and utility monitoring equipment.
An embedded system is a computer that is incorporated into a larger electronic
system and responds to external events by performing specific tasks quickly,
predictably, and reliably. Over the past decade, manufacturers have increasingly
incorporated embedded systems into a wide variety of products to provide
enhanced features and functionality. Some examples of embedded computers are
office products such as fax machines, laser printers, and photocopiers;
industrial automation equipment such as robots and process control equipment;
building control equipment such as elevator and environmental control systems;
consumer products such as camcorders and video games; medical instrumentation
and imaging systems; vending machines and automated teller machines; and vehicle
anti-lock brakes and navigation systems.
While increasingly powerful, these embedded systems have traditionally been
unable to communicate with other devices. Manufacturers are now seeking ways to
enable the networking and communication of embedded systems to further enhance
their products, extend their capabilities and develop innovative applications.
The Company believes that the embedded systems industry is similar to the
personal computer industry, in which the initial major technological advances
increased the power of individual systems, but the subsequent networking of
these systems provided tremendous benefits and enabled entirely new
applications, such as workgroup collaboration.
The Company's solution is designed to enable manufacturers of embedded systems
to reduce the cost and improve the time to market for their products
incorporating networking capability. The Company provides manufacturers of
embedded systems with its NET+Works solution for networking embedded systems.
The NET+Works solution incorporates semiconductor devices and a suite of
software. The Company also provides software development licenses and
application engineering services to OEMs to enable them to design products
incorporating NET+Works technology. The Company believes its solution is
comprehensive, standards-based, scalable and extensible, and provides compelling
value to OEMs relative to alternative solutions or the cost and effort of
developing in-house networking expertise.
4
<PAGE>
Key elements of the Company's strategy include:
expanding its existing OEM customer relationships in the imaging industry;
identifying and penetrating additional embedded systems markets;
developing market-specific versions of its products to reinforce its
position in additional embedded systems markets it enters; and
influencing industry standards for network connectivity in additional
embedded systems markets.
From its inception in 1984, the Company has developed and marketed products
enabling the connection of electronic devices to networks. The Company began
development activities related to its NET+Works technology in 1996 and
introduced its initial NET+Works product, the NET+ARM semiconductor device, in
January 1998.
The Company was incorporated in Massachusetts in 1984.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by the Company.......... 3,000,000 shares
Common stock offered by Osicom............... 2,000,000 shares
Common stock to be outstanding after the
offering................................... 13,000,000 shares
Use of proceeds.............................. To repay indebtedness due to Osicom, to repay a
portion of its outstanding indebtedness to Coast
Business Credit, to fund product development and
marketing, capital expenditures and working capital,
and for general corporate purposes.
Proposed Nasdaq National Market symbol....... NSIL
</TABLE>
5
<PAGE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED JANUARY 31, ENDED APRIL 30,
----------------------------------- -------------------
1997 1998 1999 1998 1999
------- ------- ------- ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................... $ 7,445 $ 7,920 $13,373 $2,185 $5,814
Operating income (loss) from continuing
operations........................................ (942) (1,228) (1,581) (280) 253
Income (loss) from continuing operations before
income tax benefit................................ (1,078) (1,346) (2,132) (340) 15
Income (loss) from continuing operations............ (109) (853) (2,132) (340) 15
Income (loss) from continuing operations per
share(1):
Basic............................................. $ (0.02) $ (0.09) $ (0.21) $(0.03) $ 0.00
Weighted average number of shares outstanding(1):
Basic............................................. 7,158 10,000 10,000 10,000 10,000
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30,
1997 1997 1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................... $2,703 $ 890 $1,856 $2,185 $3,199 $ 3,030 $4,959 $5,814
Operating income (loss) from continuing
operations............................ (7) (818) (231) (280) 168 (1,520) 52 253
Income (loss) from continuing operations
before income taxes................... (41) (864) (249) (340) 91 (1,718) (165) 15
Income (loss) from continuing
operations............................ 68 (833) (8) (340) 91 (1,718) (165) 15
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, 1999
---------------------------
AS
ACTUAL ADJUSTED(2)
------------ ------------
(Unaudited)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 30 $18,950
Working capital (deficit)................................. (3,782) 20,728
Total assets.............................................. 13,726 29,893
Due to Osicom(3).......................................... 5,889 --
Short-term debt........................................... 3,455 1,000
Stockholders' equity (deficit)............................ (1,821) 22,689
</TABLE>
- ---------------------------
(1) See Notes to the Company's Financial Statements for the years ended
January 31, 1997, 1998 and 1999 and the three months ended April 30, 1998
and 1999 regarding computations of net income (loss) per share.
(2)The 'As Adjusted' balances reflect the sale by the Company of 3,000,000
shares of Common Stock and the receipt of approximately $24.5 million in
estimated 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.'
(3)Reflects advances from Osicom to the Company as of April 30, 1999. The
Company anticipates repayment of all
outstanding amounts due to Osicom, offset by a $2.8 million receivable due
from Osicom, from the Company's proceeds of the offering. See Note F to the
Notes to the Financial Statements.
6
<PAGE>
RISK FACTORS
You should carefully consider the following factors and other information in
this prospectus before deciding to invest in the shares.
HISTORY OF LOSSES AND ACCUMULATED DEFICIT
The Company has incurred net losses from continuing operations for the fiscal
years ended January 31, 1997, 1998 and 1999. At April 30, 1999, the Company had
an accumulated deficit of $4.4 million. There can be no assurance that the
Company will achieve profitability on a quarterly or annual basis in the future.
In addition, revenue growth is not necessarily indicative of future operating
results and there can be no assurance that the Company will be able to sustain
revenue growth. 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, results of operations 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 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. The Company's history of
losses, coupled 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.
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 have in the past and may in the
future fluctuate substantially from quarter to quarter and from year to year.
This may result from any one or a combination of factors, many of which are
beyond the Company's control. These factors include, among others: the growth
rate of markets into which the Company sells its products; market acceptance of
and demand for the products of the Company and those of the Company's customers;
unanticipated delays or problems in the introduction of the Company's products;
the Company's ability to introduce new products in accordance with OEM design
requirements and design cycles; new product announcements or product
introductions by the Company and the Company's competitors; availability and
cost of manufacturing sources for the Company's products; changes in the mix of
sales to OEMs and sales representatives; incorrect forecasting of future
revenues; the volume of orders that are received and can be filled in a quarter;
the rescheduling or cancellation of orders by customers; costs associated with
protecting the Company's intellectual property; changes in product mix; changes
in product costs and pricing by the Company or its competitors; and changes in
currency exchange rates. Any one or more of these factors could result in
fluctuations in future operating results.
Because a significant portion of the Company's business has been and is expected
to continue to be derived from large orders placed by a limited number of large
customers, variations in the timing of such orders can cause significant
fluctuations in the Company's operating results. Anticipated orders from
customers may fail to materialize and delivery schedules may be deferred or
canceled for a number of reasons, including changes in specific customer
requirements. The Company's expenditures for research and development, sales and
marketing and general and administrative functions are based in part on future
revenue projections. The Company may be unable to adjust spending in a timely
manner in response to any unanticipated declines in revenues, which may have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company may be required to reduce prices in response to
7
<PAGE>
competitive pressure or other factors or increase spending to pursue new market
opportunities. Any decline in average selling prices of a particular product
which is not offset by a reduction in product costs or by sales of other
products with higher gross margins would decrease the Company's overall gross
profit and adversely affect the Company's business, results of operations and
financial condition.
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 non-
imaging customers can cancel orders, within specified time frames, typically 30
days or more prior to the scheduled shipment date pursuant to the Company's
policies, 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 products 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 caused and could cause fluctuations in the Company's operating results,
which could have a material adverse effect on the Company's business, results of
operations and financial condition 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 could be caused by other factors beyond the
Company's control, including late deliveries by vendors of components, changes
in implementation priorities or slower than anticipated growth in the market for
networking solutions for embedded systems. In the three months ended
October 31, 1998, the Company experienced delays in the delivery of its product
from Atmel Corporation. Such delays affected the Company's ability to fill its
orders to customers, negatively impacting the Company's third quarter financial
results. Operating results in the past have also 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. In general, the
timing and magnitude of the Company's revenues are highly dependent upon its
achievement of design wins, the timing and success of its OEMs' development
cycles, and its OEMs' product sales. Any of these factors could have a material
adverse effect on the Company's business, results of operations and financial
condition.
As a result of the factors listed above and other factors, investors in the
Company should not rely solely upon period-to-period comparisons of its
operating results as an indication of future performance. It is likely that in
some future period the Company's operating results or business outlook will be
below the expectations of securities analysts or investors, which would likely
result in a significant reduction in the market price of the shares of common
stock. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations.'
DEPENDENCE ON OEM CUSTOMERS
The Company's financial performance and future growth is dependent upon its
ability to sell its products to OEMs in various 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, including
OEMs' decisions to increase inventory supply at the commencement of their
product sales cycles and deplete such inventories prior to additional purchases,
and cancellation or rescheduling delivery of the Company's products in
accordance with the Company's policies for such actions. Furthermore, the
Company's revenues are dependent upon the ultimate success of the end-user
products of the Company's OEM customers. There can be no assurance that the
Company will successfully market its products to OEMs. Even if the Company is
successful in its efforts to market its products to OEMs and achieves a design
win from an OEM, there can be no assurance that the Company will ever achieve
revenue from the sale of products as a result of such design win. Furthermore,
even if the Company does achieve revenues from such sales there can be no
assurance that such revenues will be sustainable. Any decline in the
8
<PAGE>
financial condition of the Company's OEM customers or any failure by the
Company's OEM customers to successfully sell their products to end users may
have a material adverse effect on the Company's business, results of operations
and financial condition. 'Business -- Products and Services' and
'Business -- OEM Product Cycle.'
DEPENDENCE ON IMAGING MARKET
The imaging market has historically accounted for substantially all of the
Company's revenues. In the fiscal years ended January 31, 1997, 1998 and 1999,
100%, 100% and 95%, respectively, of the Company's revenues were generated from
customers in the imaging market. In the three months ended April 30, 1999, 97%
of the Company's revenues were generated from customers in the imaging market.
The Company's success has been and continues to be dependent on the continued
growth and success of the imaging market. Many of the Company's OEM customers
face competition from larger, more established companies which may exert
competitive or other pressures on the OEMs. Any decline in sales to the imaging
market would have a material adverse effect on the Company's business, results
of operations and financial condition.
The imaging market is characterized by declining prices of existing products.
Therefore, continual improvements in manufacturing efficiencies and the
introduction of new products and enhancements to existing products are required
for the Company to maintain its 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, results of operations and financial condition. See
'Business -- Manufacturing.'
Substantially all of the Company's OEM customers in the imaging market are
headquartered in Japan. The current economic conditions existing in many Asian
countries, including Japan, are uncertain and may have a significant effect on
the business operations of such OEM customers. Consequently, the Company's
dependence on its OEM customers in the imaging market in Japan and the uncertain
factors affecting Japan's economic condition could have a material adverse
effect on the Company's business, operating results, cash flows and financial
condition. See ' -- Risks Associated with International Operations.'
CUSTOMER CONCENTRATION
The Company's products have historically been sold into the imaging markets for
products such as printers, scanners, fax machines, copiers and multi-function
peripherals. This market is highly concentrated. Accordingly, the Company's
sales are derived from a limited number of customers, with the top five OEM
customers accounting for 73% and 52% of total revenues for the three months
ended April 30, 1999, and the fiscal year ended 1999, respectively. In
particular, sales to Ricoh Electronics and Dimatech Corporation each accounted
for 27% and 18% of total revenues, respectively, for the three months ended
April 30, 1999. Sales to Minolta Corporation and Kyocera Communication Co., Ltd.
accounted for 12% and 12% of total revenues, respectively, for the fiscal year
ended 1999. The Company expects that a small number of customers will continue
to account for a substantial portion of its total revenues for the foreseeable
future. All of the Company's sales are made on the basis of purchase orders
rather than pursuant to long-term agreements, and therefore, any customer could
cease purchasing the Company's products at any time without penalty. The
decision of any key customer to cease using the Company's products or a material
decline in the number of units purchased by a significant customer would have a
material adverse effect on the Company's business, results of operations and
financial condition. See 'Business -- Imaging Customers.'
LENGTHY SALES CYCLE
The sale of the Company's products typically involves a significant technical
evaluation and commitment of capital and other resources by potential customers,
as well as delays frequently associated with customers' internal procedures to
deploy new technologies within their products and to test and accept new
technologies. For these and other reasons, the sales cycle associated
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with the Company's products is typically lengthy, lasting nine months or longer,
and is subject to a number of significant risks, including customers' internal
acceptance reviews, that are beyond the Company's control. Because of the
lengthy sales cycle and the large size of customers' orders, if orders
forecasted for a specific customer for a particular quarter are not realized in
that quarter, the Company's operating results for that quarter could be
materially adversely affected. See 'Business -- Sales and Marketing.'
DEPENDENCE ON NEW PRODUCT DEVELOPMENT; RAPID TECHNOLOGICAL CHANGE
The semiconductor and networking industries are 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 the performance
advantages and cost-effectiveness of its products over competing products. Any
failure by the Company to modify its products to support new local area network
('LAN'), wide area network ('WAN') and Internet technologies, or alternative
technologies, or any failure to achieve widespread customer acceptance of such
modified products could have a material adverse effect on the Company's
business, results of operations 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
or sustainable degree of market acceptance in existing or additional markets.
Failure by 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, results
of operations and financial condition. In addition, the future introductions or
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, results of
operations and financial condition. See 'Business -- Industry Background.'
RISKS RELATED TO PRODUCT TRANSITIONS
From time to time, the Company or its competitors may announce new products,
capabilities or technologies that may replace or shorten the life cycles of the
Company's existing products. Announcements of currently planned or other new
products may cause customers to defer or stop purchasing the Company's products
until the Company's or its competitors' new products become available.
Furthermore, the introduction of new or enhanced products requires the Company
to manage the transition from older product inventories and ensure that adequate
supplies of new products can be delivered to meet customer demand. The Company's
failure to effectively manage transitions from older products could have a
material adverse effect on the Company's business, results of operations and
financial condition. See ' -- Inventory Risk.'
RISKS ASSOCIATED WITH ENTERING ADDITIONAL EMBEDDED SYSTEMS MARKETS
A substantial portion of the Company's recent development efforts have been
directed toward the development of new products for use in markets in which
networking solutions for embedded systems have not historically been sold, such
as the industrial automation equipment, data acquisition and test equipment,
internet devices and security equipment markets. The market for
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networking solutions for embedded systems in these targeted markets is new and
rapidly evolving. Each product to be used in these industries must be designed
to industry-specific requirements. The Company has limited experience designing
its products to meet the requirements of OEMs in these industries. Moreover, the
Company's products and services have, to date, achieved limited acceptance in
these industries. The Company's future success will depend, to a significant
degree, upon broad acceptance of the Company's products and services within the
targeted industries. Furthermore, the Company's success will also depend on the
ability of its OEM customers in these industries to successfully develop and
market networked embedded system capabilities to end users. There can be no
assurance that (i) the additional embedded systems markets targeted by the
Company for its products and services will develop; (ii) OEMs within each market
targeted by the Company will choose the Company's products and services to meet
their needs; (iii) the Company will successfully develop products to meet the
industry-specific requirements of OEMs in its targeted markets; or (iv) OEMs in
its targeted markets will gain market acceptance for their devices which
incorporate the Company's products. The failure of any of these events to occur
would have a material adverse effect on the Company's business, results of
operations and financial condition.
COMPETITION
The markets in which the Company operates are intensely competitive and
characterized by rapidly changing technology, evolving industry standards,
declining average selling prices and frequent new product introductions. A
number of companies offer products that compete with one or more elements of the
Company's solution. 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 with other hardware and
software components of the customer's products; 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, results of
operations and financial condition.
The Company primarily competes with the internal development departments of
large OEM companies that have developed their own networking solutions as well
as established developers of embedded systems software and chips such as Axis
Communications, Inc., Milan Technology, a division of Digi International Inc.,
Echelon Corporation, Emulex Corporation, H. Bollmann Manufacturers Limited
(HBM), Hitachi, Ltd., Integrated Systems, Inc., Intel Corporation, Motorola,
Inc., Samsung Electronics Co., Ltd. and Wind River Systems, Inc. In addition,
the Company is aware of certain companies which have recently introduced
products that address the markets targeted by the Company. The Company has
experienced and expects to continue to experience increased competition from
current and potential competitors, many of which 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 networking or semiconductor 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 in 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, results of operations and
financial condition. See 'Business -- Competition.'
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DEPENDENCE ON THIRD PARTY, SOFTWARE MANUFACTURING, ASSEMBLING AND PRODUCT
TESTING RELATIONSHIPS; LIMITED SOURCE SUPPLIERS
The Company 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. The Company's material
software license agreements are with Integrated Systems, Inc., which terminates
only if the Company defaults under the agreement; with Novell, Inc., which is
renewable annually at the option of both parties; and with Peerless Systems
Corporation, which expires in 2004 subject to year-to-year renewals thereafter
at the option of both parties. 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.
The Company does not have its own semiconductor fabrication assembly or testing
operations or contract manufacturing capabilities. Instead, the Company relies
upon independent contractors to manufacture its components, subassemblies,
systems and products. Currently, all of the Company's semiconductor devices are
being manufactured, assembled and tested by Atmel Corporation in the United
States and the Company expects that it will continue to rely upon Atmel to
manufacture, assemble and test a significant portion of its semiconductor
devices in the future. The Company experienced delays in the receipt of product
from Atmel which adversely affected the Company's operating results in the three
months ended October 31, 1998. In addition, the Company recently experienced a
delay in the introduction of one of its products due to a problem with Atmel's
design tools. While the Company is in the process of qualifying other suppliers,
any qualification and pre-production periods could be lengthy and may cause
delays in providing products to customers in the event that the sole source
supplier of the semiconductor devices fails to meet the Company's requirements.
For example, Atmel uses its manufacturing facilities for its own products as
well as those it manufactures on a contract basis. There is no assurance that
Atmel will have adequate capacity to meet the needs of its contract
manufacturing customers. In addition, semiconductor manufacturers generally
experience periodic constraints on their manufacturing capacity. The Company
also relies upon limited-source suppliers for a number of other components used
in the Company's products. 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 limited sources
would disrupt the Company's operations and have a material adverse effect on its
business, results of operations and financial condition. See
'Business -- Manufacturing.'
CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY
The Company's semiconductor devices provide networking capabilities for embedded
systems. The semiconductor industry is highly cylical and subject to rapid
technological change and has been subject to significant economic downturns at
various times, characterized by diminished product demand, accelerated erosion
of average selling prices and production overcapacity. The semiconductor
industry also periodically experiences increased demand and production capacity
constraints. As a result, the Company may experience substantial
period-to-period fluctuations in future operating results due to general
semiconductor industry conditions, overall economic conditions or other factors.
See 'Management's Discussion of Financial Condition and Results of Operations.'
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BENEFITS OF OFFERING TO OSICOM
The offering will provide significant benefits to Osicom, which is currently the
sole stockholder of the Company, including (i) receipt of approximately $16.3
million from the sale of its shares in the offering; (ii) the creation of a
public market for the Company's Common Stock; and (iii) the repayment of the
Company's indebtedness to Osicom of approximately $3.1 million representing the
outstanding balance as of April 30, 1999 of $5.9 million offset by a $2.8
million receivable due from Osicom to the Company. In September 1996, Osicom
acquired the Company by purchasing all of the Common Stock for $5.0 million. As
a result of this offering, Osicom will generally have greater liquidity with
respect to its investment in the Company's common stock. 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 own 8,000,000 shares of
the Company's non-voting common stock after the completion of this offering. The
non-voting common stock converts to voting common stock upon sale to
non-affiliates of Osicom. Based upon the initial public offering price of $9.00
per share, such shares owned by Osicom will have an aggregate market value of
approximately $72 million. See 'Use of Proceeds,' 'Principal and Selling
Stockholders' and 'Certain Relationships and Related Party Transactions.'
CONTRACTUAL RELATIONSHIPS WITH OSICOM
The Company is a party to agreements with Osicom, including (i) a five year
supply agreement pursuant to which Osicom purchases the NET+ARM semiconductor
device, at variable prices, structured to maintain a fixed gross margin and
Osicom through its subsidiary, Uni-Precision Industrial, Ltd., provides
manufacturing services to the Company at the request of the Company; (ii) a
sublease pursuant to which Osicom subleases office space at the Company's
facility in Waltham, Massachusetts through August 1999; and (iii) an
intercompany agreement between the Company and Osicom dated May 1, 1998, as
amended (the 'Intercompany Agreement') pursuant to which the Company transferred
its stand-alone print server product business and associated assets (the
'Stand-Alone Print Server Line') to Osicom, and Osicom has the right to
manufacture and sell stand-alone products and services to distributors. The
Intercompany Agreement also states that the Company will provide certain
manufacturing and engineering services to Osicom in connection with such
business. In accordance with the Intercompany Agreement, on May 1, 1999, Osicom
assumed responsibility for all such manufacturing. Additionally, the
Intercompany Agreement provides that the Company will share certain intellectual
property rights with Osicom. Osicom's rights in such intellectual property are
limited to use in certain products manufactured by Osicom related to the
Stand-Alone Print Server Line and cannot be transferred, resold, licensed or
assigned by Osicom. After the completion of this offering, Osicom will own 61.5%
of the Company's outstanding Common Stock in the form of non-voting common
stock, assuming no exercise of the over-allotment option. The non-voting common
stock converts into voting common stock upon sale to non-affiliates of Osicom.
See 'Certain Relationships and Related Party Transactions.'
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS AND TECHNOLOGY
The Company's ability to compete is dependent in part on its proprietary 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.
In addition, pursuant to the Intercompany Agreement with Osicom, the Company
granted Osicom co-ownership rights to certain of its existing intellectual
property in connection with the Company's transfer of its Stand-Alone Print
Server Line to Osicom. Osicom's rights to such intellectual property are limited
to use in products manufactured by Osicom related to the Stand-Alone Print
Server Line. 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 has filed one patent application and plans to file various
additional applications, such applications may be denied. Any patents, once
issued,
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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, results of operations and financial condition.
The Company exclusively licenses the right to use the NET+ARM trademark from ARM
Limited pursuant to a royalty-free agreement expiring in 2008. The Company
depends on ARM to enforce its rights to the trademark against third party
infringement. There can be no assurance that ARM will promptly and adequately
enforce these rights which could have a material adverse effect on the Company's
business, results of operations and financial condition.
The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. Although the Company has not been
notified that its products infringe any third-party intellectual property
rights, there can be no assurance that the Company will not receive such
notification in the future. Any litigation to determine the validity of
third-party infringement claims, whether or not determined in the Company's
favor or settled by the Company, would at a minimum be costly and divert the
efforts and attention of the Company's management and technical personnel from
productive tasks, which could have a material adverse effect on the Company's
business, results of operations and financial condition. There can be no
assurance that any infringement claims by third parties or any claims for
indemnification by customers or end users of the Company's products resulting
from infringement claims will not be asserted in the future or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, results of operations or financial condition. In the event
of an adverse ruling in any such matter, the Company would be required to pay
substantial damages, cease the manufacture, use and sale of infringing products,
discontinue the use of certain processes or be required to obtain a license
under the intellectual property rights of the third party claiming infringement.
There can be no assurance that a license would be available on reasonable terms
or at all. Any limitations on the Company's ability to market its products, or
delays and costs associated with redesigning its products or payments of license
fees to third parties, or any failure by the Company to develop or license a
substitute technology on commercially reasonable terms could have a material
adverse effect on the Company's business, results of operations and financial
condition. See 'Business -- Intellectual Property Trademarks and Proprietary
Rights.'
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
In the fiscal year ended January 31, 1997, 1998 and 1999 international sales
constituted approximately 7%, 30% and 50% of the Company's net sales,
respectively, and approximately 9%, 35% and 19% of its domestic sales were to
customers headquartered in Asia. For the three months ended April 30, 1999,
international sales constituted approximately 40% of the Company's net sales and
approximately 72% of its domestic sales were to customers headquartered in Asia.
The Company believes that its future growth is dependent in part upon its
ability to increase sales in international markets particularly to OEMs located
in Japan, which sell its products worldwide. These sales are subject to a
variety of risks, including fluctuations in currency exchange rates, tariffs,
import restrictions and other trade barriers, unexpected changes in regulatory
requirements, longer accounts receivable payment cycles and potentially adverse
tax consequences and export license requirements. In addition, the Company is
subject to the risks inherent in conducting business internationally, including
political and economic instability and unexpected changes in diplomatic and
trade relationships. In particular, the economies of certain countries in the
Asia-Pacific region are experiencing considerable economic instability and
downturns. Because the Company's sales to date have been denominated in United
States dollars, increases in the value of
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the United States dollar could increase the price in local currencies of the
Company's products in non-US markets and make the Company's products more
expensive than competitors' products denominated in local currencies. 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. There can be no assurance that
one or more of the factors described above will not have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company intends to expand its presence in Europe to address new markets. New
issues are arising in Europe resulting from the formation of a European Economic
and Monetary Union ('EMU'). One change resulting from this union requires EMU
member states to irrevocably fix their respective currencies to a new currency,
the euro, as of January 1, 1999, at which date the euro became a functional
legal currency of these countries. During the next three years, business in the
EMU member states will be conducted in both the existing national currency such
as the French franc or the Deutsche mark, and the euro. As a result, companies
operating or conducting business in EMU member states will need to ensure that
their financial and other software systems are capable of processing
transactions and properly handling these currencies, including the euro. The
Company is assessing the impact that the conversion to the euro will have on its
internal systems, the sale of its products, and the European and global
economies. There can be no assurance that the conversion to the euro will not
have a material adverse effort on the Company's business, results of operations
and financial condition. See 'Management's Discussion and Analysis of Financial
Conditions and Results of Operations.'
DEPENDENCE ON KEY PERSONNEL
The Company's business and prospects depend to a significant degree upon the
continuing contributions of its executive officers and its key technical
personnel. The Company does not have employment contracts with any of its key
personnel, with the exception of its Vice President, Industrial Automation,
Embedded Markets Europe and does not maintain any key man life insurance
policies. The loss of key management or technical personnel could have a
material adverse effect on the Company's business, results of operations and
financial condition. Competition for such personnel is intense, and there can be
no assurance that the Company will be successful in attracting and retaining
qualified personnel. Failure to attract and retain key personnel could have a
material adverse effect on the Company's business, results of operations and
financial condition. See 'Business -- Employees' and 'Management.'
REGULATORY COMPLIANCE AND EVOLVING INDUSTRY STANDARDS
The market for the Company's products is subject to 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. As the standards evolve, the Company may 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, results of operations and financial condition.
RISKS OF PRODUCT DEFECTS; PRODUCT LIABILITY
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
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loss of credibility with the Company's customers or product recall. The use of
the Company's products for applications in devices that interact directly with
the general public, where the failure of the embedded system could cause
property damage or personal injury, could expose the Company to significant
product liability claims. Although the Company has not experienced any product
liability or economic loss claims to date, the sale and support of the Company's
products may entail the risk of such claims. Any of such occurrences could have
a material adverse effect upon the Company's business, results of operations and
financial condition. See 'Business -- Products and Services.'
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. Such growth would require the Company to
implement new and enhance existing financial and management information systems
and controls and 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. The
Company's inability to manage its expanded operations effectively could have a
material adverse effect on the Company's business, results of operations and
financial condition.
YEAR 2000 COMPLIANCE
Many currently installed computer systems, software products and other control
devices are coded to accept only two digit entries in the date code fields, and
will need to accept four digit entries to distinguish dates after December 31,
1999 from prior dates. As a result, many companies' computer systems, software
products and control devices may need to be upgraded or replaced in order to
comply with such 'Year 2000' requirements. The Company relies on its systems,
applications and control devices in operating and monitoring all major aspects
of its business. The Company believes its products are Year 2000 compliant. With
respect to its own systems, the Company relies on the representations of its
primary software vendors that their products are Year 2000 compliant. Based in
part on these representations, the Company believes its other systems, software
and devices are also Year 2000 compliant. Any noncompliance of the Company's
systems, software and devices could severely disrupt the Company's operations
and have a material adverse affect on its business, results of operations and
financial condition.
The Company also relies, directly and indirectly, on external systems of its
customers, suppliers, creditors, financial organizations, utilities providers
and governmental entities, both domestic and international. None of these
systems are under the control of the Company. Consequently, the Company could be
affected through disruptions in the operations of the enterprises with which the
Company interacts. Furthermore, the purchasing frequency and volume of customers
or potential customers may be affected by Year 2000 issues as companies expend
significant resources to make their current systems Year 2000 compliant. Certain
of the Company's customers have requested information from the Company
concerning its exposure to Year 2000 problems, the steps it has taken to resolve
any Year 2000 problems and what level of management attention is being focused
on the issue. Similarly, the Company intends to send inquiries to certain of its
suppliers requesting substantially the same information from them. The Company
has received representations from certain of its suppliers, including some of
its sole source suppliers, as to the Year 2000 compliance of their systems and
products. The Company has not assessed the Year 2000 compliance of its
customers. If the Company's customers encounter Year 2000 problems that prevent
their products from functioning properly, these customers may be forced to
devote significant resources to fixing these problems and may reduce or suspend
the manufacture of new products to be networked during such time. As a result,
the Company's sales of its products to these customers could be materially and
adversely affected. In addition, if the Company's suppliers, particularly its
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sole-source suppliers, are unable to manufacture or deliver supplies to the
Company as a result of Year 2000 problems, the Company's ability to manufacture
and sell its products would be materially and adversely affected. The Company
does not currently have in place any contingency plans for its operations if
Year 2000 issues are not resolved in time or go undetected. The incomplete or
untimely resolution of any of these issues could have a material adverse effect
on the Company's business, results of operations and financial condition.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company anticipates that its available cash resources following the offering
will be sufficient to meet its presently anticipated capital requirements
through the next 12 months. Nonetheless, the Company may elect to sell
additional equity securities, subject to the provisions of the Underwriting
Agreement, or to obtain additional credit. The Company's future capital
requirements may vary materially from those now planned and will depend on many
factors, including, but not limited to, the levels at which the Company
maintains inventory and accounts receivable; the market acceptance of the
Company's products; the levels of promotion and advertising required to launch
products or enter markets and attain a competitive position in the marketplace;
volume pricing concessions; the Company's business, product, capital expenditure
and research and development plans and technology roadmap; capital improvements
to new and existing facilities; technological advances; the response of
competitors to the Company's products; and the Company's relationships with
suppliers and customers. In addition, the Company may require an increase in the
level of working capital to accommodate planned growth, hiring and
infrastructure needs. Additional capital may be required for consummation of any
acquisitions of businesses, products or technologies. To the extent that the
funds generated from this offering, together with existing resources and cash
generated from operations, are insufficient to fund the Company's future
activities, the Company may need to raise additional funds through public or
private financings or borrowings. No assurance can be given that additional
financing will be available or that, if available, such financing can be
obtained on terms favorable to the Company and its shareholders. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of then current stockholders of the Company will be reduced and such
equity securities may have rights, preferences or privileges senior to those
holders of the Company's common stock. If adequate funds are not available to
satisfy short- or long-term capital requirements, the Company may be required to
limit its operations significantly. See 'Use of Proceeds' and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations.'
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 and could make it more difficult for the Company to raise
funds through equity offerings in the future.
Subject to applicable federal and securities laws and the restrictions set forth
below, after completion of the offering, Osicom may sell any and all of the
shares of common stock beneficially owned by it or distribute any or all such
shares of common stock to its stockholders. Sales or distribution by Osicom of
substantial amounts of common stock in the public market or to its stockholders,
or the perception that such sales or distribution could occur, could adversely
affect the prevailing market prices for the common stock. Osicom has advised the
Company that its current intent is to continue to hold all of the common stock
beneficially owned by it following the offering. However, Osicom is not subject
to any obligation to retain its interest in the Company, except that Osicom has
agreed not to sell or otherwise dispose of any shares of common stock for a
period of 365 days after the date of this prospectus without the prior written
consent of CIBC World Markets Corp. See 'Underwriting.' As a result, there can
be no assurance concerning the period of time during which Osicom will maintain
its beneficial ownership of common stock owned by it following the offering.
Moreover, there can be no assurance that, in
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any transfer by Osicom of a controlling interest in the Company, any holders of
common stock will be able to participate in such transaction or will realize any
premium with respect to their shares of common stock.
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, (ii) 431,250
shares of common stock subject to options, which will be subject to lock-up
agreements prohibiting the sale or other disposition of such shares until
180 days after the date of this prospectus without the prior written consent of
CIBC World Markets Corp. and (iii) 8,000,000 shares of common stock beneficially
owned by Osicom which will be subject to lock-up agreements prohibiting the sale
or other disposition of such shares until 365 days after the date of this
prospectus without the prior written consent of CIBC World Markets Corp. As a
result, no shares other than those offered by this prospectus are available for
immediate sale on the date of this prospectus, 431,250 shares of common stock
subject to options and 8,000,000 shares of common stock beneficially owned by
Osicom will become eligible for sale 180 days and 365 days after the date of
this prospectus, respectively. See 'Shares Eligible For Future Sale.'
A total of 6,000,000 shares of Common Stock is reserved for issuance under the
Stock Option Plan (as defined in 'Management -- Stock Option Plan'). It is
anticipated that the Company will grant options to purchase approximately
2,950,000 shares under the Stock Option Plan after the consummation of this
offering. After the completion of this offering, but not prior to 180 days
after the completion of this offering, the Company intends to file a Form S-8
registration statement covering the common stock that may be issued pursuant to
the exercise of options granted by the Company. As a result, 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. See 'Management -- Stock Option Plan' and
'Management -- Director Stock Option Plan,' 'Shares Eligible For Future Sale'
and 'Underwriting.'
BROAD DISCRETION IN APPLICATION OF PROCEEDS
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 $3.1 million of indebtedness to Osicom
which is $5.9 million offset by a $2.8 million receivable due from Osicom to the
Company, and approximately $2.4 million of the approximately $3.4 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. The Company has not specifically allocated approximately
$18.9 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.
ACQUISITION RISKS
In the future, the Company may pursue acquisitions of product lines,
technologies or businesses. Future acquisitions by the Company may result in the
use of significant amounts of cash, potentially dilutive issuances of equity
securities, incurrence of debt and amortization expenses related to goodwill and
other intangible assets, each of which could materially adversely affect the
Company's business, results of operations and financial condition. In addition,
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 technology and products and
services of an acquired business, diversion of management's attention from other
business concerns, the risks
18
<PAGE>
of entering markets in which the Company has limited or no prior experience and
the potential loss of key employees of the acquired business. There are
currently no negotiations, commitments or agreements with respect to any
acquisition. In the event that an acquisition does occur, such acquisition may
have a material adverse effect on the Company's business, results of operations
and financial condition. See 'Use of Proceeds.'
NO PRIOR TRADING MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common Stock of
the Company. The initial public offering price will be determined by
negotiations among the Company, Osicom and the Underwriters and may not be
indicative of the price that will prevail on the open market. See 'Underwriting'
for a discussion of the factors to be considered in determining the initial
public offering price. There can be no assurance that an active public market
will develop or be sustained after this offering or that the market price of the
common stock will not decline below the initial public offering price. Future
announcements concerning the Company or its competitors, quarterly or annual
variations in operating results, announcement of technological innovations, the
introduction of new products or changes in product pricing policies by the
Company or its competitors, proprietary rights or product liability litigation,
changes in earnings estimates by analysts, or general market conditions in the
industries served by the Company's products could cause the market price of the
common stock to experience significant price and volume fluctuations that have
particularly affected the market prices for the securities of technology
companies. In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against such company. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect upon the
Company's business, results of operations and financial condition.
ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and By-Laws include provisions that may
be deemed to have anti-takeover effects and may delay, defer or prevent a
takeover attempt that shareholders might consider in their best interests. These
provisions include a classified Board of Directors and the ability to issue
shares of preferred stock 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.'
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. Purchasers of the
common stock offered hereby will suffer immediate and substantial dilution of
$7.31 per share in the net tangible book value of the common stock from the
initial public offering price (at an assumed initial public offering price of
$9.00 per share). Moreover, the Company may at any time in the future sell
additional securities or rights to purchase such securities, grant additional
warrants, stock options or other forms of equity-based incentive compensation to
the Company's management 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, including the exercise of stock options currently outstanding by
officers, directors and
19
<PAGE>
employees of the Company, would have a dilutive effect upon the holders of the
common stock. See 'Dilution' and 'Management -- Executive Compensation.'
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.'
20
<PAGE>
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 developed and marketed networking solutions for
embedded systems that enable the connection of electronic devices to networks.
In 1994, the Company introduced the Digital Products Option ('DPO') Interface
Specification and its network interface card ('NIC'), two network connectivity
products used by printer controller designers and OEMs of imaging devices. DPO
was designed using the same networking technology found in the Company's
previous products.
In 1996, the Company began developing its NET+Works family of networking
products designed to network-enable a broad array of embedded systems in a
variety of markets. In September 1996, the Company was acquired by Osicom, a
designer and manufacturer of carrier, enterprise and customer premise networking
equipment. The Company has been a wholly-owned subsidiary of Osicom since the
acquisition. Supported by Osicom's funding of working capital, the Company
completed the development of its NET+Works family of products, and began
shipping that family of products in March 1998.
Effective as of May 1, 1998, pursuant to the Intercompany Agreement, the Company
transferred its Stand-Alone Print Server Line to Osicom. Therefore, with respect
to the Company, the Stand-Alone Print Server Line is treated as a discontinued
operation. However, the Company continues to provide significant manufacturing
and engineering services to Osicom for the Stand-Alone Print Server Line for
which Osicom pays the Company on a fixed margin basis. On May 1, 1999, Osicom
assumed manufacturing responsibility for the Stand-Alone Print Server Line
products which it sells. Osicom assumed responsibility for engineering support
of the Stand-Alone Print Server Line on July 1, 1999. As of July 1, 1999, the
Company does not provide contracted services to Osicom with respect to the
Stand-Alone Print Server Line. 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 Stand-Alone Print Server Line
unless the context otherwise requires.
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking statements
within the meaning of the federal securities laws. These statements include,
among others, the following: future product development plans, use of proceeds,
projected capital expenditures, liquidity and business strategy. These
statements may be found under 'Prospectus Summary,' 'Risk Factors,'
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources' and 'Business.' Forward-looking
statements typically are identified by use of terms such as 'may,' 'will,'
'expect,' 'anticipate,' 'estimate' and similar words, although some
forward-looking statements are expressed differently. You should be aware that
the Company's actual results could differ materially from those contained in the
forward-looking statements due to a number of factors, including delays in
product introductions, interruptions in supply and competitive product
introductions. You should also consider carefully the statements under 'Risk
Factors' and other sections of this prospectus, which address additional factors
that could cause the Company's actual results to differ from those set forth in
the forward-looking statements.
21
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of Common
Stock offered hereby are estimated to be approximately $24.5 million at an
assumed initial offering price of $9.00 per share, after deducting the
underwriting discount and estimated offering expenses. See 'Underwriting.' The
Company will not receive any of the proceeds from the sale of shares being
offered by Osicom.
The Company expects to repay a portion of its indebtedness to Osicom and one of
Osicom's subsidiaries in the approximate amount of $5.9 million which will be
offset by a $2.8 million receivable due from Osicom. This indebtedness bears
interest at the prime rate plus three percent per year (10.8% per year at
April 30, 1999) 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 $2.4 million of the amounts
due to Coast Business Credit under its line of credit. As of April 30, 1999, the
Company had $3.4 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 2.5% per year, not to be
less than 8.0% per year (10.3% per year at April 30, 1999). 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
February 1, 2001. 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. The Company may from
time to time explore prospective acquisition opportunities; however, 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.
22
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
April 30, 1999, (i) on an actual basis, and (ii) as adjusted to reflect the sale
of 3,000,000 shares of Common Stock offered by the Company hereby and the
application of approximately $24.5 million in estimated net proceeds therefrom.
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>
APRIL 30, 1999
------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(Dollars in thousands,
except per share data)
<S> <C> <C>
Short-term debt............................................. $ 3,455 $ 1,000
------- -------
------- -------
Due to Osicom(2)............................................ $ 5,889 $ --
Stockholders' equity (deficit):
Common Stock, par value $0.01 per share; 35,000,000 shares
authorized and 10,000,000 shares issued and outstanding
actual; 13,000,000 issued and outstanding as
adjusted(3)............................................ 100 130
Preferred Stock, par value $0.01 per share; 5,000,000
shares authorized and no shares issued actual and as
adjusted............................................... -- --
Additional paid-in capital................................ 2,463 26,943
Accumulated deficit....................................... (4,384) (4,384)
------- -------
Total stockholders' equity (deficit)................... (1,821) 22,689
------- -------
Total capitalization.............................. $ 4,068 $22,689
------- -------
------- -------
</TABLE>
- ---------------------------
(1) Adjusted to give effect to the sale by the Company of 3,000,000 shares of
common stock and the application of approximately $24.5 million in net
proceeds from this offering, after deducting the underwriting discount with
respect to such shares and estimated offering expenses.
(2) Reflects advances from Osicom to the Company as of April 30, 1999. The
Company anticipates repayment of all outstanding amounts due to Osicom from
the proceeds of this offering, offset by a $2.8 million receivable due from
Osicom. See Note F to the Notes to the Financial Statements.
(3) Of the 13,000,000 issued and outstanding shares of common stock as adjusted,
5,000,000 shares are voting common stock and 8,000,000 shares are non-voting
common stock.
23
<PAGE>
DILUTION
The net tangible book value of the Company as of April 30, 1999, was a deficit
of $3.1 million, or $0.31 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. Assuming the sale by the Company of 3,000,000 shares of
common stock offered hereby and application of the estimated net proceeds
therefrom, the pro forma adjusted net tangible book value of the Company as of
April 30, 1999 would have been approximately $22.0 million, or $1.69 per share.
This represents an immediate increase in such net tangible book value of $2.00
per share to existing stockholders and an immediate dilution of $7.31 per share
to new investors. The following table illustrates this per share dilution in net
tangible book value:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $9.00
Net tangible book value per share as of April 30, 1999.... $(.31)
Increase per share attributable to new investors(1)....... 2.00
-----
Pro forma net tangible book value per share as of April 30,
1999............................................................... 1.69
-----
Dilution per share to new investors................................ $7.31
-----
-----
</TABLE>
- ---------------------------
(1) Reflects the sale by the Company of 3,000,000 shares of common stock and the
receipt of approximately $24.5 million in net proceeds from this offering,
after deducting the underwriting discount and estimated offering expenses.
------------------------
The following table summarizes, on an adjusted basis as of April 30, 1999, the
difference between the total number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by existing stockholders and by new investors (at an assumed initial
public offering price of $9.00 per share and without giving effect to the
underwriting discount and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Osicom............................ 10,000,000(1) 66.7% $ 5,000,000(2) 10.0% $0.50
New investors..................... 5,000,000 33.3 45,000,000 90.0 9.00
---------- ----- ----------- -----
---------- ----- ----------- -----
Total....................... 15,000,000 100.0% $50,000,000 100.0%
---------- ----- ----------- -----
---------- ----- ----------- -----
</TABLE>
- ---------------------------
(1)Sales by Osicom in this offering will reduce the number of shares it holds to
8,000,000 shares or 61.5% (7,500,000 shares or approximately 56.6% if the
underwriters' over-allotment option is exercised in full) of the total shares
of Common Stock outstanding after this offering and will increase the number
of shares held by new investors to 5,000,000 shares or 38.5% (5,750,000
shares or approximately 43.4% if the underwriters' over-allotment option is
exercised in full) of the total shares of Common Stock outstanding after this
offering. See 'Principal and Selling Stockholders.'
(2) Represents gross consideration paid by Osicom to the former stockholders of
the Company in connection with the acquisition of the Company in September
1996.
24
<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 data for the
fiscal years ended January 31, 1997, 1998 and 1999 and balance sheet data as of
January 31, 1998 and 1999 have been derived from the financial statements of the
Company which have been audited by BDO Seidman, LLP, independent accountants.
The statement of operations for the fiscal year ended January 31, 1996 and the
balance sheet data as of January 31, 1996 and 1997 have been derived from the
audited financial statements of the Company not included herein. The statement
of operations data for the fiscal year ended January 31, 1995 and the balance
sheet data as of January 31, 1995 have been derived from the Company's unaudited
financial statements not included herein. The statement of operations data for
the three months ended April 30, 1998 and 1999 and the balance sheet data as of
April 30, 1999 have been derived from the Company's unaudited financial
statements included herein. The Company believes that the unaudited historical
financial statements contain all adjustments needed to present fairly the
information included. Those statements and the adjustments made include only
normal and recurring adjustments.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED JANUARY 31, ENDED APRIL 30,
--------------------------------------------------- ---------------
1995 1996 1997 1998 1999 1998 1999
----------- ------- ------- ------- ------- ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................... $5,363 $ 4,598 $ 7,445 $ 7,920 $13,373 $2,185 $5,814
Cost of sales............... 3,029 2,662 4,294 4,060 7,271 1,037 3,120
------ ------- ------- ------- ------- ------ ------
Gross profit................ 2,334 1,936 3,151 3,860 6,102 1,148 2,694
------ ------- ------- ------- ------- ------ ------
Operating expenses:
Selling and marketing..... 1,498 914 1,563 1,810 3,336 628 1,326
Engineering, research and
development................... 635 1,698 1,028 1,483 2,153 448 502
General and
administrative................ 409 2,294 1,502 1,795 2,194 352 613
------ ------- ------- ------- ------- ------ ------
Total operating expenses.... 2,542 4,906 4,093 5,088 7,683 1,428 2,441
------ ------- ------- ------- ------- ------ ------
Operating income (loss) from
continuing operations......... (208) (2,970) (942) (1,228) (1,581) (280) 253
Interest expense............ (66) (99) (136) (118) (551) (60) (238)
------ ------- ------- ------- ------- ------ ------
Income (loss) from
continuing operations before
income taxes.................. (274) (3,069) (1,078) (1,346) (2,132) (340) 15
Provision for income tax
benefit....................... 446 643 969 493 -- -- --
------ ------- ------- ------- ------- ------ ------
Income (loss) from
continuing operations......... $ 172 $(2,426) $ (109) $ (853) $(2,132) $ (340) $ 15
------ ------- ------- ------- ------- ------ ------
------ ------- ------- ------- ------- ------ ------
Income (loss) from
continuing operations per
share:
Basic..................... $ 0.02 $ (0.34) $ (0.02) $ (0.09) $ (0.21) $(0.04) $ 0.00
Diluted................... $ 0.02 $ (0.34) $ (0.02) $ (0.09) $ (0.21) $(0.04) $ 0.00
Supplemental net income
(loss) per share(1)........... $ 0.02 $ (0.31) $ (0.01) $ (0.08) $ (0.20) $(0.03) $ 0.00
Weighted average number of
shares outstanding:
Basic..................... 7,161 7,176 7,158 10,000 10,000 10,000 10,000
Diluted................... 10,000 7,176 7,158 10,000 10,000 10,000 10,000
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------------------------------- APRIL 30,
1995 1996 1997 1998 1999 1999
----------- ------- ------- ------- ------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents... $ -- $ 19 $ 394 $ 185 $ 583 $ 30
Working capital (deficit)... (852) (1,261) (241) (787) (3,471) (3,782)
Total assets................ 7,318 7,033 7,615 7,933 11,648 13,726
Due to Osicom(2)............ 0 0 948 1,812 5,885 5,889
Total debt (including
short-term debt).............. 6,190 2,863 3,338 3,005 3,191 3,455
Stockholders' equity
(deficit)..................... 1,076 (458) 763 586 (1,836) (1,821)
</TABLE>
- ---------------------------
(1) Supplemental net income (loss) per share is based upon the weighted number
of shares of common stock used in the calculation of net income (loss) per
share increased by the sale of 668,000 shares, the proceeds of which would
be necessary to reduce borrowings by $5.6 million.
(2) Reflects advances from Osicom to the Company as of April 30, 1999. The
Company anticipates repayment of all outstanding amounts due to Osicom from
the proceeds of the offering, offset by a $2.8 million receivable due from
Osicom. See Note F to the Notes to the Financial Statements.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read this discussion together with the financial statements and other
financial information included in this prospectus.
OVERVIEW
The Company develops and markets semiconductor devices and software solutions
designed to meet the networking requirements of embedded systems. The Company's
products are incorporated into the design of embedded systems to provide them
with the ability to communicate over standards-based LANs and the Internet,
enabling the development of new embedded systems applications. The Company
believes that it offers the first comprehensive solution that, in conjunction
with the physical interface and memory, encompasses all of the required hardware
and software necessary to network-enable embedded systems. The Company's
technology is designed to have broad applicability and therefore may add network
functionality to many embedded systems.
The Company's products are currently contained in a broad array of imaging
products, including printers, scanners, fax machines, copiers and multi-function
peripherals manufactured by 22 OEMs such as Minolta Corporation, NEC
Corporation, Ricoh Company, Ltd., Sharp Corporation and Xerox Corporation. The
Company's products are also in various stages of being incorporated into the
design of products in additional embedded systems markets, such as industrial
automation equipment, communication devices, data acquisition and test
equipment, Internet devices and utility monitoring equipment.
From its inception in 1984, the Company has developed and marketed products to
enable the connection of electronic devices incorporating embedded systems to
networks. In 1994, the Company introduced the DPO Interface Specification and
Network Interface Card, two network connectivity products used by printer
controller designers and OEMs of imaging devices.
In 1996, the Company began developing its NET+Works family of networking
semiconductor devices designed to network-enable a broad array of embedded
systems in a variety of markets. In September 1996, Osicom acquired all of the
Company's outstanding capital stock from its stockholders for $5.0 million. The
Company has been a wholly-owned subsidiary of Osicom since the acquisition.
Supported by Osicom's funding of working capital, the Company completed the
development of its NET+Works family of products, and began shipping that family
of products in March 1998.
Effective as of May 1, 1998, the Company transferred its Stand-Alone Print
Server Line to Osicom. Therefore, the Company treats the Stand-Alone Print
Server Line as a discontinued operation, and Osicom now manufactures, sells and
supports the stand-alone print server and other products. However, the Company
continues to provide significant manufacturing and engineering services to
Osicom for the Stand-Alone Print Server Line for which Osicom pays the Company
on a cost basis. On May 1, 1999, Osicom assumed responsibility for all
manufacturing of the Stand-Alone Print Server Line products which it sells. On
July 1, 1999 Osicom assumed responsibility for providing engineering support for
the Stand-Alone Print Server Line. As of July 1, 1999, the Company does not
provide contracted services to Osicom with respect to the Stand-Alone Print
Server Line. See 'Certain Relationships and Related Party Transactions.' The
financial data discussed below do not include the operations of the Stand-Alone
Print Server Line.
The Company generates revenues from the sales of network semiconductor devices,
NICs and software solutions, development tools and application engineering
services to the OEMs in the embedded system markets. The Company's networking
products are sold to OEMs which incorporate them into electronic devices
incorporating embedded systems that are sold to end users. The Company generally
recognizes product and software license revenue upon shipment to its OEM
customers. Revenue recognition is not dependent upon the customers of those OEMs
accepting the OEM's products into which the Company's products are incorporated.
Revenue from service obligations is deferred and recognized over the lives of
the contracts. The Company accrues warranty costs, sales returns, and other
allowances at the time of shipment. In general, the timing
26
<PAGE>
and magnitude of the Company's revenues are dependent upon its achievement of
design wins, the timing and success of its OEMs' development cycles and its
OEMs' product sales. In addition to revenues from actual sales of the hardware
products, NETsilicon also receives immaterial amounts of revenue that are earned
from the sales of support services provided to OEMs during their design stage,
and also from post-sale support contracts (generally for the 12 month period
following date of actual shipment of product to the OEM). The sale of the
Company's products typically involves a significant technical evaluation and
commitment of capital and other resources by customers, as well as delays
frequently associated with customers' internal procedures to deploy new
technologies within their products and to accept and test new technologies. For
these and other reasons, the sales cycles associated with the Company's products
is typically lengthy, lasting nine months or longer.
In the fiscal years ended January 31, 1997, 1998 and 1999 international sales
constituted approximately 7%, 30% and 50% of the Company's net sales,
respectively, and approximately 9%, 35% and 19% of its domestic sales were to
customers headquartered in Asia during the fiscal years ended January 31, 1997,
1998 and 1999, respectively. Approximately 100%, 100% and 95% of the Company's
net sales in the fiscal years ended January 31, 1997, 1998, and 1999,
respectively, were made to OEM customers in the imaging market, many of which
are headquartered in Japan. For the three months ended April 30, 1999,
international sales constituted approximately 40% of the Company's net sales and
approximately 72% of its domestic sales were to customers headquartered in Asia.
Approximately 97% of the Company's net sales for the three months ended
April 30, 1999, were made to OEM customers in the imaging market.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years ended January 31, 1997,
1998 and 1999, and for the three months ended April 30, 1998 and 1999,
information derived from the Company's Statement of Operations expressed as a
percentage of net sales.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
JANUARY 31, APRIL 30,
--------------------------- ----------------
1997 1998 1999 1998 1999
----- ----- ----- ----- -----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 57.7 51.3 54.4 47.5 53.7
----- ----- ----- ----- -----
Gross profit...................................... 42.3 48.7 45.6 52.5 46.3
----- ----- ----- ----- -----
Operating expenses:
Selling and marketing........................... 21.0 22.9 24.9 28.7 22.8
Engineering, research and development........... 13.8 18.7 16.1 20.5 8.6
General and administrative...................... 20.2 22.6 16.4 16.1 10.5
----- ----- ----- ----- -----
Total operating expenses.......................... 55.0 64.2 57.4 65.3 41.9
----- ----- ----- ----- -----
Operating income (loss) from continuing
operations...................................... (12.7) (15.5) (11.8) (12.8) 4.4
Interest expense.................................. (1.8) (1.5) (4.1) (2.8) (4.1)
----- ----- ----- ----- -----
Income (loss) from continuing operations before
income taxes.................................... (14.5) (17.0) (15.9) (15.6) 0.3
Provision for income taxes........................ 13.0 6.2 -- -- --
----- ----- ----- ----- -----
Income (loss) from continuing operations.......... (1.5)% (10.8)% (15.9)% (15.6)% 0.3%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
THREE MONTHS ENDED APRIL 30, 1999 COMPARED TO THREE MONTHS ENDED APRIL 30, 1998
Net sales. Net sales increased to $5.8 million for the three months ended April
30, 1999 from $2.2 million in the three months ended April 30, 1998,
representing an increase of 166.1%. The increase in net sales was due primarily
to an increase in OEM customers to which the Company shipped product from 11 in
the three months ended April 30, 1998 to 26 in the three months ended April 30,
1999. Net sales included maintenance and service revenue of $72,000, or 1.2% of
27
<PAGE>
net sales in the three months ended April 30, 1999 compared to $79,000 or 3.6%
of net sales in the three months ended April 30, 1998. Backlog for the Company's
products and services was approximately $8.4 million and $4.8 million at
April 30, 1999 and 1998, respectively, all of which was scheduled to be shipped
within 12 months.
Cost of sales; gross profit. Cost of sales consists principally of the cost of
raw material components and subcontract labor assembly from outside
manufacturers and suppliers. Gross profit increased to $2.7 million, or 46.3% of
net sales, for the three months ended April 30, 1999 from $1.1 million, or 52.5%
of net sales, in the three months ended April 30, 1998, representing an increase
of 134.7%. The gross margin percentage decrease in the three months ended
April 30, 1999 was due primarily to a decline in average sales prices.
Selling and marketing expenses. Selling and marketing expenses consist mainly of
employee-related expenses, commissions to sales representatives, trade shows and
travel expenses. Selling and marketing expenses increased to $1.3 million, or
22.8% of net sales, for the three months ended April 30, 1999 from $628,000, or
28.7% of net sales, in the three months ended April 30, 1998, representing an
increase of 111.1%. This increase was the result of expenses incurred due to
increased sales volume such as a $205,000 increase in commissions. The Company
also incurred expenses of $106,000 attributable to the opening of a European
sales office.
Engineering, research and development expenses. Engineering, research and
development expenses consist primarily of salaries and the related costs of
employees engaged in research, design and development activities, net of
capitalized software costs. Engineering, research and development expenses
increased to $502,000, or 8.6% of net sales, for the three months ended
April 30, 1999 from $448,000, or 20.5% of net sales, in the three months ended
April 30, 1998, representing an increase of 12.1%. This increase was due to the
increased expenditures associated with the development of the Company's
NET+Works family of products. Software development costs of $316,000 and
$163,000 in the three months ended April 30, 1999 and 1998, respectively, were
capitalized and are being amortized over the products' useful lives estimated at
three years. Amortization expenses related to capitalized software development
costs for the three months ended April 30, 1998 and 1999 were $67,000 and
$79,000, respectively.
General and administrative expenses. General and administrative expenses consist
mainly of salaries, employee-related expenses, legal expenses, audit fees and
reserves for accounts receivable allowances. General and administrative expenses
increased to $613,000, or 10.5% of net sales, for the three months ended
April 30, 1999 from $352,000, or 16.1% of net sales, in the three months ended
April 30, 1998, representing an increase of 74.1%. The increase in these
expenses resulted from $73,000 of expenses attributable to a newly formed MIS
group as well as other expenses resulting from increased sales.
Interest expense. Interest expense is the result of the Company's borrowings
against its line of credit with its lender, Coast Business Credit and the
interest charged by its parent, Osicom, for borrowings made by the Company from
Osicom. Interest expense increased to $238,000, or 4.1% of net sales, in the
three months ended April 30, 1999, from $60,000, or 2.8% of net sales, in the
three months ended April 30, 1998, representing an increase of 296.7%. During
the three months ended April 30, 1999, approximately $136,000 was attributable
to interest charges on advances to the Company from Osicom, compared to $20,000
in the three months ended April 30, 1998. The interest rate on the Company's
debt with Osicom is the prime rate plus three percent per year.
Provision for income taxes. There was no net provision for income taxes for the
three months ended April 30, 1998 because the tax benefits attributable to
continuing operations were offset by the tax provision attributable to
discontinued operations. The 1999 provision was offset by a net operating loss
carryforward. At April 30, 1999, the Company had federal net operating losses of
approximately $3.8 million, and research and development credits of $210,000
which expire at various dates through 2014 and which may be available to reduce
future taxable income. The extent to which net operating loss carryforwards may
be utilized in a single taxable year may be reduced in the event there has been
any 'ownership change' of a taxpayer. The acquisition of the Company by Osicom
in September 1996 resulted in such an ownership change. Further ownership
28
<PAGE>
changes in the future may reduce the extent to which any net operating losses
and credits may be utilized.
FISCAL YEAR ENDED JANUARY 31, 1999 COMPARED TO FISCAL YEAR ENDED JANUARY 31,
1998
Net sales. Net sales increased to $13.4 million in the fiscal year ended
January 31, 1999 from $7.9 million in the fiscal year ended January 31, 1998,
representing an increase of 68.9%. The increase in net sales was due primarily
to an increase in OEM customers to which the Company shipped product from seven
in fiscal year 1998 to 20 in fiscal year 1999. Net sales included maintenance
and service revenue of $424,000, or 3.2% of net sales in the fiscal year ended
January 31, 1999 compared to $606,000 or 7.7% of net sales in the fiscal year
ended January 31, 1998. Backlog for the Company's products and services was
approximately $7.8 million and $1.9 million at January 31, 1999 and 1998,
respectively, all of which was scheduled to be shipped within 12 months.
Cost of sales; gross profit. Gross profit increased to $6.1 million, or 45.6% of
net sales, in the fiscal year ended January 31, 1999 from $3.9 million, or 48.7%
of net sales, in the fiscal year ended January 31, 1998, representing an
increase of 58.1%. The gross margin percentage decrease in the fiscal year ended
January 31, 1999, was due primarily to costs of $224,000 resulting from the late
delivery of the NET+ARM chip from Atmel, as well as slower than anticipated
general raw material cost reductions of $38,000 due to cash constraints. In
addition, the total impact from the decline in average sales prices resulted in
a decrease in gross profit of $153,000 for the fiscal year ended January 31,
1999 from the fiscal year ended January 31, 1998.
Selling and marketing expenses. Selling and marketing expenses increased to $3.3
million, or 24.9% of net sales, in the fiscal year ended January 31, 1999 from
$1.8 million, or 22.9% of net sales, in the fiscal year ended January 31, 1998,
representing an increase of 84.3%. This increase was the result of
(i) additional sales commissions of $681,000 due to the increased net sales
volume, (ii) increased marketing costs of $687,000 were primarily associated
with the introduction and brand identification efforts related to the NET+Works
family of products subsequent to its introduction in January 1998 as well as the
addition of two senior marketing employees, and (iii) marketing costs of $88,000
associated with targeting additional OEM's in the imaging market.
Engineering, research and development expenses. Engineering, research and
development expenses increased to $2.2 million, or 16.1% of net sales, in the
fiscal year ended January 31, 1999 from $1.5 million, or 18.7% of net sales, in
the fiscal year ended January 31, 1998, representing an increase of 45.2%. This
increase was due primarily to the increased expenditures associated with the
development of the Company's NET+Works family of products. Software development
costs of $724,000 and $556,000 in the fiscal years ended January 31, 1999 and
1998, respectively, were capitalized and are being amortized over the products'
useful lives estimated at three years. Amortization expenses related to
capitalized software development costs were $227,300 and $277,300 in the fiscal
years ended January 31, 1999 and 1998, respectively.
General and administrative expenses. General and administrative expenses
increased to $2.2 million, or 16.4% of net sales, in the fiscal year ended
January 31, 1999 from $1.8 million, or 22.6% of net sales, in the fiscal year
ended January 31, 1998, representing an increase of 22.2%. The increase in these
expenses resulted primarily from an increase of approximately $300,000 in the
accounts receivable valuation reserve to reflect the higher level of gross
receivables in the fiscal year ended January 31, 1999, as well as from the
addition of a chief financial officer at a cost of approximately $100,000.
Interest expense. Interest expense is the result of the Company's borrowings
against its line of credit with its lender, Coast Business Credit and the
interest charged by its parent, Osicom, for borrowings made by the Company from
Osicom. Interest expense increased to $551,000, or 4.1% of net sales, in the
fiscal year ended January 31, 1999, from $118,000, or 1.5% of net sales, in the
fiscal year ended January 31, 1998, representing an increase of 366.9%. During
the fiscal year ended January 31, 1999, approximately $353,000 was attributable
to interest charges on advances to the Company from Osicom. During the fiscal
year ended January 31, 1998, Osicom did not charge any interest on advances to
the Company. The interest rate on the Company's debt with Osicom is the prime
rate plus three percent per year.
29
<PAGE>
Provision for income taxes. There was no net provision for income taxes for the
fiscal years ended January 31, 1999 and 1998 because the tax benefits
attributable to continuing operations were offset by the tax provision
attributable to discontinued operations. At January 31, 1999, the Company had
federal net operating losses of approximately $3.8 million, and research and
development credits of $210,200 which expire at various dates through 2014 and
which may be available to reduce future taxable income. The extent to which net
operating loss carryforwards may be utilized in a single taxable year may be
reduced in the event there has been any 'ownership change' of a taxpayer. The
acquisition of the Company by Osicom in September 1996 resulted in such an
ownership change. Further ownership changes in the future may reduce the extent
to which any net operating losses and credits may be utilized.
FISCAL YEAR ENDED JANUARY 31, 1998 COMPARED TO FISCAL YEAR ENDED JANUARY 31,
1997
Net sales. Net sales increased to $7.9 million in the fiscal year ended
January 31, 1998 from $7.4 million in the fiscal year ended January 31, 1997,
representing an increase of 6.4%. An increase in sales resulted from an increase
in the number of OEM customers from five to seven and moderately increased
volume in units sold, representing $760,000 of sales. These factors were offset
in part by declining sales prices. The decline in average sales prices resulted
in a decrease in gross profit of $260,000 for the fiscal year ended January 31,
1998 from the fiscal year ended January 31, 1997. Backlog for the Company's
products and services was approximately $1.9 million and $1.8 million at the
fiscal years ended January 31, 1998 and 1997, respectively, all of which was
scheduled to be shipped within 12 months.
Cost of sales; gross profit. Gross profit increased to $3.9 million, or 48.7% of
net sales, in the fiscal year ended January 31, 1998, from $3.2 million, or
42.3% of net sales, in the fiscal year ended January 31, 1997, representing an
increase of 22.5%. The gross margin increase reflected primarily reductions in
the costs of raw materials.
Selling and marketing expenses. Selling and marketing expenses increased to $1.8
million, or 22.9% of net sales, in the fiscal year ended January 31, 1998, from
$1.6 million, or 21.0% of net sales, for the fiscal year ended January 31, 1997,
representing an increase of 15.8%. This increase resulted from expanded
marketing efforts to increase the Company's OEM customer base.
Engineering, research and development expenses. Engineering, research and
development expenses increased to $1.5 million, or 18.7% of net sales, in the
fiscal year ended January 31, 1998 from $1.0 million, or 13.8% of net sales, for
the fiscal year ended January 31, 1997, representing an increase of 44.3%. The
increase in these expenses resulted from the increased expenditures associated
with the development of the Company's NET+Works family of products in the fiscal
year ended January 31, 1998. In the fiscal year ended January 31, 1997 the
Company's investment in engineering, research and development were limited due
to cash constraints. Software development costs of $556,000 and $369,500 in the
fiscal years ended January 31, 1998 and 1997, respectively were capitalized and
are being amortized over the products' useful lives. Amortization expenses
related to capitalized software development costs for the fiscal years ended
January 31, 1998 and 1997 were $277,300 and $321,900, respectively.
General and administrative expenses. General and administrative expenses
increased to $1.8 million, or 22.6% of net sales, in the fiscal year ended
January 31, 1998 from $1.5 million, or 20.2% of net sales, in the fiscal year
ended January 31, 1997, representing an increase of 19.5%. The increase in these
expenses resulted primarily from an expansion of the Company's infrastructure to
facilitate growth.
Interest expense. Interest expense decreased to $118,000, or 1.5% of net sales,
in the fiscal year ended January 31, 1998 from $136,000, or 1.8% of net sales,
in the fiscal year ended January 31, 1997, representing a decrease of 13.2%.
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
fiscal years ended January 31, 1998 and 1997 because the tax benefit
attributable to continuing operations was offset by the tax provision
attributable to discontinued operations. At January 31, 1998 the Company had
30
<PAGE>
federal net operating losses of approximately $1.5 million and research and
development credits of approximately $210,000 which expire at various dates
through 2013 and which may be available to reduce future taxable income. The
extent to which net operating loss carryforwards may be utilized in a single
taxable year may be reduced in the event there has been an 'ownership change' of
a taxpayer. The acquisition of the Company by Osicom in September 1996 resulted
in such an ownership change. Further ownership changes in the future may reduce
the extent to which any net operating losses and credits may be utilized.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited statement of operations data in
dollar amounts and as a percentage of net sales for the three month period
indicated. This information has been presented on the same basis as the audited
Financial Statements appearing elsewhere in this Prospectus and, in the opinion
of management, includes all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary to present fairly the
unaudited quarterly results. This information should be read in conjunction with
the Company's audited Financial Statements and the Notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30,
1997 1997 1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(Unaudited, in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........................... $2,703 $ 890 $1,856 $2,185 $3,199 $ 3,030 $4,959 $5,814
Cost of sales....................... 1,376 441 875 1,037 1,497 2,117 2,619 3,120
------ ------ ------ ------ ------ ------- ------ ------
Gross profit........................ 1,327 449 981 1,148 1,702 913 2,340 2,694
------ ------ ------ ------ ------ ------- ------ ------
Operating expenses:
Selling and marketing............. 478 401 505 628 627 1,008 1,074 1,326
Engineering, research &
development..................... 402 424 259 448 502 669 533 502
General and administrative........ 454 442 448 352 405 756 681 613
------ ------ ------ ------ ------ ------- ------ ------
Total operating expenses............ 1,334 1,267 1,212 1,428 1,534 2,433 2,288 2,441
------ ------ ------ ------ ------ ------- ------ ------
Operating income (loss) from
continuing operations............. (7) (818) (231) (280) 168 (1,520) 52 253
Interest expense.................... (34) (46) (18) (60) (77) (198) (217) (238)
------ ------ ------ ------ ------ ------- ------ ------
Income (loss) from continuing
operations before income taxes.... (41) (864) (249) (340) 91 (1,718) (165) 15
Provision for income tax benefit.... 109 31 241 -- -- -- -- --
------ ------ ------ ------ ------ ------- ------ ------
Net income (loss) from continuing
operations........................ $ 68 $ (833) $ (8) $ (340) $ 91 $(1,718) $ (165) $ 15
------ ------ ------ ------ ------ ------- ------ ------
------ ------ ------ ------ ------ ------- ------ ------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30,
1997 1997 1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales....................... 50.9 49.6 47.1 47.5 46.8 69.9 52.8 53.7
----- ----- ----- ----- ----- ----- ----- -----
Gross profit........................ 49.1 50.4 52.9 52.5 53.2 30.1 47.2 46.3
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Selling and marketing............. 17.7 45.1 27.2 28.7 19.6 33.3 21.7 22.8
Engineering, research &
development..................... 14.9 47.6 14.0 20.5 15.7 22.1 10.7 8.6
General and administrative........ 16.8 49.6 24.1 16.1 12.6 24.9 13.8 10.5
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses............ 49.4 142.3 65.3 65.3 47.9 80.3 46.2 41.9
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) from
continuing operations............. (0.3) (91.9) (12.4) (12.8) 5.3 (50.2) 1.0 4.4
Interest expense.................... (1.2) (5.2) (1.0) (2.8) (2.5) (6.5) (4.3) (4.1)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from continuing
operations before income taxes.... (1.5) (97.1) (13.4) (15.6) 2.8 (56.7) (3.3) 0.3
Provision for income tax benefit.... 4.0 3.5 13.0 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) from continuing
operations...................... 2.5% (93.6)% (0.4)% (15.6)% 2.8% (56.7)% (3.3)% 0.3%
----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
</TABLE>
31
<PAGE>
The Company's net sales and operating results have in the past and may in the
future fluctuate substantially from quarter to quarter and from year to year.
This may result from any one or a combination of factors, many of which are
beyond the Company's control. These factors include, among others: the growth
rate of markets into which the Company sells its products; market acceptance of
and demand for the products of the Company and those of the Company's customers;
unanticipated delays or problems in the introduction of the Company's products;
the Company's ability to introduce new products in accordance with OEM design
requirements and design cycles; new product announcements or product
introductions by the Company and the Company's competitors; availability and
cost of manufacturing sources for the Company's products; changes in the mix of
sales to OEMs and sales representatives; incorrect forecasting of future
revenues; the volume of orders that are received and can be filled in a quarter;
the rescheduling or cancellation of orders by customers; costs associated with
protecting the Company's intellectual property; changes in product mix; changes
in product costs and pricing by the Company or its competitors; and changes in
currency exchange rates. The Company believes that period-to-period comparisons
of its operating results should not be relied upon as an indication of future
performance. It is likely that in some future period the Company's operating
results or business outlook will be below the expectations of securities
analysts or investors, which would likely result in a significant reduction in
the market price of the shares of common stock. See 'Selected Financial Data,'
the Financial Statements of the Company and the Notes thereto and 'Risk
Factors -- Potential Fluctuations in Operating Results' appearing elsewhere in
this prospectus.
The Company's quarterly revenues for the three months ended October 31, 1998 and
January 31, 1999 were significantly impacted by delays in the delivery of its
products from Atmel Corporation. Such delays affected the Company's ability to
fill its orders to customers in the three months ended October 31, 1998,
reducing its quarterly revenues to below its expectations. Many such orders were
filled during the three months ended January 31, 1999, generating unusually high
revenues for this period.
During the three months ended October 31, 1998, management completed an
evaluation of its reserves, royalties, purchased software and other assets.
Following such review, the Company recorded non-recurring charges of
approximately $253,000 to cost of sales and $355,000 to operating expenses to
reflect adjustments to such accounts. In addition, during the three months ended
January 31, 1999, the Company made an adjustment to the valuation of its
inventory, which was reflected as a write-down of assets of $272,000 to cost of
sales. The Company believes these accounts are properly reflected as of its
January 31, 1999 financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Prior to this offering, the Company financed its operations through advances
from Osicom and borrowings under its short term bank line of credit. As of
April 30, 1999, the Company had a working capital deficit of $3.8 million and
$30,000 in cash and cash equivalents.
The Company's operating activities provided cash of $546,000 during the three
months ended April 30, 1999, primarily as a result of growth in accounts payable
and other current liabilities, partially offset by growth in accounts receivable
and inventories. The Company's operating activities used cash in the amount of
$1.9 million during the fiscal year ended January 31, 1999 and generated cash of
$45,000 in the fiscal year ended January 31, 1998. Cash used in the fiscal year
ended January 31, 1999 was primarily attributable to a net loss, growth in
accounts receivable and inventory caused by growth in demand for the Company's
OEM products, offset in part by a growth in accounts payable and other current
liabilities and the non-cash impact of depreciation and amortization. Cash
provided by operating activities in the fiscal year ended January 31, 1998 was
primarily attributable to a decrease in inventories and the non-cash impact of
depreciation and amortization and the valuation allowance associated with
intangible assets, offset in part by a net loss, growth in accounts receivable
and a decrease in accounts payable and other current liabilities.
32
<PAGE>
In order to support the Company's anticipated growth, the Company expects that
its sales and marketing expenses, engineering and research and development
expenses and general and administrative expenses each will increase in the
fiscal year ending January 31, 2000 and thereafter compared to the amounts of
such expenses in the fiscal year ending January 31, 1999. There can be no
assurance that the Company's available cash and cash flow from operations will
be sufficient to fund such additional expenses.
The Company's standard payment terms are net 30 days. While the Company actively
pursues collection within that time, receivables have frequently taken longer to
collect because it sells products to large companies in Asia. In addition, the
Company has experienced a significant amount of its revenue shipments in the
last month of the quarter and the last month of the fiscal year.
The Company's investing activities used cash in the amount of $496,000 in the
three months ended April 30, 1999 for the purchase of $132,000 of property and
equipment to support the Company's expanded operations and $316,000 for
capitalized software development costs. During the fiscal year ended
January 31, 1999 the Company's investing activities used cash of $328,000 for
the purchase of property and equipment and $724,000 for capitalized software
development costs. During the fiscal year ended January 31, 1998 the Company's
investing activities used cash of $605,000 for the purchase of property and
equipment and $556,000 for capitalized software development costs.
Cash used by financing activities was $603,000 for the three months ended
April 30, 1999, primarily from net loan payments to Osicom of $866,000 less
proceeds from short-term debt of $263,000. Cash provided by financing activities
was $3.2 million during the fiscal year ended January 31, 1999, primarily from
net loans by Osicom of $3.0 million and net proceeds from short-term debt of
$186,000, net of long-term debt repayments of $18,000. Cash provided by
financing activities was $890,000 during the fiscal year ended January 31, 1998,
primarily from loans by Osicom of $854,000 and net proceeds from short-term debt
of $291,000, net of long-term debt repayments of $255,000.
As of April 30, 1999, the balance due to Osicom from loans was approximately
$5.9 million, offset by a receivable due to NETsilicon from Osicom of $2.8
million. This loan is subordinate to bank debt. As of January 31, 1998, Osicom
began accruing interest on the outstanding balance on the loan at the prime rate
plus three percent per year. The Company intends to repay the loan to Osicom in
full from the proceeds of this offering and has no plans to borrow additional
funds from Osicom subsequent to this offering. The Company's short-term debt is
in the form of a credit facility provided by Coast Business Credit. Coast
Business Credit is a division of Southern Pacific Bank and provides asset based
lending services. The Company's credit facility is for $5.0 million, of which
$1.6 million was unused at April 30, 1999 and is 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 8.0%, and expires
February 1, 2001.
The Company anticipates that its available cash resources following the offering
will be sufficient to meet its presently anticipated capital requirements
through the next 12 months. Nonetheless, the Company may elect to sell
additional equity securities, subject to the provisions of the Company's 365-day
'lock-up' agreement with the Underwriters, or to obtain additional credit. The
Company's future capital requirements may vary materially from those now planned
and will depend on many factors, including, but not limited to, the levels at
which the Company maintains inventory and accounts receivable; the market
acceptance of the Company's products; the levels of promotion and advertising
required to launch products or enter markets and attain a competitive position
in the marketplace; volume pricing concessions; the Company's business, product,
capital expenditure and research and development plans and technology roadmap;
capital improvements to new and existing facilities; technological advances; the
response of competitors to the Company's products; and the Company's
relationships with suppliers and customers. In addition, the Company may
33
<PAGE>
require an increase in the level of working capital to accommodate planned
growth, hiring and infrastructure needs. Additional capital may be required for
consummation of any acquisitions of businesses, products or technologies. To the
extent that the funds generated from this offering, together with existing
resources and cash generated from operations, are insufficient to fund the
Company's future activities, the Company may need to raise additional funds
through public or private financings or borrowings. No assurance can be given
that additional financing will be available or that, if available, such
financing can be obtained on terms favorable to the Company and its
shareholders. If additional funds are raised through the issuance of equity
securities, the percentage ownership of then current stockholders of the Company
will be reduced and such equity securities may have rights, preferences or
privileges senior to those of holders of the Company's common stock. If adequate
funds are not available to satisfy short- or long-term capital requirements, the
Company may be required to limit its operations significantly.
YEAR 2000 COMPLIANCE
The Year 2000 issue refers generally to the problems that some software may have
in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether '00' means 1900 or 2000, which may result in failures or the
creation of erroneous results.
The Company is taking steps to address potential Year 2000 problems, including
(i) identifying the computer systems and products affected; (ii) contacting
vendors and suppliers; (iii) determining the Year 2000 compliance status of each
of its systems and products; and (iv) implementing any necessary changes.
Although the Company does not currently expect that the impact of the Year 2000
issue will be material to its systems or products, it could discover (or fail to
discover) Year 2000 issues in the course of its evaluation process that would
have a materially adverse effect on the Company's business, results of
operations or financial condition if not properly addressed.
The Company's products are not date-dependent and the Company believes that they
are Year 2000 compliant. The Company has tested software obtained from third
parties that is incorporated into its products, and is seeking assurances from
its vendors that their licensed software is Year 2000 compliant. Furthermore,
the Company intends to send inquiries to certain of its suppliers requesting
information concerning exposure to Year 2000 problems. The Company expects to
complete this process by September 1999. The Company has received
representations from certain of its suppliers, including some of its sole source
suppliers, as to the Year 2000 compliance of their systems and products. Despite
testing by the Company and by its current and potential customers, and
assurances from the vendors of the software and hardware incorporated into its
products, the Company's products may contain undetected errors or defects
associated with Year 2000 date functions. Known or unknown errors or defects in
such products could severely disrupt the Company's operations and have a
material adverse effect on its business, financial condition, cash flows and
results of operations.
The Company's internal systems include both information technology ('IT') and
non-IT systems. The Company has completed an assessment of its material internal
IT and non-IT systems, including software and hardware technology. To the extent
the Company cannot test the technology, it is seeking assurances from such
vendors that their systems are Year 2000 compliant. The Company is not aware of
any material operational issues or costs associated with preparing its internal
IT and non-IT systems for the Year 2000; however, it may experience material
unanticipated problems and costs caused by undetected errors or defects in the
technology used in its internal IT and non-IT systems. The Company intends to
complete the remediation of any non-Year 2000 compliant technology by
September 1999.
The Company does not have any information concerning the Year 2000 compliance of
its customers. The Company's current and potential customers may incur
significant expense to achieve Year 2000 compliance. If such customers are not
Year 2000 compliant, they may incur material costs to remedy problems or face
litigation costs. As a result, such customers and
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potential customers could reduce or eliminate plans that they have to purchase
the Company's products or services. Such events could have a material adverse
effect on the Company's business, financial condition, cash flows and results of
operations.
The Company has funded its efforts to address the Year 2000 issue from available
cash and has not separately accounted for these costs in its financial
statements. These costs have not been material as of the date of this
Prospectus. The Company expects to incur additional costs associated with Year
2000 compliance. Subject to the foregoing uncertainties, the Company does not
expect those costs to be in excess of $100,000.
Because the Company does not believe the risks of Year 2000 compliance are
material, the Company does not plan to develop a contingency plan to address
situations that may result if it is unable to achieve Year 2000 compliance for
its critical operations. However, the Company is subject to external forces that
may affect industry and commerce generally, such as utility or transportation
company Year 2000 compliance failures and related service interruptions.
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.
Substantially all 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 ('FASB') 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 No. 133'). SFAS No. 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 No. 133 is effective for years
beginning after June 15, 2000. Adoption of SFAS No. 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 develops and markets semiconductor devices and software solutions
designed to meet the networking requirements of embedded systems. The Company's
products are incorporated into the design of embedded systems to provide them
with the ability to communicate over standards-based LANs and the Internet,
enabling the development of new embedded systems applications. The Company
believes that it offers the first comprehensive solution that, in conjunction
with the physical interface and memory, encompasses all of the hardware and
software necessary to network-enable electronic devices incorporating embedded
systems. The Company's products are contained in a broad array of imaging
products, including printers, scanners, fax machines, copiers and multi-function
peripherals manufactured by 22 OEMs, including Minolta Corporation, NEC
Corporation, Sharp Corporation and Xerox Corporation. The Company's products are
also in various stages of being incorporated into the design of products in
additional embedded systems markets, such as industrial automation equipment,
communication devices, data acquisition and test equipment, Internet devices and
utility monitoring equipment.
INDUSTRY BACKGROUND
An embedded system is a computer that is incorporated into a larger electronic
system and responds to external events by performing specific tasks quickly,
predictably, and reliably. Some examples of embedded computers are office
products such as fax machines, laser printers, and photocopiers; industrial
automation equipment such as robots and process control equipment; building
control equipment such as elevator and environmental control systems; consumer
products such as camcorders and video games; medical instrumentation and imaging
systems; vending machines and automated teller machines; and vehicle anti-lock
brakes and navigation systems.
Many electronic systems incorporating embedded systems run automatically, do not
require a person's constant presence and can be candidates for network
connectivity. Connection to a network affords the operators of these devices the
convenience of controlling or monitoring them remotely rather than from where
the devices are located. Examples of 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. Despite the many benefits of networking, and the vast number of
devices that are potential candidates to be networked, few embedded systems are
currently connected to a network due to the high historic cost of developing
network solutions for these systems.
The connection of PCs in business environments across LANs, WANs, and, more
recently, in home and mobile environments across the Internet, marked 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 created by those PCs. 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
emergence of networking standards such as Ethernet and TCP/IP. Imaging device
networking solutions, like those manufactured and sold by the Company,
incorporated those common transmission protocols.
In markets other than imaging, network connectivity has generally been based
upon the unique or 'proprietary' communication protocols used by the
manufacturers of the embedded systems to be networked. Creating and upgrading
networks based on proprietary protocols generally has been costly and time
consuming for these OEMs. In addition, these networks generally have been
restrictive for end users. End users have been unable to gain the benefits of
new, add-on products and software developed by third-party vendors incorporating
networking industry standards, resulting in out-dated and sub-optimal systems
requiring costly upgrades.
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With the recent convergence on common networking protocols, such as TCP/IP and
Ethernet, OEMs have increasingly attempted to incorporate standards-based
networking solutions into their products. These solutions have integrated
multiple hardware and software sub-systems commercially available from
third-party vendors, each of which provide a part of the total solution. A
multi-source solution requires the engineering and integration of components
including a microprocessor, an Ethernet chip, a direct memory access ('DMA')
controller, a memory controller, a Web server, a Hypertext 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 networking solutions are in some
ways superior to proprietary solutions, OEMs of multi-sourced solutions must
hire dedicated network engineering teams, endure lengthy development and
integration cycles and incur substantial technology enhancement and maintenance
costs. As an alternative to a multi-sourced solution, OEMs have designed
standards-based solutions in which the embedded system or systems to be
networked are connected to an off-the-shelf, microprocessor-based board. Such
solutions are very expensive, physically large and impractical for a wide
variety of users.
The Company believes that historically there have not been cost-effective and
practical alternatives for networking embedded systems. As a result, most
non-imaging devices have not been connected to networks. In situations where
OEMs have achieved network connectivity in their devices, they have sacrificed
time, effort and expense to create proprietary solutions assembled from numerous
and distinct vendors or board-based solutions. As a result, end users have
purchased systems which were either not cost effective or contained generally
rudimentary levels of network connectivity that could not be easily upgraded.
THE NETSILICON SOLUTION
The Company develops and markets semiconductor devices and software solutions
designed to meet the networking requirements of embedded systems. The Company
delivers a standards-based networking solution for embedded systems comprised of
its proprietary NET+Works semiconductors and software. The Company also provides
OEMs with software development licenses and application engineering services to
enable them to design products incorporating NET+Works technology. The Company's
solutions are designed to enable its customers to reduce the cost and improve
the time to market for their products that incorporate networking functionality.
The Company has 15 years of experience providing networking connectivity for a
wide array of electronic devices.
The Company believes that its products offer OEM's a compelling solution because
the products are:
Standards-Based. The Company's products incorporate existing LAN, WAN and
Internet networking standards. This makes it possible for electronic devices
incorporating embedded systems to communicate with other standards-based
equipment, enabling the free exchange of information, distributed processing
and remote maintenance.
Comprehensive. The Company offers a comprehensive solution that, in
conjunction with the physical interface memory, consolidates the hardware and
software necessary to network enable electronic devices in a single
semiconductor device. In addition, the Company offers OEMs a package of
development tools and application engineering services to further facilitate
a shorter time-to-market for their network-ready products. OEMs that
incorporate the Company's products do not need to develop in-house networking
expertise in order to offer advanced connectivity in their products. This
allows them to focus their engineering resources on developing other aspects
of their products. Furthermore, OEMs incorporating the Company's solutions
into their products do not need to acquire networking hardware or software
from multiple third-party vendors and perform the associated highly complex
and lengthy integration and maintenance. The Company believes its NET+Works
product, in conjunction with a physical interface and memory components,
delivers a complete networking solution to OEMs.
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Scalable and Extensible. The NET+Works technology is based on a design
platform that allows networking extensibility across a wide range of hardware
platforms and performance levels. Scalability is achieved through a design
which allows the Company to offer pin-compatible semiconductor devices from
5 MIPS (million instructions per second) to 40 MIPS performance levels. As a
result, OEMs can incorporate varying performance levels into their products
without redesigning the hardware or reprogramming the software.
Proven. Since its inception, the Company has focused its efforts on enabling
the connection of electronic devices to networks. The Company's technology
embodies refinements and enhancements developed by the Company during its
years of service to OEMs. The Company's semiconductor devices are
incorporated into a broad array of imaging products, including printers,
scanners, fax machines, copiers and multi-function peripherals manufactured
by 22 OEMs, including Minolta Corporation, NEC Corporation, Sharp Corporation
and Xerox Corporation.
BUSINESS STRATEGY
The Company's objective is to continue to expand its market position as a
developer and supplier of networking solutions for embedded systems. Key
elements of the Company's strategy include the following:
Expand Existing Customer Relationships in the Imaging Industry. Twenty-two
OEMs in the imaging industry have incorporated the Company's networking
solutions. Its products have been designed into a broad array of imaging
products, including printers, scanners, fax machines, copiers and
multi-function peripherals. OEMs are currently commercially shipping 45
imaging products incorporating the Company's semiconductor devices. In
addition, many of these OEMs are in various stages of designing other
products which will incorporate the Company's NET+Works solution. The Company
seeks to leverage its existing relationships with OEM's by working closely
with them to understand the OEMs' evolving requirements and to meet them. In
addition, the Company is focusing its efforts on obtaining design wins with
those companies in the imaging industry that do not currently incorporate the
Company's semiconductor devices.
Identify and Penetrate Additional Embedded Systems Markets. The overall
addressable market for embedded networking systems is comprised of electronic
devices in a variety of markets, each of which has its own combination of
OEMs and end-users. The Company targets those embedded systems 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 networking solution. The
Company's ability to target multiple other markets results from the basic
design of the Company's semiconductor devices, specifically their suitability
for incorporation into a very wide variety of embedded systems with minimal
additional research or product development expenses required by the Company.
The Company evaluates each new market opportunity based upon four criteria
(i) significant potential sales of the Company's products within three to
five years; (ii) absence of a 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.
Develop Market-Specific Products and Features. The Company intends to bolster
its competitive position within the markets it addresses by developing
value-added versions and features for its products, specifically tailored to
each markets' unique requirements. The Company believes that this approach to
product development increases the attractiveness of the NET+Works solution
over more generic, less function-rich alternatives.
Influence Industry Standards. The Company believes that each embedded system
market it targets is likely to have one or more OEMs that will be early
adopters of networking
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technology. Because the Company anticipates that these OEMs will have
significant influence in determining the network connectivity standards
within that market, the Company seeks to establish relationships with these
OEMs. The Company plans to develop its products in conjunction with these
early adopters, and to position its products as the networking solution of
choice for each embedded system market it chooses to address. For example, in
June 1998 the Company joined with key industrial automation OEMs Automation
Research Corp., Jetter GmbH, Object Automation, Inc., Parker-Hannifin
Corporation, Performance Software, Inc. and Richard Hirschmann GmbH & Co. to
create the Industrial Automation Open Networking Alliance ('Alliance'). The
Alliance is designed to promote a standards-based approach to networking for
industrial automation and focus on overcoming obstacles to its rapid
adoption. The Alliance now has 23 members and the Company believes that, by
taking a leading role in the growth of the Alliance, it will establish its
products in the industrial automation market.
PRODUCTS AND SERVICES
The Company's technology solution is comprised of products and application
engineering services. The Company's NET+Works products are semiconductor devices
containing core microprocessors integrated with value-added software. The
Company's solution is sold as a complete system and includes both the hardware
and a license to use the full array of software developed by the Company. The
Company believes its NET+Works solution, in conjunction with a physical
interface and memory, provides all of the functionality needed to implement LAN
and Internet connectivity.
Hardware Products
The Company offers its NET+Works solution integrated onto semiconductor devices
known as NET+ARM containing core microprocessors from ARM. The Company also
offers its NET+Works solution with a Motorola microprocessor. The Company's
semiconductor devices are then incorporated directly onto the embedded
controller board or integrated into a network interface card ('NIC'). Other
required components of the solution include the physical interfaces and memory,
which are either shared with the controller or located on the NIC. Though the
majority of the Company's sales today are in the form of network interface
cards, OEMs are increasingly integrating the Company's stand-alone semiconductor
devices into their controllers and such sales will represent and increasing
percentage of future sales.
The Company's NET+ARM semiconductor devices operate at a speed of 12 MIPS.
Because of the extensibility of the NET+Works solution, the Company has
announced an expanded product offering that will operate at 5, 15 and 40 MIPS.
The Company believes that the price at which its NET+ARM semiconductor devices
are available to OEM customers represents a significant cost savings relative to
the cost of currently available components necessary to achieve comparable
functionality. Though the Company plans to offer semiconductor devices
containing embedded processors other than ARM, it currently has no such
commitments.
The product's processing speed is enhanced by NET+DMA, an interface between the
Ethernet MAC (media access controller) and the main memory bank. A patent
application has been filed and is currently pending for NET+DMA. The Company
plans to file additional patent applications for certain aspects of its
networking technology.
Software
The Company's NET+Works solution integrates a suite of software integrated with
the NET+ARM semiconductor device. In conjunction with the physical interface and
memory, the integrated NET+ARM semiconductor device and value added software
delivers a complete solution to the Company's customers. The software includes:
NET+Drivers and RTOS. NET+Drivers and RTOS components are the basic pieces
that operate the hardware and software. The RTOS is based on one of two
popular third-party
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commercial offerings: pSOS+ from Integrated Systems, Inc. ('ISI') and VxWorks
from Wind River. NETsilicon's drivers are fully integrated and supported by
the RTOS and tools.
NET+Protocols. NET+Protocols contain the open standard communications
protocols such as TCP and UDP.
NET+Services. NET+Services add the necessary networking service modules of an
HTTP Web Server (NET+Web), Email (NET+Mail), Data Transfer through FTP
(NET+Data), Installation with DHCP and Bootp (NET+Install), and Management
with SNMP (NET+Management) and are all based on industry standards.
NET+APIs. NET+APIs provide the needed access to the RTOS and NET+Services for
OEM applications software engineers without having to attain networking
engineering knowledge.
The Company also offers software to enable connection and communication with
embedded controllers over a variety of interface specifications, including DPO,
PSIO, and PCI. The DPO Interface Specification is an open-architecture
specification designed by the Company and licensed to controller designers and
imaging device OEMs. The DPO interface can function with networks comprised of
multiple protocols and operating systems, including Novell NetWare, AppleTalk,
UNIX, TCP/IP and Windows NT. In addition, the DPO interface meets the networking
functionality standard established by Hewlett-Packard Company, enabling OEM
products to be competitive with those of Hewlett-Packard Company. PSIO is an
interface specification that the Company licenses from Peerless Systems Corp. so
that the Company's products can interface with controllers provided by Peerless.
See ' -- Intellectual Property, Trademarks and Proprietary Rights.' The Company
also offers a PCI interface specification to simplify and reduce the cost of
operating in PCI bus applications.
A key component of the Company's strategy is to leverage its NET+ARM
semiconductor devices by adding application-specific software that is focused on
the unique needs of vertical industry markets. The Company's first customized
vertical-market applicaiton is an embedded networking solution designed for use
by manufacturers of imaging devices, such as printers, copiers, faxes, scanners
and multifunction peripherals. This product utilizes the same core technology
found in the Company's NET+ARM semiconductor devices and adds NET+Applications
software developed by the Company specifically for use in imaging devices. The
NET+Works solution for the imaging market offers full networking operating
system support, full print server applications and management capabilities,
enabling devices to report status messages, such as 'toner low' or 'paper jam'
to network administrators via email across a LAN, WAN or the Internet. It is
available for installation directly on the controller board, thereby eliminating
the need for a separate NIC. The Company developed NET+Works solutions for the
imaging market in coordination with imaging technology leaders including Adobe
Systems, Inc., Peerless Systems Corp. and Imaging Technologies Corp. The Company
is currently developing NET+Applications for the industrial automation market.
These components allow customers to develop prototypes on a network, transfer
data and configure their devices in significantly less time than the six months
generally required with alternative approaches, without any sacrifice in system
performance or increase in memory requirements.
Software Development Tools
NET+ARM semiconductor devices are sold to OEMs with a set of integrated
NET+Utilities and tools for hardware and software development, many of which,
the Company believes, are unique to the Company. These include the Company's
NET+Web, a Hypertext Markup Language ('HTML')-to-C compiler which OEM customers
can use to automate the generation of HTML Web pages.
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The Company also provides to customers with target development boards including
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 and developed on NET+ARM
semiconductor devices. 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 semiconductor devices.
Cross-compilers, linkers and symbolic debuggers, if desired, must be obtained by
the OEM directly from the RTOS vendor. Full documentation provided to OEMs
includes a guide to beginning the design cycle, hardware and software reference
manuals, development board jumpers and a components guide.
The development tools also include additional cost options such as ARM's
development tools and ISI's pRISM+ or Wind River's Tornado open, graphical
development environments. ISI's pRISM+ and Wind River's Tornado support embedded
developers with tools that span the complete development process, from
conception to development and through life cycle support. See ' -- Intellectual
Property, Trademarks and Proprietary Rights.'
Before the Company's semiconductor devices are incorporated into the design of
an OEM's product, the OEM may purchase some sample semiconductor devices and the
software to create custom application programming interfaces and other software
components of the ultimate network solution for the OEMs embedded systems.
Application Engineering Services
The Company believes its OEM customers place significant emphasis on full
product support. Therefore, design support is provided for the first six months
of the OEM's design cycle. Additionally, 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 include:
Project Management. The Company provides its OEM customers with assistance in
(i) interface specifications analysis; (ii) lead time planning;
(iii) delivery scheduling; and (iv) product cycle planning.
Consulting. The Company's field application engineering staff provide
development process 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 with
product testing and support during the OEM's process of integrating the
Company's technology into its products.
On-going 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 sessions during 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 is trained to solve more complex problems and
back up help desk staff. OEM field engineers are trained to solve problems by
taking traces and studying network environments, protocols and stacks.
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.
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Product Updates. Updates on all releases of the NET+Works solution are
available to OEMs initially under warranty and thereafter on an optional
service and maintenance contract basis.
The Company receives revenue from the foregoing application engineering
services, for which an OEM customer may contract separately. The Company
believes that such revenues are immaterial to its overall financial results of
operations.
PRODUCT DEVELOPMENT
The Company's success depends upon its ability to enhance its solution and
develop and introduce new products to meet changing customer needs on a timely
basis. The Company focuses its hardware development efforts on improving the
performance of its products, simplifying the integration process for its
products and introducing new products with a variety of speeds, capabilities and
price points. The Company focuses its software development efforts on addressing
industry needs, developing industry-specific applications and integrating
additional operating systems and protocols into its solution.
The Company has made and expects to continue to make substantial investments in
product development. For the fiscal years ended January 31, 1997, 1998 and 1999,
the Company's engineering, research and development expenses were approximately
$1.0 million, $1.5 million, and $2.2 million, respectively or 13.8%, 18.7% and
16.1% of net sales, respectively. For the three months ended April 30, 1999, the
Company's engineering, research and development expenses were approximately
$502,000, or 8.6% of net sales. As of April 30, 1999, the Company had 30
full-time employees who have substantial networking and software driver
development experience engaged in research and development activities.
SALES AND MARKETING
The Company markets and sells its products to OEMs through a combination of
(i) its direct sales and marketing staff; (ii) strategic partner relationships
and alliances; (iii) manufacturers representatives; and (iv) authorized
developers.
Direct Sales and Marketing
As of April 30, 1999, the Company employed a total of 27 employees in its direct
sales and marketing efforts. The Company manages most of its sales efforts from
its headquarters in Waltham, Massachusetts and a sales office in Germany. The
Company's direct sales staff solicits prospective customers in North America,
provides technical advice and support with respect to the Company's products,
and works closely with the Company's partners, representatives and developers
worldwide to secure new customer design wins and provide support during their
development of new products. The direct sales and marketing staff participates
in select industry trade shows and conferences to promote the Company's products
and to generate new business leads.
The Company designs its marketing programs to build NETsilicon and NET+Works
awareness and generate new sales leads. The Company's primary marketing
activities include advertising, direct mail, customer communications, trade show
participation, and press, media and industry analyst relations.
Partnership Relationships and Alliances
The Company augments its direct sales efforts through various strategic
marketing alliances. These include, in the imaging market, alliances with the
makers of printer controllers, and in other markets, alliances with vendors and
suppliers to the Company, such as ARM, Atmel Corporation, Integrated Systems,
Inc. and Wind River Systems, Inc. The Company's strategy for making sales to
imaging OEMs is to have its interface specification incorporated 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 will use the Company's networking
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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 target 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 Systems Corp. in order to make sales to OEMs who deploy Peerless'
controller.
In June 1998, the Company co-founded the Industrial Automation Open Networking
Alliance with key industrial automation OEMs Automation Research Corp., Jetter
GmbH, Object Automation, Inc., Parker-Hannifin Corporation, Performance
Software, Inc. and Richard Hirschmann GmbH & Co. to create the Industrial
Automation Open Networking Alliance. This Alliance is designed to promote a
standards-based approach to networking for industrial automation that is
embodied in the Company's technology. The Alliance has grown to 23 members,
including GE Fanuc, Sun Microsystems, Inc., and Siemens AG.
The Company and its printer controller partners engage in joint marketing
efforts, presenting their individual products as a fully compatible,
comprehensive imaging and networking solution to imaging OEMs.
Manufacturers Representatives
Manufacturers representatives act as local sales agents for the Company and work
on a commission basis. There are nine manufacturers representatives in North
America, three in Europe and Israel, and one in Japan. The Company's direct
sales staff supports and works closely with these representatives, who have
extensive relationships with the current and potential customers in their
territories.
Authorized Developers
The Company also markets and sells 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
commission on the Company's sales to OEMs which result from these
recommendations. As of April 30, 1999, the Company had approved 17 consulting
firms as 'authorized developers' of its products.
OEM PRODUCT CYCLE
The Company's products are sold to OEMs, which incorporate them into devices
that are sold to end users. The timing and magnitude of the Company's revenues
are highly dependent upon its achievement of design wins, the timing and success
of its OEMs' development cycles, and its OEMs' product sales.
The Company initially targets OEMs that are developing embedded systems products
and are seeking to incorporate networking capability into their products. OEMs
typically select core components, such as the Company's semiconductor devices,
early in the device design process. Prior to the selection of core components,
OEMs typically purchase development tools and receive application engineering
services from the Company to facilitate the integration of NET+Works products
into their design. When the Company has received notification from an OEM that
its solution has been selected for incorporation into an OEM's final product,
the Company achieves what is known as a design win. The revenue the Company
receives from these qualification stage purchases is an immaterial portion of
the Company's total revenue. Once an OEM selects the components it will use for
its product, it generally does not substitute an alternative component as the
change typically requires significant cost or development time. Therefore, the
Company is
43
<PAGE>
generally the sole supplier of networking technology throughout the life cycle
of an embedded system once its products have been selected for inclusion in the
product design. Even if the Company is successful in its efforts to market its
products to OEMs and achieves a design win from an OEM, however, there can be no
assurance that the Company will ever achieve revenue from the sale of products
as a result of such design win. Furthermore, even if the Company does achieve
revenues from such sales there can be no assurance that such revenues will be
sustainable.
The length of the product development process can vary greatly among the
Company's OEMs, ranging from six to more than 24 months, with no certainty that
any given design will result in a commercial product. When the OEM's product
development cycle nears successful completion, OEMs typically begin purchasing
the Company's products to supply their initial manufacturing efforts. Only upon
the commencement of product shipment does the Company achieve significant
revenues. OEMs then typically purchase quantities of the Company's products
periodically to match their ongoing manufacturing needs, based on their demand
requirements. Sales of the Company's products are therefore dependent upon the
sales of the OEMs' products into which they are designed.
The following is a summary of the Company's shipping customer activity over the
prior eight quarters:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30,
1997 1997 1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shipping customers during the
period(1):
Imaging market................. 7 7 7 11 14 18 19 22
Additional embedded systems
markets...................... -- -- -- -- -- -- 1 5
----- ----- ----- ----- ----- ----- ----- -----
Total.......................... 7 7 7 11 14 18 20 27
----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
</TABLE>
- ---------------------------
(1) Represents the number of customers to which product was shipped during the
period indicated.
IMAGING CUSTOMERS
The Company sells its products for incorporation into OEM devices.
Representative customers from the Company's 22 imaging OEMs who incorporated the
Company's solution into their products include:
<TABLE>
<S> <C>
Fuji Xerox Co. Ltd. New Generation Computing, Inc.
Kyocera Communications Ricoh Electronics
Konica Business Systems Sharp Electronics Corporation
Minolta Corporation Xerox Corporation
NEC Corporation
</TABLE>
The Company's 22 imaging OEM customers have designed its solution into 45
imaging products currently available for sale. All of the Company's net sales
for the fiscal year ended January 31, 1998 and 95% of net sales for the fiscal
year ended January 31, 1999 were derived from the imaging device market. Konica
Business Systems, Kyocera Communications and Minolta Corporation, each
represented greater than 10% of the Company's net sales for the fiscal year
ended January 31, 1999. For the three months ended April 30, 1999, 97% of the
net sales were derived from the imaging device market. DIMATECH Corporation,
Minolta Corporation, Ricoh Electronics and Sharp Electronics Corporation each
represented greater than 10% of the Company's net sales for the three months
ended April 30, 1999.
44
<PAGE>
MANUFACTURING
The Company does not maintain its own manufacturing capabilities for its
semiconductor devices, but relies on third parties to provide foundry
capabilities. The Company engages Atmel Corporation to manufacture the NET+ARM
semiconductor device. Shipments of the semiconductor device are first delivered
to the Company, where its staff performs quality assurance testing. The Company
purchases tested, packaged chips from Atmel. The Company does not have a written
agreement with Atmel regarding production, relying instead upon standard
purchase orders. The Company is in the process of qualifying a second source for
the NET+ARM semiconductor devices. Additionally, the Company obtains price
quotes from possible second sources for semiconductor devices in order to ensure
that the Company is receiving competitive price terms from its current
manufacturer.
The Company contracts with domestic qualified assemblers and with Uni Precision
Industrial, Ltd. ('Uni'), a Hong Kong-based subsidiary of Osicom, to assemble
printed circuit boards for the Company's NICs. 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 are comparable with those it could receive from an
unrelated third party providing the same services and are more favorable than it
receives from its domestic assemblers. The Company has no obligation to utilize
the services of Uni, and plans to continue doing so provided that the Company
receives price-competitive terms from that vendor. The Company has qualified an
additional supplier of printed circuit boards to ensure the availability of its
NICs. See 'Certain Relationships and Related Party Transactions.'
The Company has 28 full-time employees in Waltham, Massachusetts performing
manufacturing-related activities, including purchasing, final assembly, testing,
quality assurance, packaging and shipping.
PRODUCT BACKLOG
The Company's business is characterized by short-term shipment schedules. 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 non-imaging customers can
cancel orders within specified time frames, typically 30 days or more prior to
the scheduled shipment date pursuant to the Company's policies, 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 products or for other reasons. Decisions by such
customers to reduce their inventory levels have led, and could in the future
lead, to reductions in purchases from the Company. These reductions, in turn,
have caused and could cause fluctuations in the Company's operating results,
which could have a material adverse effect on the Company's business, results of
operations and financial condition in periods in which the inventory is reduced.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and 'Business -- Backlog.'
As of June 30, 1999, the Company's backlog was approximately $9.0 million, as
compared to $5.2 million as of June 30, 1998. The Company includes all firm
purchase orders scheduled for delivery within the subsequent 12 months in its
backlog. The Company anticipates that all of its backlog will be shipped to
customers within the next 12 months.
COMPETITION
The Company believes it is the only supplier of networking products for embedded
systems to offer a single-vendor, standards-based solution which consolidates
all necessary networking hardware and software subsystems onto a single
semiconductor device. The Company believes that the competitive factors
affecting the market for the Company's products include product
45
<PAGE>
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 the
customer's products; and the quality of support services, product documentation
and training.
The markets in which the Company operates are intensely competitive, and
characterized by rapidly changing technology, evolving industry standards,
declining average selling prices and frequent new product introductions. A
number of companies offer products that compete with one or more elements of the
Company's solution. 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 with other hardware and
software components of the customer's products; 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, results of
operations and financial condition.
The Company primarily competes with the internal development departments of
large OEM companies that have internally developed their own networking
solutions as well as established developers of embedded systems software and
chips such as Axis Communications, Inc., Milan Technology, a division of Digi
International Inc., Echelon Corporation, Emulex Corporation, H. Bollmann
Manufacturers Limited (HBM), Hitachi, Ltd., Integrated Systems, Inc., Intel
Corporation, Motorola, Inc., Samsung Electronics Co., Ltd. and Wind River
Systems, Inc. In addition, the Company is aware of certain companies which have
recently introduced products that address the markets targeted by the Company.
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 networking or
semiconductor 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
in 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, results
of operations and financial condition.
INTELLECTUAL PROPERTY, TRADEMARKS AND PROPRIETARY RIGHTS
The Company's ability to compete is dependent in part on its proprietary 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.
In addition, pursuant to the Intercompany Agreement with Osicom, the Company
granted Osicom co-ownership rights to certain of its existing intellectual
property in connection with the Company's transfer of its Stand-Alone Print
Server Line to Osicom. Osicom's rights to such intellectual property are limited
to use in products manufactured by Osicom related to the Stand-Alone Print
Server Line. 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 has filed one patent application and plans to file various
additional applications, such applications may be denied. Any patents, once
issued, may be circumvented by the Company's competitors. Furthermore, there can
be no assurance that others will not develop technologies that are superior to
the Company's. Despite the Company's
46
<PAGE>
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, results of operations and
financial condition.
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. The Company's material
software license agreements are with Integrated Systems, Inc., which terminates
only if the Company defaults under the agreement; with Novell, Inc., which is
renewable annually at the option of both parties; and with Peerless Systems
Corporation, which expires in 2004 subject to year-to-year renewals thereafter
at the option of both parties. 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.
The Company exclusively licenses the right to use the NET+ARM trademark from ARM
Limited pursuant to a royalty-free agreement expiring in 2008. The Company
depends on ARM to enforce its rights to the trademark against third party
infringement. There can be no assurance that ARM will promptly and adequately
enforce these rights which could have a material adverse effect on the Company's
business, results of operations and financial condition.
The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. Although the Company has not been
notified that its products infringe any third-party intellectual property
rights, there can be no assurance that the Company will not receive such
notification in the future. Any litigation to determine the validity of
third-party infringement claims, whether or not determined in the Company's
favor or settled by the Company, would at a minimum be costly and divert the
efforts and attention of the Company's management and technical personnel from
productive tasks, which could have a material adverse effect on the Company's
business, results of operations and financial condition. There can be no
assurance that any infringement claims by third parties or any claims for
indemnification by customers or end users of the Company's products resulting
from infringement claims will not be asserted in the future or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, results of operations or financial condition. In the event
of an adverse ruling in any such matter, the Company would be required to pay
substantial damages, cease the manufacture, use and sale of infringing products,
discontinue the use of certain processes or be required to obtain a license
under the intellectual property rights of the third party claiming infringement.
There can be no assurance that a license would be available on reasonable terms
or at all. Any limitations on the Company's ability to market its products, or
delays and costs associated with redesigning its products or payments of license
fees to third parties, or any failure by the Company to develop or license a
substitute technology on commercially reasonable terms could have a material
adverse effect on the Company's business, results of operations and financial
condition.
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 $34,175 per month and
the lease expires on September 30, 2001. The Company subleases 6,000
47
<PAGE>
square feet of this office space to Osicom through August 1999. 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 April 30, 1999, the Company had approximately 97 full-time employees,
which includes 58 engaged in product development and manufacturing-related
duties and 27 in sales and marketing. 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.
48
<PAGE>
MANAGEMENT
The following table sets forth information with respect to each person who
serves as an executive officer or director or who has been nominated to serve as
a director of the Company and their ages as of January 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- -----------------------------------------------
<S> <C> <C>
Cornelius 'Pete' Peterson VIII....... 62 Chairman of the Board of Directors, Chief
Executive Officer, President(1)
John K. Brennan...................... 45 Vice President, Manufacturing
Michael Evensen...................... 34 Vice President, Industrial Automation, Embedded
Markets Europe
William E. Peisel.................... 55 Vice President, Engineering, Chief Technical
Officer
Cornelius 'Neil' Peterson IX......... 38 Vice President, Imaging and Embedded Markets,
Asia
Daniel J. Sullivan................... 42 Vice President, Finance, Chief Financial
Officer
David Yager.......................... 43 Vice President, Embedded Markets, North America
Francis E. Girard.................... 60 Director(1)
William Johnson...................... 57 Director(2)
Edward B. Roberts, Ph.D. ............ 63 Director(3)
F. Grant Saviers..................... 54 Director(1)(3)
Michael Keith Ballard................ 44 Director Nominee(1)(2)(4)
</TABLE>
- ---------------------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
(4) Will become a director upon completion of the offering.
EXECUTIVE OFFICERS AND DIRECTORS
Cornelius 'Pete' Peterson VIII has served as President and a director of the
Company since founding the Company in 1984. Prior to founding NETsilicon,
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.
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. from
Merrimack College and an M.B.A. from Boston University.
Michael Evensen has been Vice President, Industrial Automation, Embedded Markets
Europe of the Company since October 1998. From September 1997 to September 1998,
Mr. Evensen was Director of Business Development at Richard Hirschmann
Electronics UK Ltd., where he was responsible for Hirschmann's entry into the
industrial automation market. From July 1995 to September 1998, Mr. Evensen
served as director of Anite Systems Ltd. From March 1991 to July 1995,
Mr. Evensen served as OEM Business Manager for Cray Communications, Ltd. in
Europe, the United States and Asia. Prior to Cray Communications, Mr. Evensen
was a Sales Engineer for
49
<PAGE>
Dataco De Rex, Inc., where he was responsible for European sales. Mr. Evensen
holds a B.S. from Copenhagen University.
William E. Peisel joined the Company in 1987, becoming Vice President,
Engineering in 1989 and Chief Technical Officer in 1995. 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.
Cornelius 'Neil' Peterson IX joined the Company in 1986 and has served as Vice
President, Imaging and Embedded Markets, Asia since 1993. From 1986 to 1993, Mr.
Peterson served as Regional Manager and Vice President of Commercial Sales.
Mr. Peterson has over 14 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 Corporation (formerly Burroughs). He holds a B.S. Degree
from Roger Williams University. Mr. Peterson is the son of Pete Peterson,
President of the Company.
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. from Merrimack College and an M.B.A. from New Hampshire College.
David Yager joined the Company in June 1999 as Vice President of Sales. Mr.
Yager was Director of Sales & Business Development at Echelon Corporation since
1991. He was responsible for building the direct sales force in North America as
well as Echelon's entry into the Industrial Automation, Transportation and
Utility markets. Mr. Yager served as Director of Sales, Strategic Accounts at
Advanced Micro Devices from 1985 to 1990 and Regional Sales Manager from 1980 to
1985. Mr. Yager has over 20 years of sales and management experience in major
accounts, new account development, systems integrator, indirect and direct sales
channels. Mr. Yager holds a BSEE from Northeastern University.
Francis E. Girard has been a Director of the Company since July 1999. He has
been Chief Executive Officer of Comverse Network Systems, Inc. since
January 1998 and a member of the Board of Directors of Comverse Technology,
Inc., the parent corporation of Comverse Network Systems, Inc., since
January 1998. From May 1996 through January 1998, he was President, Chief
Executive Officer and a Director of Boston Technology, Inc., which merged into
Comverse Network Systems, Inc. in January 1998. From 1989 through May 1996, he
served in various senior executive positions with Boston Technology, Inc., most
recently as Executive Vice President of World Sales. Mr. Girard is a Director of
Artisoft, Inc. and the Massachusetts Telecommunications Council and a member of
the International Engineering Consortium. He holds a BA degree from Merrimack
College.
William Johnson has been a Director of the Company since July 1999. Mr. Johnson
has been Vice President and General Manager, Networks & Access Communications
Division of Compaq Computer Corp. since July 1998, and served in other
capacities with Compaq since July 1997. From December 1996 through May 1997, he
was a principal in J & J Consulting, and he served as President and Chief
Executive Officer of Crosscomm Corp. from March through October 1996. He was
General Manager, Networking Hardware Division for International Business
Machines Corporation from 1993 through 1996. Mr. Johnson holds MSEE and MBA
degrees from Northeastern University.
50
<PAGE>
Edward B. Roberts, Ph.D. has been a Director of the Company since July 1999.
Dr. Roberts is the David Sarnoff Professor of Management of Technology at the
Massachusetts Institute of Technology, where he chairs the Sloan School's
Management of Technological Innovation & Entrepreneurship Research and Education
Programs. In 1991, he founded, and now currently chairs the MIT Entrepreneurship
Center. He also co-founded the MIT Enterprise Forum in 1979 and also currently
chairs this Forum. Dr. Roberts is a Director of Advanced Magnetics, Inc.,
Pegasystems, Inc. and Selfcare, Inc. as well as several privately held
companies. In 1969, he founded and is now currently a member of the Board of
Directors of Medical Information Technology, Inc. and a General Partner of the
Zero Stage Capital Group of Venture Capital Funds. Dr. Roberts holds four
degrees from Massachusetts Institute of Technology, including a Ph.D. in
Economics.
F. Grant Saviers has been a Director of the Company since July 1999.
Mr. Saviers was the Chairman of the Board, Chief Executive Officer, and
previously President and Chief Operating Officer of Adaptec Inc. from 1992
through 1998. Prior to that, he was employed in various capacities by Digital
Equipment Corporation for 24 years, most recently as Vice President for
PC Systems and Peripherals. Mr. Saviers is a Director of Analog Devices, Inc.
and Chaparral Network Storage, Inc. He is a Director of The Computer Museum
History Center and a member of the Advisory Boards of the College of Engineering
at the University of California, Berkeley and Leavey School of Business, Santa
Clara University.
Michael Keith Ballard will become a Director of this Company upon completion of
the offering. Mr. Ballard is a partner in Aragon Ventures, LLC, a private
investment fund. Mr. Ballard has also been the President and Chief Executive
Officer of Savannah-Chanel Vineyards since 1997. He was the Director of the
Dial-Up Technology Division of Cisco Systems, Inc. from 1996 to 1997 and was
Vice President of Business Development for Telebit Corporation from 1994 through
1996. He was the Chief Operating Officer of UUNET Technologies, Inc. from 1993
to 1994. Mr. Ballard holds a B.F.A. degree from the University of Utah.
The Company is authorized to have six directors and currently has five
directors. The Company expects to appoint a sixth director following the
completion of this offering. The terms of the Board of Directors are divided
into three classes: Class I, whose term will expire at the annual meeting of
stockholders to be held in 2000; Class II, whose term will expire at the annual
meeting of stockholders to be held in 2001; and Class III, whose term will
expire at the annual meeting of stockholders to be held in 2002. The Class I
director is Mr. Johnson and Mr. Ballard will be a Class I director upon becoming
a member of the Board; the Class II directors are Mr. Saviers and Mr. Girard and
the Class III directors are Mr. Peterson and Dr. Roberts. At each annual meeting
of stockholders, the successors to directors whose terms then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election. This classification of the Board of Directors
may have the effect of delaying or preventing changes in control or management
of the Company. Officers of the Company are elected by the Company's Board and
serve at the Board's discretion.
COMMITTEES OF THE BOARD OF DIRECTORS
Executive Committee
The Board of Directors of the Company has appointed an Executive Committee,
which currently consists of Mr. Peterson, Mr. Saviers and Mr. Girard. Mr.
Ballard will be appointed to the Executive Committee upon his election to the
Board. 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 Mr. Johnson. Mr. Ballard will be appointed to the Audit
Committee upon his election to the Board. The Audit Committee's duties include
engaging and discharging the Company's
51
<PAGE>
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 Mr. Saviers and Dr. Roberts. 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 or by
telephone. 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 Director 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 stockholders. 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.
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 years 1999 and 1998; and (ii) the Company's four most
highly compensated executive officers who were serving at the end of fiscal
years 1999 and 1998 whose annual salaries and bonuses exceeded $100,000 (all of
the foregoing individuals are hereinafter referred to collectively as the 'Named
Executive Officers'), for services rendered in all capacities to the Company and
its subsidiaries for the Company's fiscal years 1999 and 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------
FISCAL SALARY BONUS(1)
NAME AND PRINCIPAL POSITION YEAR ($) ($)
- --------------------------- ------ -------- --------
<S> <C> <C> <C>
Cornelius 'Pete' Peterson, ................................. 1999 $150,000 --
Chief Executive Officer, President 1998 152,629 --
William E. Peisel, ......................................... 1999 150,600 $12,425
Executive Vice President, Chief Technical Officer 1998 135,789 --
John K. Brennan, ........................................... 1999 113,523 --
Vice President, Manufacturing 1998 101,264 10,000
Cornelius 'Neil' Peterson, ................................. 1999 136,295 88,023
Vice President, Sales & Marketing 1998 79,667 69,995
</TABLE>
- ---------------------------
(1) Bonus represents commissions paid on the basis of sales achieved during the
fiscal year.
52
<PAGE>
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. Deferences herein to the 'Board' mean
the Board of Directors or the Committee, as the case may be. A total of
6,000,000 shares of Common Stock is reserved for issuance under the Stock Option
Plan. It is anticipated that the Company will grant options to purchase
approximately 2,950,000 shares under the Stock Option Plan after the
consummation 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 Internal Revenue Code of 1986, as amended (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 four installments: on each of the first, second, third and
fourth anniversaries of the date of grant as to 25% of the shares covered by the
option. 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 three 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.
Options granted under the Stock Option Plan may also terminate in the event of
certain mergers, consolidations or sales of assets of the Company. However, in
such instances, the Stock Option Plan also provides that at least 30 days in
advance of such an event all outstanding vested and non-vested options shall
become exercisable for a period of 30 days. Options not exercised during that
time period shall be forfeited.
The Board retains the right to amend the Stock Option Plan as to non-qualified
stock options and to amend any outstanding non-qualified option. However, any
amendment relating to incentive stock options will require stockholder approval.
An amendment adversely affecting the rights of an
53
<PAGE>
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 independent 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 800,000 shares of Common Stock is
reserved for issuance under the Director Stock Option Plan, none of which
options are outstanding as of the date of this Prospectus. It is anticipated
that the Company will grant options to purchase 125,000 shares under the
Director Stock Option Plan after the consummation of this offering.
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.
Options granted under the Director Stock Option Plan may also terminate in the
event of certain mergers, consolidations or sales of assets 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 and non-vested
options shall become exercisable for a period of 30 days. 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
54
<PAGE>
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
stockholder approval.
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.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Michael Evensen on
October 1, 1998. The agreement provides for a base salary subject to annual
review by the Compensation Committee. Currently, the base salary of Mr. Evensen
is $125,000 per annum. In addition to the base salary, Mr. Evensen is entitled
to receive up to $125,000 per annum in additional compensation as commissions
upon the attainment of business and performance goals and targets which are
mutually agreed upon each year by the Company and Mr. Evensen.
Mr. Evensen receives additional employment benefits in the form of reimbursed
business expenses, travel expenses, health, medical, dental, life and disability
benefits, and other benefits provided by the Company to all employees.
Mr. Evensen is also entitled to three weeks paid vacation for each year of full
employment, exclusive of legal holidays.
The employment agreement provides that upon the completion of this offering,
Mr. Evensen will receive options to purchase 141,000 shares of common stock of
the Company, of which 12.5% will vest immediately, 12.5% will vest one year
after completion of this offering, and 25% will vest on each of the second,
third and fourth anniversaries of the offering. Mr. Evensen's stock options
shall be exercisable at the initial public offering price. Mr. Evensen is
eligible to participate in any additional option programs instituted for senior
employees of the Company.
Mr. Evensen may be terminated by the Company at any time without cause, upon six
months notice. If the Company were to terminate Mr. Evensen's employment for
cause, the Company would have no further obligation to Mr. Evensen except to pay
all accrued and unpaid base salary and vacation pay to the date of termination.
Mr. Evensen may voluntarily terminate his employment at any time upon three
months notice to the Company.
Mr. Evensen has agreed not to compete with the Company's present or contemplated
business, to solicit or encourage any other person to terminate a relationship
with the Company, or enter into any agreement which conflicts with his duties to
the Company. Mr. Evensen is also subject to a Company Confidential Information
and Invention Assignment Agreement, which survives the termination of the
employment agreement for any reason. The agreement is governed by the laws of
Germany.
The Company has agreed with Cornelius Peterson VIII, its Chairman, President and
Chief Executive Officer, that in the event that the Company is sold to, or
merges with, a company unaffiliated with the Company or Osicom, all of his stock
options being granted at the closing of this offering will vest immediately,
regardless of whether any performance or time criteria otherwise applicable to
vesting have been satisfied. The Company also agreed that if Mr. Peterson's
employment is terminated or not renewed without cause, or if he is disabled or
dies, his options
55
<PAGE>
will remain in full force and effect and any performance-based criteria will be
deemed satisfied notwithstanding the Company's actual financial results.
The Company has agreed with Daniel J. Sullivan, its Vice President, Finance and
Chief Financial Officer, that if his employment is terminated without cause, the
Company will pay him one year's base salary and all of his unvested Osicom and
NETsilicon stock options will immediately vest.
The Company has no other employment agreements with any of its employees.
LONG-TERM INCENTIVE PLANS
The Company has no long-term incentive plans other than the Stock Option Plan
and the Director Stock Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are F. Grant Saviers and Edward B.
Roberts, Ph.D. There are currently no compensation committee interlocks with
other entities or insider participation on the Compensation Committee.
56
<PAGE>
PRINCIPAL AND SELLING 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 5.0% 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. None of the executive officers or
directors own or have the right to acquire within 60 days of the date of this
prospectus any shares of Common Stock of the Company. Except the stockholders
have sole voting and investment power as to shares shown. Of the shares owned by
Osicom prior to the offering, 9,000,000 shares are shares of non-voting common
stock. Following the offering, Osicom will own 8,000,000 shares of non-voting
common stock and no shares of voting common stock. Each stockholder listed below
other than Osicom has an address c/o NETsilicon, Inc., 411 Waverley Oaks Road,
Suite 227, Waltham, Massachusetts 02454. The shares listed for each shareholder
other than Osicom represent shares which such individual will have the right to
acquire within 60 days of the date of this prospectus pursuant to stock options
to be granted after the completion of this offering.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING NUMBER AFTER THE OFFERING
--------------------------- OF SHARES -----------------------
NUMBER BEING NUMBER
OF SHARES PERCENTAGE OFFERED OF SHARES PERCENTAGE
NAME OF BENEFICIAL HOLDER ---------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Osicom Technologies, Inc........ 10,000,000 100.0% 2,000,000 8,000,000 61.5%
2800 28th Street
Suite 100
Santa Monica, CA 90405
Cornelius 'Pete' Peterson
VIII............................ -- -- -- 113,342 *
John K. Brennan................. -- -- -- 17,811 *
Michael Evensen................. -- -- -- 17,811 *
William E. Peisel............... -- -- -- 40,479 *
Cornelius 'Neil' Peterson IX.... -- -- -- 32,383 *
Daniel J. Sullivan.............. -- -- -- 32,383 *
David Yager..................... -- -- -- 14,375 *
Francis E. Girard............... -- -- -- -- *
William Johnson................. -- -- -- -- *
Edward B. Roberts, Ph.D......... -- -- -- -- *
F. Grant Saviers................ -- -- -- -- *
All officers and directors as a
group (11 persons)........... -- -- -- 268,584 2.1
</TABLE>
- ---------------------------
* less than 1%.
57
<PAGE>
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 and Osicom entered into the Intercompany Agreement on 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
Stand-Alone Print Server Line. 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
at cost its remaining inventory of stand-alone print servers to Osicom. The
Intercompany Agreement also requires the Company to provide certain
manufacturing and engineering support to Osicom, for which Osicom shall pay a
charge equal to the direct cost of such support plus 10% overhead 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 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. Pursuant to
the Intercompany Agreement, the Company granted Osicom co-ownership rights to
certain of its existing intellectual property in connection with the Company's
transfer of the Stand-Alone Print Server Line to Osicom. Osicom's rights in such
intellectual property are limited to use in certain products manufactured by
Osicom related to the Stand-Alone Print Server Line, and cannot be transferred,
resold, licensed or assigned by Osicom. Pursuant to the Intercompany Agreement,
Osicom assumed responsibility for manufacturing the Stand-Alone Print Server
Line on May 1, 1999. Osicom assumed responsibility for providing engineering
support to the Stand-Alone Print Server Line on July 1, 1999. As of July 1,
1999, the Company does not provide contracted services to Osicom with respect to
the Stand-Alone Print Server Line.
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 semiconductor device at fixed gross margins for
use in the Stand-Alone Print Server Line. The Supply Agreement also provides
that Osicom through its subsidiary, Uni-Precision Industrial, Ltd., 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. In addition, in
the ordinary course of business, Uni Precision manufactures and assembles
products for the Company on a competitive bid basis.
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 (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 Sublease will expire in August 1999.
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 the prime rate plus three percent per annum. As of
May 31, 1999, the balance of such advances was $5.9 million, which is the
highest amount borrowed by the Company from Osicom.
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<PAGE>
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
10,000,000 shares of Common Stock and no shares of preferred stock issued and
outstanding.
COMMON STOCK
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. 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.
Voting Common Stock
Holders of voting 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. 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.
Non-Voting Common Stock
Holders of non-voting common stock are not entitled to vote on the election of
directors or any other matter submitted to the shareholders for approval except
for any proposal that would change the terms of the non-voting common stock. As
of the date of this prospectus, Osicom owns all of the outstanding 9,000,000
shares of non-voting common stock. Upon the sale or transfer of any shares of
non-voting common stock to a non-affiliate of Osicom, such shares automatically
convert to shares of voting common stock. Osicom and its affiliates have agreed
not to accept a proxy to vote any of the Company's voting common stock. An
affiliate of Osicom is any person or entity controlling, controlled by or under
common control with Osicom.
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.'
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
59
<PAGE>
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.
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. In addition, the classification of the Company's Board of Directors may
deter a stockholder from voting to remove incumbent directors and gaining
control of the Board of Directors. See 'Risk Factors -- Anti-Takeover
Provisions,' 'Management,' '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.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for the securities of the
Company. Upon completion of the offering, the Company will have outstanding
13,000,000 shares of common stock (assuming no exercise of the Underwriters'
over-allotment option or options outstanding under the Company's stock option
plans). Of these shares, the 5,000,000 shares sold in the offering will be
freely tradable without restriction or further registration under the Securities
Act of 1933, as amended, unless they are purchased by 'affiliates' of the
Company as that term is defined in Rule 144 under the Securities Act (which
sales would be subject to certain limitations and restrictions described below).
The remaining 8,000,000 shares, which are held by Osicom, are 'restricted
shares' under Rule 144 (the 'Restricted Shares'). Restricted Shares may be sold
in the public market only if registered under the Securities Act or if they
qualify for an exemption from registration under Rule 144, Rule 144(k) or
Rule 701 promulgated under the Securities Act. Osicom has agreed for a period of
365 days after the date of this prospectus and each director, executive officer
and employee of the Company has agreed for a period of 180 days after the date
of this prospectus without the prior written consent of CIBC World Market Corp.
not to offer, pledge, sell, offer to sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly any shares of common stock or any securities convertible into or
exercisable or exchangeable for shares of common stock. As a result of the
contractual restrictions described herein and the provisions of Rule 144,
Rule 144(k) and Rule 701, the Restricted Shares will be available for sale in
the public market as follows: (i) no shares will be available for immediate sale
on the date of this prospectus, (ii) 431,250 shares of common stock subject to
options will be subject to lock-up agreements prohibiting the sale or other
disposition of such shares until 180 days after the date of this prospectus
without the prior written consent of CIBC World Markets Corp. and
(iii) 8,000,000 shares of common stock beneficially owned by Osicom which will
be subject to lock-up agreements prohibiting the sale or other disposition of
such shares until 365 days after the date of this prospectus without the prior
written consent of CIBC World Markets Corp. CIBC World Market Corp. in its sole
discretion and without notice may earlier release for sale in the public market
all or any portion of the shares subject to the lock-up agreement. As a result,
no shares other than those offered by this prospectus are available for
immediate sale on the date of this prospectus, 431,250 shares of common stock
subject to options and 8,000,000 shares of common stock beneficially owned by
Osicom will become eligible for sale 180 days and 365 days after the date of
this prospectus, respectively.
In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this prospectus, a person (or persons whose shares are aggregated) who
has beneficially owned shares for at least one year (including the holding
period of any prior owner except an affiliate) is entitled to sell in 'brokers'
transactions' or to market makers, within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of common stock then outstanding (130,000 shares immediately after the
offering) or (ii) the average weekly trading volume in the common stock during
the four calendar weeks preceding the required filing of a Form 144 with respect
to such sale. Sales under Rule 144 are subject to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years, is entitled to sell such shares without having to comply
with the manner of sale, public information, volume limitation or notice filing
provisions of Rule 144. Unless otherwise restricted, '144(k) shares' may
therefore be sold immediately upon the completion of the offering. Under
Rule 701 under the Securities Act, persons who purchase shares upon exercise of
options granted prior to the offering are entitled to sell such shares 90 days
after the offering in reliance on Rule 144, without having to comply with the
holding period requirements of Rule 144 and, in the case of non-affiliates,
without having to comply with the volume limitation or notice filing provisions
of Rule 144.
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<PAGE>
After the completion of this offering, but not prior to 180 days after the
completion of this offering, the Company intends to file a Registration
Statement on Form S-8 under the Securities Act to register the 6,000,000 shares
of common stock reserved for issuance under the Stock Option Plan and the
800,000 shares of common stock under the Director Stock Option Plan. After the
date of such filing, if not otherwise subject to a lock-up agreement, shares
purchased pursuant to such plans and options generally would be available for
resale in the public market.
LOCK-UP AGREEMENTS
Osicom and the Company have each agreed with the Underwriters that it will not
sell or otherwise dispose of any shares of common stock until 365 days from the
date of the prospectus without the prior written consent of CIBC World Markets
Corp. Furthermore, the Company has agreed not to file a registration statement
on Form S-8 covering any shares of common stock prior to 180 days after the
completion of this offering. Therefore, no employee of the Company will be able
to sell or otherwise dispose of any shares of common stock issued pursuant to
the Stock Option Plan prior to 180 days from the date of this prospectus.
Currently, no employee beneficially owns any shares of the Company's common
stock other than through options granted under the Stock Option Plan. In
addition Osicom has agreed not to (and to not permit any subsidiary other than
the Company to) purchase any shares of common stock until 365 days from the
date of the prospectus.
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<PAGE>
UNDERWRITING
NETsilicon and Osicom have entered into an underwriting agreement with the
underwriters named below. CIBC World Markets Corp. and U.S. Bancorp Piper
Jaffray are acting as representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of voting common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER ----------------
<S> <C>
CIBC World Markets Corp.................................
U.S. Bancorp Piper Jaffray..............................
---------
Total.............................................
---------
---------
</TABLE>
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The shares should be ready for delivery on or about , 1999 against
payment in immediately available funds. The representatives have advised
NETsilicon and Osicom that the underwriters propose to offer the shares directly
to the public at the public offering price that appears on the cover page of
this prospectus. In addition, the representatives may offer some of the shares
to other securities dealers at such price less a concession of $ per share.
The underwriters may also allow, and such dealers may reallow, a concession not
in excess of $ per share to other dealers. After the shares are released for
sale to the public, the representatives may change the offering price and other
selling terms at various times.
NETsilicon and Osicom have granted the underwriters an over-allotment option.
This option, which is exercisable for up to 30 days after the date of this
prospectus, permits the underwriters to purchase a maximum of 750,000 additional
shares (250,000 from NETsilicon and 500,000 from Osicom) to cover
over-allotments. If the underwriters exercise all or part of this option, they
will purchase shares covered by the option at the initial public offering price
that appears on the cover page of this prospectus, less the underwriting
discount. If this option is exercised in full, the total price to public will be
$ , the total proceeds to NETsilicon will be $ and the
total proceeds to Osicom will be $ . The underwriters have severally
agreed that, to the extent the over-allotment option is exercised, they will
each purchase a number of additional shares proportionate to the underwriter's
initial amount reflected in the foregoing table.
The following table provides information regarding the amount of the discount to
be paid to the underwriters by NETsilicon and Osicom:
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<PAGE>
<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH
EXERCISE OF FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------- --------------------- ---------------------
<S> <C> <C> <C>
NETsilicon.............................. $ $ $
Osicom..................................
----------- -----------
Total........................................ $ $
</TABLE>
NETsilicon and Osicom estimate that their portions of the total expenses of the
offering, excluding the underwriting discount, will be approximately $600,000
and $400,000, respectively.
NETsilicon and Osicom have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
NETsilicon and Osicom have each agreed to a 365-day 'lock up' with respect to
shares of NETsilicon common stock that they beneficially own, including
securities that are convertible into shares of common stock and securities that
are exchangeable or exercisable for shares of common stock. This means that, for
a period of 365 days following the date of this prospectus, neither NETsilicon
nor Osicom may offer, sell, pledge or otherwise dispose of these NETsilicon
securities without the prior written consent of CIBC World Markets Corp.
NETsilicon's executive officers and directors and certain other persons have
agreed to a 180-day 'lock up' with respect to securities that are exercisable
for an aggregate of 254,709 shares of NETsilicon common stock that they
beneficially own, including securities that are convertible into shares of
common stock and securities that are exchangeable or exercisable for shares of
common stock. This means that for a period of 180 days following the date of
this prospectus, NETsilicon's executive officers and directors and certain other
stockholders, may not offer, sell, pledge or otherwise dispose of these
NETsilicon securities without the prior written consent of CIBC World Markets
Corp.
The representatives have informed NETsilicon that they do not expect
discretionary sales by the underwriters to exceed five percent of the shares
offered by this prospectus.
There is no established trading market for the shares. The offering price for
the shares has been determined by NETsilicon, Osicom and the representatives,
based on the following factors: prevailing market and economic conditions,
revenues and earnings of NETsilicon, the state of NETsilicon's business
operations, an assessment of NETsilicon's management and consideration of the
above factors relative to market valuation of companies in related businesses.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:
Stabilizing transactions -- The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares,
so long as stabilizing bids do not exceed a specified maximum.
Over-allotments and syndicate covering transactions -- The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created in
connection with the offering, the representatives may engage in syndicate
covering transactions by purchasing shares in the open market. The
representatives may also elect to reduce any short position by exercising all
or part of the over-allotment option.
Penalty bids -- If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may reclaim
a selling concession from the underwriters and selling group members who sold
those shares as part of this offering.
64
<PAGE>
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither NETsilicon nor the underwriters makes any representation or prediction
as to the effect that the transactions described above may have on the price of
the shares. These transactions may occur on the Nasdaq National Market or
otherwise. If such transactions are commenced, they may be discontinued without
notice at any time.
LEGAL MATTERS
The validity of the 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 Underwriters by Morgan, Lewis & Bockius LLP,
Philadelphia, Pennsylvania.
EXPERTS
The financial statements of the Company as of January 31, 1999 and 1998 and for
each of the three years in the period ended January 31, 1999 included in this
Prospectus have been audited by BDO Seidman, LLP, independent certified public
accountants, and have been so included in reliance on its reports, given upon
its authority as an expert in accounting and auditing.
WHERE YOU CAN FIND MORE 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 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 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.
65
<PAGE>
NETSILICON, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Balance Sheets as of January 31, 1998 and 1999 and April 30,
1999 (unaudited).......................................... F-3
Statements of Operations for the Years Ended January 31,
1997, 1998 and 1999 and the Three Months Ended April 30,
1998 and 1999 (unaudited)................................. F-4
Statements of Stockholder's Equity (Deficit) for the Years
Ended January 31, 1997, 1998 and 1999 and April 30, 1999
(unaudited)............................................... F-5
Statements of Cash Flows for the Years Ended January 31,
1997, 1998 and 1999 and the Three Months Ended April 30,
1998 and 1999 (unaudited)................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<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 1999 and the related statements of
operations, stockholder's equity (deficit) and cash flows for each of the three
years in the period ended January 31, 1999. 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 1999, and the results of its operations and its cash flows
for each of the three years in the period ended January 31, 1999 in conformity
with generally accepted accounting principles.
/S/ BDO SEIDMAN, LLP
.....................................
BDO SEIDMAN, LLP
Boston, Massachusetts
February 26, 1999, except for notes
I (ii) and (iii) which are
as of June 30, 1999
F-2
<PAGE>
NETSILICON, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
------------------------ APRIL 30,
1998 1999 1999
---------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................... $ 185,100 $ 582,600 $ 29,500
Accounts receivable, net (Notes D and S)........... 3,595,300 4,204,500 4,722,200
Due from affiliate (Note F)........................ -- 1,218,300 2,753,800
Inventory, net (Notes B, D and S).................. 2,607,400 3,769,300 4,129,100
Prepaid expenses and other current assets.......... 172,600 238,600 130,200
---------- ----------- -----------
TOTAL CURRENT ASSETS.......................... 6,560,400 10,013,300 11,764,800
---------- ----------- -----------
PROPERTY AND EQUIPMENT, NET (Notes C, D and E).......... 773,900 685,200 725,500
---------- ----------- -----------
OTHER ASSETS:
Capitalized software, net (Note B)................. 221,400 470,400 707,300
Capitalized software of discontinued operations,
net (Note A)..................................... 330,100 -- --
Other assets....................................... 47,600 479,500 528,600
---------- ----------- -----------
TOTAL OTHER ASSETS............................ 599,100 949,900 1,235,900
---------- ----------- -----------
TOTAL ASSETS............................................ $7,933,400 $11,648,400 $13,726,200
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term debt (Note D)........................... $2,987,100 $ 3,191,500 $ 3,454,600
Current maturities of long-term debt (Note E)...... 17,900 -- --
Accounts payable................................... 1,777,300 2,789,800 3,582,900
Due to affiliates (Note F)......................... 2,171,000 6,423,100 7,092,400
Other current liabilities.......................... 394,000 1,080,100 1,416,900
---------- ----------- -----------
TOTAL CURRENT LIABILITIES..................... 7,347,300 13,484,500 15,546,800
---------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note G)
STOCKHOLDER'S EQUITY (DEFICIT) (Notes I, J and K):
Preferred stock, $0.01 par value; 5,000,000
authorized; none issued.......................... -- -- --
Common stock, $0.01 par value; 35,000,000
authorized; Issued and outstanding:
Voting, 1,000,000 shares...................... 10,000 10,000 10,000
Nonvoting, 9,000,000 shares................... 90,000 90,000 90,000
Additional paid-in capital......................... 2,463,000 2,463,000 2,463,000
Accumulated deficit................................ (1,976,900) (4,399,100) (4,383,600)
---------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY (DEFICIT).......... 586,100 (1,836,100) (1,820,600)
---------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT).... $7,933,400 $11,648,400 $13,726,200
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
NETSILICON, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JANUARY 31, APRIL 30,
--------------------------------------- -----------------------
1997 1998 1999 1998 1999
----------- ----------- ----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
NET SALES...................................... $ 7,444,500 $ 7,920,300 $13,373,000 $2,185,000 $5,814,500
COST OF SALES (Note F)......................... 4,293,600 4,060,200 7,270,400 1,037,000 3,120,100
----------- ----------- ----------- ---------- ----------
GROSS PROFIT.............................. 3,150,900 3,860,100 6,102,600 1,148,000 2,694,400
----------- ----------- ----------- ---------- ----------
OPERATING EXPENSES:
Selling and marketing..................... 1,562,700 1,809,600 3,336,400 628,000 1,325,600
Engineering, research and development..... 1,027,700 1,482,600 2,152,500 448,100 502,100
General and administrative................ 1,502,300 1,795,400 2,194,400 351,900 612,800
----------- ----------- ----------- ---------- ----------
TOTAL OPERATING EXPENSES............. 4,092,700 5,087,600 7,683,300 1,428,000 2,440,500
----------- ----------- ----------- ---------- ----------
OPERATING INCOME (LOSS) FROM CONTINUING
OPERATIONS................................... (941,800) (1,227,500) (1,580,700) (280,000) 253,900
Interest expense.......................... (136,200) (118,500) (551,700) (60,000) (238,400)
----------- ----------- ----------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAX BENEFIT........................... (1,078,000) (1,346,000) (2,132,400) (340,000) 15,500
Income tax benefit (Note L)............... 968,600 493,000 -- -- --
----------- ----------- ----------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS....... (109,400) (853,000) (2,132,400) (340,000) 15,500
INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET
OF INCOME TAX OF $968,600, $493,000 and $0 in
1997, 1998 and 1999, respectively and $0 and
$0 in the three months ended April 30, 1998
and 1999, respectively (Notes A and L)....... 1,329,500 676,600 (289,800) (310,700) --
----------- ----------- ----------- ---------- ----------
NET INCOME (LOSS).............................. $ 1,220,100 $ (176,400) $(2,422,200) $ (650,700) $ 15,500
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
NET INCOME (LOSS) PER SHARE (Notes K and M)
BASIC:
NET INCOME (LOSS) PER COMMON SHARE:
From continuing operations...... $ (0.02) $ (0.09) $ (0.21) $ (0.04) $ 0.00
From discontinued operations.... 0.19 0.07 (0.03) (0.03) 0.00
----------- ----------- ----------- ---------- ----------
Net income (loss) per common
share......................... $ 0.17 $ (0.02) $ (0.24) $ (0.07) $ 0.00
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING........................ 7,158,300 10,000,000 10,000,000 10,000,000 10,000,000
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
NETSILICON, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCKHOLDER'S
--------------------- ------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- -------- -------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1996... 7,197,300 $ 72,000 141,700 $ 14,200 $2,476,800 $(3,020,600) $ (457,600)
Stock option exercises........ 32,800 300 -- -- (300) -- --
Cashless exercise of options
and warrants (Note J)....... 900,300 9,000 -- -- (9,000) -- --
Preferred stock conversion.... 1,869,600 18,700 (141,700) (14,200) (4,500) -- --
Net income.................... -- -- -- -- -- 1,220,100 1,220,100
---------- -------- -------- -------- ---------- ----------- -----------
Balance at January 31, 1997... 10,000,000 100,000 -- -- 2,463,000 (1,800,500) 762,500
Net loss...................... -- -- -- -- -- (176,400) (176,400)
---------- -------- -------- -------- ---------- ----------- -----------
Balance at January 31, 1998... 10,000,000 100,000 -- -- 2,463,000 (1,976,900) 586,100
Net loss...................... -- -- -- -- -- (2,422,200) (2,422,200)
---------- -------- -------- -------- ---------- ----------- -----------
Balance at January 31, 1999... 10,000,000 100,000 -- -- 2,463,000 (4,399,100) (1,836,100)
Net income.................... -- -- -- -- -- 15,500 15,500
---------- -------- -------- -------- ---------- ----------- -----------
Balance at April 30, 1999
(unaudited)................. 10,000,000 $100,000 -- $ -- $2,463,000 $(4,383,600) $(1,820,600)
---------- -------- -------- -------- ---------- ----------- -----------
---------- -------- -------- -------- ---------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
NETSILICON, INC.
STATEMENTS OF CASH FLOWS
(NOTE O)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JANUARY 31, APRIL 30,
--------------------------------------- ----------------------
1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 1,220,100 $ (176,400) $(2,422,200) $ (650,700) $ 15,500
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities
Depreciation and amortization........ 674,200 580,500 644,100 127,800 170,000
Intangible assets valuation
allowance.......................... -- 237,900 -- -- --
Changes in current assets and liabilities:
(Increase) decrease in accounts
receivable......................... (1,037,100) (169,300) (609,200) 516,500 (517,700)
(Increase) decrease in inventories... 560,300 55,400 (1,161,900) (1,140,200) (359,800)
(Increase) decrease in other current
assets............................. 105,600 (87,000) (66,000) (61,100) 108,400
Increase (decrease) in accounts
payable............................ (1,562,600) (168,000) 1,012,500 957,300 793,100
Increase (decrease) in other current
liabilities........................ (497,900) (227,800) 686,100 100,100 336,800
----------- ----------- ----------- ----------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES.......... (537,400) 45,300 (1,916,600) (150,300) 546,300
----------- ----------- ----------- ----------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment....... (138,600) (604,800) (328,100) (83,800) (131,700)
Software development costs (Note B)....... (369,500) (556,000) (723,600) (162,500) (315,500)
Capitalized software transferred to Osicom
(Note A)................................ -- -- 577,400 -- --
Other assets.............................. (2,700) 16,100 (431,900) 43,200 (49,100)
----------- ----------- ----------- ----------- --------
NET CASH USED IN INVESTING
ACTIVITIES.................... (510,800) (1,144,700) (906,200) (203,100) (496,300)
----------- ----------- ----------- ----------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds (repayments) of affiliates
advances................................ 947,500 854,400 3,033,800 709,900 (866,200)
Proceeds from issuance of short-term debt,
net (Note D)............................ 917,000 291,000 204,400 (372,800) 263,100
Repayments of long-term debt (Note E)..... (441,900) (254,700) (17,900) -- --
----------- ----------- ----------- ----------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES.......... 1,422,600 890,700 3,220,300 337,100 (603,100)
----------- ----------- ----------- ----------- --------
INCREASE (DECREASE) IN CASH.................... 374,400 (208,700) 397,500 (16,300) (553,100)
CASH -- BEGINNING OF PERIOD.................... 19,400 393,800 185,100 185,100 582,600
----------- ----------- ----------- ----------- --------
CASH -- END OF PERIOD.......................... $ 393,800 $ 185,100 $ 582,600 $ 168,800 $ 29,500
----------- ----------- ----------- ----------- --------
----------- ----------- ----------- ----------- --------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for April 30, 1998 and 1999 is unaudited)
NETsilicon, Inc. (the 'Company') develops and markets semiconductor devices
and software solutions designed to meet the networking requirements of embedded
systems. The Company's products are incorporated into the design of embedded
systems to provide them with the ability to communicate over standards-based
Local Area Networks ('LANs'), Wide Area Networks ('WANs') and the Internet,
enabling the development of new embedded systems applications. The Company
believes that it offers the first compenhensive solution that, in conjunction
with the physical interface and memory, encompasses all of the hardware and
software necessary to network enable embedded systems. The Company's technology
is designed to have broad applicability and therefore may add network
functionality to many enbedded systems. The Company's products are currently
contained in a broad array of imaging products, including printers, scanners,
fax machines, copiers and multi-function peripherals manufactured by 22 original
equipment manufacturers ('OEMs'). The Company's products are also in various
stages of being incorporated into the design of products in additional markets,
such as industrial automation equipment, communication devices, data acquisition
and test equipment, Internet devices and utility monitoring equipment.
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 Stand-Alone Print
Server. 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
'Stand-Alone Print Server Line 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 Stand-Alone Print Server
Line to Osicom, which consisted principally of specific sales employees and
capitalized software related to Stand-Alone Print Server products. Based on this
transaction, the Company has accounted for the Stand-Alone Print Server Line as
a discontinued operation. Capitalized software related to the Stand-Alone Print
Server 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,
general and administrative, research and development expenses included in
discontinued operations within the Company's historical Statements of Operations
represent only those transactions specific to the Stand-Alone Print Server Line.
See Note Q.
F-7
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information for April 30, 1998 and 1999 is unaudited)
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 Company's operations; all other allocations of general corporate
expenses, including public company costs, were based upon specific
identification of the relationship of Company's operations to the total
operations of Osicom. Management believes that such allocated general expenses
are representative of the expenses the Company will incur as a separate public
company. Included in selling and marketing and general and administrative
expenses are $80,000, $202,900, and $50,000 of allocated corporate overhead
expenses for the years, ended January 31, 1999, 1998 and 1997, respectively.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates -- The financial statements are prepared in conformity
with generally accepted accounting principles which require 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, is stated at the lower of cost (first-in,
first-out method) or market. Inventories consisted of:
<TABLE>
<CAPTION>
JANUARY 31,
----------------------- APRIL 30,
1998 1999 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw material............................. $1,350,400 $1,603,400 $1,119,600
Work in process.......................... 1,273,400 2,150,100 2,364,900
Finished goods........................... 175,600 140,400 754,400
---------- ---------- ----------
2,799,400 3,893,900 4,238,900
Less: Valuation reserve.................. 192,000 124,600 109,800
---------- ---------- ----------
$2,607,400 $3,769,300 $4,129,100
---------- ---------- ----------
---------- ---------- ----------
</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
F-8
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information for April 30, 1998 and 1999 is unaudited)
equipment range from three to seven years. Depreciation of leasehold
improvements is computed using the straight-line method over five 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 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 fiscal years ended January 31, 1997, 1998 and 1999 and the three months
ended April 30, 1998 and 1999, was $321,900, $277,300, $227,300, $66,700 and
$78,600, respectively. Accumulated amortization was $132,200, $206,200, $284,800
as of January 31, 1998, 1999 and April 30, 1999, 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 to its OEM customers. 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.
F-9
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information for April 30, 1998 and 1999 is unaudited)
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 all periods presented
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.)
Unaudited Information -- The financial statements include the unaudited
balance sheet as of April 30, 1999 and the related statements of operations,
changes in shareholders' equity (deficit) and cash flows for the three months
ended April 30, 1998 and 1999. This unaudited information has been prepared by
the Company on the same basis as the audited financial statements and, in
management's opinion, reflects all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the financial
information, in accordance with generally accepted accounting principles, for
the periods presented. Results for interim periods are not necessarily
indicative of the results to be expected for the entire year.
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 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 adoption of SFAS
No. 130 had no material effect 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
F-10
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information for April 30, 1998 and 1999 is unaudited)
enterprises report certain information about their products and services, the
geographic areas in which they operate and their major customers. The adoption
of SFAS No. 131 did not have a material effect 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 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 adoption of SFAS No. 132 did not have an effect on its
financial position or results of operations.
Derivative Instruments -- 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, 2000. Adoption of SFAS 133 is not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
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. During 1998, SOP No. 98-9 was issued. The provisions of
SOP No. 98-9 amend certain provisions of SOP No. 98-4 and SOP 97-2. The adoption
of these standards had 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:
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
------------------------ -----------
1998 1999 1999
----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Manufacturing, engineering and plant
equipment and software................ $ 2,931,800 $3,240,700 $ 3,359,000
Office furniture and fixtures........... 313,800 313,800 322,500
Leasehold and building improvements..... 138,900 158,100 162,800
----------- ---------- -----------
Total property and equipment....... 3,384,500 3,712,600 3,844,300
Less: Accumulated depreciation.......... (2,610,600) (3,027,400) (3,118,800)
----------- ---------- -----------
Net book value..................... $ 773,900 $ 685,200 $ 725,500
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
Depreciation expense was $352,300, $303,200, $416,800, $61,100 and $91,400
for the fiscal years ended January 31, 1997, 1998, 1999, and the three month
periods ended April 30, 1998 and 1999, respectively.
F-11
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information for April 30, 1998 and 1999 is unaudited)
D. SHORT TERM DEBT
Short term debt consisted of the following:
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
----------------------- -----------
1998 1999 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <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
years ended January 31, 1998, 1999 and
the three months ended April 30, 1999
was 11.8%, 10.5% and 10.3%,
respectively........................... $2,987,100 $3,191,500 $3,454,600
---------- ---------- ----------
---------- ---------- ----------
</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% (10.3% at April 30, 1999).
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 amount and average amounts of debt
outstanding were $2,987,100 and $2,298,000 during the year ended January 31,
1998, $3,478,000 and $2,614,900 during the year ended January 31, 1999, and
$4,021,000 and $3,501,000 for the three months ended April 30, 1999.
E. LONG TERM DEBT
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.
The Company was obligated under capital leases that expired on October 1,
1998. At January 31, 1998, the net book value of equipment under capital leases
was $18,900. Remaining principal due was $17,900.
F-12
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information for April 30, 1998 and 1999 is unaudited)
F. DUE FROM OR TO AFFILIATES
Due from affiliates at January 31, and April 30, 1999 represents a
receivable from an Osicom subsidiary. Charges to this subsidiary for
manufactured goods and other expenses, including charges related to the sale of
the Company's Stand-Alone Print Server Line, for the year ended January 31, 1999
and the three months ended April 30, 1999 were approximately $1,410,500 and
$1,454,500, respectively.
Due to affiliates consist of:
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
----------------------- -----------
1998 1999 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Due to Osicom............................ $1,812,200 $5,884,800 $5,888,700
Due to Uni-Precision..................... 358,800 538,300 1,203,700
---------- ---------- ----------
$2,171,000 $6,423,100 $7,092,400
---------- ---------- ----------
---------- ---------- ----------
</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 prime plus 3% per year (10.8% at April 30, 1999).
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 years ended January 31, 1998
and 1999 and the three months ended April 30, 1998 and 1999 purchases from Uni
were $775,600, $1,557,200, $295,757 and $1,328,900 of which $358,800, $538,300
and $1,203,700 were unpaid at January 31, 1998, 1999 and April 30, 1999.
G. LEASES AND OTHER COMMITMENTS
(I) LEASES
Rental expense under operating leases was $291,600, $330,800 and $460,500
for the years ended January 31, 1997, 1998 and 1999, respectively. Rent expense
for the quarters ended April 30, 1998 and 1999 was $106,500 and $114,000,
respectively. The table below sets forth minimum payments under operating leases
with remaining terms in excess of one year, at January 31, 1999:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
2000.................................................... $ 410,100
2001.................................................... 410,100
2002.................................................... 273,400
----------
$1,093,600
----------
----------
</TABLE>
(II) EMPLOYMENT CONTRACT
The company has an employment contract with its Vice President, Industrial
Automation, Embedded Markets Europe with an indefinite term. Either party can
terminate the agreement with six month notice. The contract provides for base
compensation of $125,000 per year plus commissions up to $125,000 per year.
F-13
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information for April 30, 1998 and 1999 is unaudited)
H. LITIGATION
The Company is not aware of any claims or actions pending against it.
I. STOCKHOLDERS' EQUITY
(i) 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 ($0.01 par value)
5,000,000 shares of Preferred Stock ($0.01 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, 1999 no such designations
have been made.
(ii) On June 30, 1999, the Company effected a 100,000-for-one stock split
resulting in 10,000,000 shares being issued and outstanding post-split. In
connection with the split, Osicom exchanged its 10,000,000 shares of common
stock for 9,000,000 shares of non voting and 1,000,000 shares of voting common
stock.
All shareholder's equity accounts have been retroactively restated to
reflect these changes.
(iii) Upon consummation of the offering, the Company will grant options to
officers, employees and directors for the purchase of approximately 2,950,000
shares. The exercise price will be the same as the offering price to the public.
J. OTHER CAPITAL STOCK TRANSACTIONS AND BUSINESS ACQUISITIONS
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. All stock options are granted at not less than the
fair market value on the date of grant. Under the plans, options generally vest
over a two-year period from the date of grant.
F-14
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information for April 30, 1998 and 1999 is unaudited)
The following table summarizes the activity in the Osicom stock option
plans as it relates to the employees of the Company:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- --------------
<S> <C> <C>
Shares under option at January 31, 1996..... -- --
Granted................................... 98,054 $30.48
Exercised................................. -- --
Canceled.................................. -- --
-------
Shares under option at January 31, 1997..... 98,054 30.48
Granted................................... 41,407 28.76
Exercised................................. 5,812 31.88
Canceled.................................. 4,191 24.72
-------
Shares under option at January 31, 1998..... 129,458 30.06
Granted................................... 187,737 11.63
Exercised................................. 5,091 31.88
Canceled.................................. 39,272 33.96
-------
Shares under option at January 31, 1999..... 272,832 16.78
Granted................................... 79,925 15.56
Exercised................................. -- --
Canceled.................................. 15,419 14.38
-------
Shares under option at April 30, 1999
(unaudited)............................... 337,338 16.60
-------
-------
</TABLE>
Additional information about outstanding options to purchase Osicom common
stock held by employees of the Company at April 30, 1999 is 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>
$4.78 to $9.39............. 118,045 9.5 $ 6.82 -- --
$10.88 to $19.31........... 128,880 8.4 15.69 20,395 $15.94
$20.81 to $32.25........... 85,413 3.2 29.83 80,413 29.81
$45.00..................... 5,000 9.3 45.00 -- --
------- -------
$4.78 to $45.00............ 337,338 7.5 16.60 100,808 27.01
------- -------
------- -------
</TABLE>
All stock options issued to employees have an exercise price not less than
the fair market value of the Osicom's Common Stock on the date of grant, 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 SFAS No. 123, the Company's income (loss) and per share
amounts for the years ended January 31, 1997, 1998, 1999 and the three
months ended April 30, 1998 and 1999, would have been revised to the
pro forma amounts presented below:
F-15
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information for April 30, 1998 and 1999 is unaudited)
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
------------------------------------ --------------------
1997 1998 1999 1998 1999
---------- --------- ----------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss):
As reported........ $1,220,100 $(176,400) $(2,422,200) $(650,700) $ 15,500
Pro forma.......... $ 627,900 $(528,300) $(2,702,200) $(607,700) $(56,500)
Basic income (loss)
per share:
As reported........ $ 0.17 $ (0.02) $ (0.24) $ (0.07) $ (0.00)
Pro forma.......... $ 0.09 $ (0.05) $ (0.27) $ (0.06) $ (0.01)
</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 year ended January 31, 1997: expected life of
option 3 years, expected volatility of 45%, risk free interest rate of 6.25% and
a 0% dividend yield. The fair value, at date of grant, using these assumptions
was $7.67 to $11.74 per option and the weighted average was $11.23. The
assumptions for the year ended January 31, 1998 were: expected life of option
3 years, expected volatility of 45%, risk free interest rate of 5.35% and a 0%
dividend yield. The fair value, at date of grant, using these assumptions was
$2.04 to $11.44 and the weighted average was $5.27. The assumptions for the year
ended January 31, 1999 and the three months ended April 30, 1998 and 1999 were:
expected life of option of 3 years, expected volatility of 45%, risk free
interest rate of 5.28% and a 0% dividend yield. The fair value, at date of
grant, using these assumptions was $1.23 to $9.52 per option and the weighted
average was $3.11, $4.88, and $5.57 for the year ended January 31, 1999, and the
three months ended April 30, 1998 and 1999, respectively.
L. INCOME TAXES
The Company's provision for taxes on income consists of for the fiscal
years ended January 31:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- ----
<S> <C> <C> <C>
Income taxes:
Current........................................ $ -- $ -- $--
Deferred....................................... -- -- --
-------- -------- ----
Total..................................... -- -- --
Allocation of tax expense to discontinued
operations.................................. 968,600 493,000 --
-------- -------- ----
Income tax benefit............................. $968,600 $493,000 $--
-------- -------- ----
-------- -------- ----
</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, 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:
F-16
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information for April 30, 1998 and 1999 is unaudited)
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------
1998 1999
--------- -----------
<S> <C> <C>
Deferred tax assets:
Valuation allowances....................... $ 88,200 $ 178,900
Research and development credits........... 210,000 210,200
Tax loss carryforward...................... 656,900 1,582,200
Other...................................... 34,400 39,800
--------- -----------
Gross deferred tax assets............... 989,500 2,011,100
Less: valuation allowance.................. (757,300) (1,812,800)
--------- -----------
Deferred tax asset...................... 232,200 198,300
--------- -----------
Deferred tax liabilities:
Software development costs................. (232,200) (198,300)
--------- -----------
Deferred tax liabilities................ (232,200) (198,300)
--------- -----------
Net deferred tax asset (liability)...... $ -- $ --
--------- -----------
--------- -----------
</TABLE>
At January 31, 1999, the Company has federal net operating losses ('NOL')
of approximately $3,753,700 and research and development credits of $210,200
which may be available to reduce future taxable income; these carryforwards
expire at various dates through 2014. The Internal Revenue Code of 1986, as
amended ('Code'), reduces the extent to which NOLs 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. $558,900 of the Company's NOL's expiring in years ending
January 31, 2008 through 2010 are subject to annual limitation of approximately
$290,000. Further ownership changes, as defined by the Code, may reduce the
extent to which any net operating losses and credits may be utilized. These
carryforwards expire as follows:
<TABLE>
<CAPTION>
NOL CREDITS
--- -------
<S> <C> <C>
2008.................................................. $ 170,100 $ 54,800
2009.................................................. 400 102,300
2010.................................................. 389,800 53,100
2013.................................................. 998,100 --
2014.................................................. 2,195,300 --
---------- --------
$3,753,700 $210,200
---------- --------
---------- --------
</TABLE>
The reconciliation between income tax expense and a theoretical United
States tax computed by applying a rate of 35% for the fiscal years ended
January 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Loss before income taxes from
continuing operations................ $(1,078,000) $(1,346,000) $(2,132,400)
----------- ----------- -----------
----------- ----------- -----------
Theoretical tax expense (benefit) at
35%.................................. $ (377,300) $ (471,100) $ (746,300)
Impact of non-qualified stock
options.............................. -- (60,000) (24,300)
Impact of state taxes and other........ (164,300) (83,600) (284,900)
Change in valuation allowance.......... (427,000) 121,700 1,055,500
----------- ----------- -----------
Tax benefit............................ $ (968,600) $ (493,000) $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-17
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information for April 30, 1998 and 1999 is unaudited)
M. EARNINGS PER SHARE CALCULATION
The following data show the amounts used in computing basic earnings per
share.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JANUARY 31, ENDED APRIL 30,
------------------------------------- -----------------------
1997 1998 1999 1998 1999
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss)................. $1,220,100 $ (176,400) $(2,422,200) $ (650,700) $ 15,500
Less: preferred dividends......... -- -- -- -- --
---------- ---------- ----------- ---------- ----------
Net income (loss) available to
common shareholders used in
basic EPS....................... $1,220,100 $ (176,400) $(2,422,200) $ (650,700) $ 15,500
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
Average number of common shares
used in basic EPS............... 7,158,300 10,000,000 10,000,000 10,000,000 10,000,000
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
The Company had a net loss for the fiscal years ending January 31, 1998 and
1999 and for the three month period ended April 30, 1998. Accordingly, the
effect of dilutive securities including warrants to acquire common stock and
stock options, vested and nonvested, are not included in the calculations 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>
THREE MONTHS
YEAR ENDED JANUARY 31, ENDED APRIL 30,
------------------------------------- -------------------------
1997 1998 1999 1998 1999
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss) available to
common shareholders used in
basic EPS..................... $1,220,100 $ (176,400) $(2,422,200) $ (650,700) $ 15,500
Adjustments..................... -- -- -- -- --
---------- ---------- ----------- ----------- -----------
Net income (loss) available to
common shareholders after
assumed conversions of
dilutive securities........... $1,220,100 $ (176,400) $(2,422,200) $ (650,700) $ 15,500
---------- ---------- ----------- ----------- -----------
Average number of common shares
used in basic EPS............. 7,158,300 10,000,000 10,000,000 10,000,000 10,000,000
Effect of dilutive securities:
Convertible preferred
stock.................... 1,149,100 -- -- -- --
Warrants................... 517,600 -- -- -- --
Stock benefit plans........ 48,100 -- -- -- --
---------- ---------- ----------- ----------- -----------
Average number of common shares
and dilutive potential common
stock used in diluted EPS..... 8,873,100 10,000,000 10,000,000 10,000,000 10,000,000
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>
The shares issuable upon exercise of options and warrants represent 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
F-18
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information for April 30, 1998 and 1999 is unaudited)
be antidilutive. The average market price for the periods presented has
been assumed to be equal to the offering price of the shares to be issued 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 antidilutive.
[/R]
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
fiscal years ended January 31, 1997 and 1998 the interest expense incurred on
these notes was $22,300 and $27,100, respectively.
O. SUPPLEMENTAL CASH FLOW DISCLOSURES
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.
Interest paid approximated the related expenses for the fiscal years ended
January 31, 1997, and 1998. Interest paid for the fiscal year ended January 31,
1999 was approximately $262,800. Interest paid was $74,400 and $102,300 for the
three month periods ended April 30, 1998 and 1999, respectively.
No income taxes were paid for the years ended January 31, 1997, 1998 and
1999 or the three month period ended April 30, 1999.
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.
Substantially all of the Company's OEM customers in the imaging market are
headquartered in Japan. The current economic conditions existing in many Asian
countries, including Japan, are uncertain and may have a significant effect on
the business operations of such OEM customers. Consequently, the Company's
dependence on its OEM customers in the imaging market in Japan and the uncertain
factors affecting Japan's economic condition could have a material adverse
effect on the Company's business, operating results, cash flows and financial
condition.
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, 1999. The Company
performs ongoing credit evaluations of its customers' financial condition and
does not require collateral.
F-19
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information for April 30, 1998 and 1999 is unaudited)
The following data shows the customers accounting for more than 10% of net
receivables:
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
------------- -----------
1998 1999 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Customer A.................................................. 2.0% 18.5% 22.0%
Customer B.................................................. 2.6 5.9 15.0
Customer C.................................................. -- 13.7 12.0
Customer D.................................................. -- 19.7 7.0
Customer E.................................................. 18.6 4.0 2.0
Customer F.................................................. 26.6 -- --
Customer G.................................................. 17.0 -- --
</TABLE>
The following data shows that sales to major customers as a percentage of
net sales:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED JANUARY 31, ENDED APRIL 30,
------------------------- ----------------
1997 1998 1999 1998 1999
----- ----- ----- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Customer H........................................ -- % 7.1% 11.6% --% 13.3%
Customer E........................................ 6.7 8.7 11.6 22.6 2.2
Customer D........................................ -- 8.8 11.4 4.8 4.0
Customer A........................................ -- 2.9 9.6 4.9 18.3
Customer I........................................ 21.0 33.7 7.9 4.0 3.1
Customer J ....................................... -- -- 7.4 20.0 --
Customer K........................................ 3.2 13.8 7.2 15.9 3.8
Customer C........................................ -- -- 4.3 -- 27.3
Customer L........................................ 0.4 10.8 3.5 0.5 2.0
Customer B........................................ -- 1.5 2.6 4.3 10.5
Customer M........................................ 10.4 2.3 -- 1.1 0.7
Customer N........................................ 33.3 5.3 -- -- --
</TABLE>
Q. DISCONTINUED OPERATION
Effective May 1, 1998 the Company sold its Stand-Alone Print Server 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 Stand-Alone Print Server 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 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. The agreement is for one
year unless earlier terminated by mutual agreement. Lastly, Osicom has agreed to
cause certain intellectual property previously owned by Osicom to be co-owned by
the Company and Osicom.
F-20
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information for April 30, 1998 and 1999 is unaudited)
The Company entered into a supply agreement with Osicom pursuant to which
the Company sells to Osicom several products, including the NET+ARM 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.
R. SEGMENT INFORMATION
Information 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>
THREE MONTHS
YEARS ENDED JANUARY 31, ENDED APRIL 30,
------------------------------------- -----------------------
1997 1998 1999 1998 1999
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales:
United States................... $6,934,200 $5,653,500 $ 6,683,800 $ 458,500 $3,452,700
Asia............................ -- 1,150,700 5,355,800 1,219,800 2,028,900
Europe.......................... 510,300 1,089,500 960,500 497,500 302,900
Other........................... -- 26,600 372,900 9,200 30,000
---------- ---------- ----------- ---------- ----------
Total net sales.............. $7,444,500 $7,920,300 $13,373,000 $2,185,000 $5,814,500
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
There were no long-lived assets at any foreign locations during the years
presented.
F-21
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information for April 30, 1998 and 1999 is unaudited)
S. VALUATION AND QUALIFYING ACCOUNTS
Changes in the inventory valuation reserve were as follows:
<TABLE>
<S> <C>
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
Additions charged to costs and expenses................... 131,800
Amounts used during year.................................. (199,200)
---------
Balance at January 31, 1999................................. 124,600
Additions charged to costs and expenses................... 30,000
Amounts used during the quarter........................... (44,800)
---------
Balance at April 30, 1999................................... $ 109,800
---------
---------
</TABLE>
Changes in the accounts receivable valuation reserve were as follows:
<TABLE>
<S> <C>
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
Additions charged to costs and expenses................... 312,000
Amounts used during year.................................. (29,100)
---------
Balance at January 31, 1999................................. 300,000
Additions charged to costs and expenses................... 80,000
Amounts used during the quarter........................... --
---------
Balance at April 30, 1999................................... $ 380,000
---------
---------
</TABLE>
Note: See Managements' Discussion and Analysis of Financial Condition and
Results of Operations.
F-22
<PAGE>
[GRAPHIC]
Graphic titled The NET+Works Comprehensive Solution. The graphic depicts a three
dimensional, four color box divided into quarters. Each quarter is connected to
the clockwise adjacent quarter by an arrow. The four quarters of the box are
labeled as follows (clockwise from lower right): 'NET+Works Development Tools
and Support', Fully Integrated by NETsilicon', 'NET+ARM Hardware', 'NET+Works
Software'. Below the box is a listing of the following NET+ product categories:
NET+ Drivers, NET+Protocols, NET+Services, NET+Industry Applications,
NET+APIs, NET+ DMA. NETsilicon, Inc.'s logo is located in the lower right hand
corner of the graphic.
<PAGE>
- --------------------------------------------------------------------------------
[LOGO]
NETSILICON, INC.
5,000,000 SHARES
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
, 1999
CIBC WORLD MARKETS
U.S. BANCORP PIPER JAFFRAY
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<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)
payable in connection with this offering of the shares of Common Stock offered
hereby are as follows:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Securities and Exchange Commission registration fee......... $ 19,821.40
NASD filing fee............................................. 4,985.00
Nasdaq filing fee........................................... 48,000.00
Printing and engraving expenses............................. 300,000.00
Legal fees and expenses..................................... 200,000.00
Accounting fees and expenses................................ 100,000.00
Blue Sky fees and expenses (including legal fees)........... 15,000.00
Transfer agent and registrar fees and expenses.............. 25,000.00
Miscellaneous............................................... 287,193.60
-------------
Total.................................................. $1,000,000.00
-------------
-------------
</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
II-1
<PAGE>
Exchange Commission such indemnification is against public policy as expressed
in 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 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 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>
<C> <S> <C>
1.1 -- Form of Underwriting Agreement.
3.1 -- Restated Articles of Organization of the Company.........
*3.3 -- Amended and Restated By-laws of the Company..............
*4. -- Specimen of stock certificate for shares of common
stock.....................................................
5.1 -- Opinion of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel
LLP.......................................................
10.1 -- NETsilicon, Inc. Amended and Restated 1998 Incentive and
Nonqualified Stock Option Plan............................
10.2 -- NETsilicon, Inc. 1998 Amended and Restated 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........
*10.7 -- Amendment No. 2 to the Loan and Security Agreement
between the Company and Coast Business Credit dated
October 28, 1998..........................................
*10.8 -- Employment Agreement between the Company and Michael
Evensen dated October 1, 1998.............................
*10.10 -- Trademark License Agreement between ARM Limited and
Osicom Technologies Inc. dated July 14, 1998..............
*10.11 -- Software License Agreement between Integrated Systems,
Inc. and Osicom Technologies Inc. dated November 14, 1997,
as amended................................................
*10.12 -- License Agreement between Peerless Systems Corporation
and Osicom Technologies Incorporated, DPI Print Server
Division for Peerless Standard Input/Output (PSIO) dated
August 10, 1998...........................................
*10.13 -- Novell Embedded Systems Technology Master Agreement
between Novell, Inc. and Digital Products, Inc., dated
December 1, 1995, as amended..............................
*10.14 -- Letter Agreement Amendment to Intercompany Agreement
between Osicom Technologies, Inc. and the Company.........
*10.15 -- Letter Agreement between the Company and Cornelius
Peterson VIII.............................................
23.1 -- Consent of BDO Seidman, LLP..............................
23.3 -- Consent of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel
LLP (to be included in Exhibit 5.1).......................
24.1 -- Power of Attorney (included on signature page)...........
27.1 -- Financial Data Schedule..................................
</TABLE>
- ------------
* Previously filed.
II-2
<PAGE>
(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 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 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
II-3
<PAGE>
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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
duly caused this Amendment No. 3 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Waltham,
Massachusetts on July 2, 1999.
NETSILICON, INC.
By: /S/ CORNELIUS PETERSON
......................................
CORNELIUS PETERSON VIII
CHAIRMAN OF THE BOARD, 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 Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE(S) DATE
---------- -------- ----
<C> <S> <C>
/S/ CORNELIUS PETERSON Chairman of the Board, President and July 2, 1999
......................................... Chief Executive Officer
CORNELIUS PETERSON VIII
/S/ DANIEL J. SULLIVAN Vice President -- Finance, Chief July 2, 1999
......................................... Financial Officer
DANIEL J. SULLIVAN
/S/ FRANCIS E. GIRARD Director July 2, 1999
.........................................
FRANCIS E. GIRARD
/S/ WILLIAM JOHNSON Director July 2, 1999
.........................................
WILLIAM JOHNSON
/S/ EDWARD B. ROBERTS Director July 2, 1999
.........................................
EDWARD B. ROBERTS, PH.D.
/S/ F. GRANT SAVIERS Director July 2, 1999
.........................................
F. GRANT SAVIERS
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement...........................
3.1 -- Restated Articles of Organization of the Company.........
*3.3 -- Amended and Restated By-laws of the Company..............
*4 -- Specimen of stock certificate for shares of common
stock.....................................................
5.1 -- Opinion of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel
LLP.......................................................
10.1 -- NETsilicon, Inc. Amended and Restated 1998 Incentive and
Nonqualified Stock Option Plan............................
10.2 -- NETsilicon, Inc. 1998 Amended and Restated 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........
*10.7 -- Amendment No. 2 to the Loan and Security Agreement
between the Company and Coast Business Credit dated
October 28, 1998..........................................
*10.8 -- Employment Agreement between the Company and Michael
Evensen dated October 1, 1998.............................
*10.10 -- Trademark License Agreement between ARM Limited and
Osicom Technologies Inc. dated July 14, 1998..............
*10.11 -- Software License Agreement between Integrated Systems,
Inc. and Osicom Technologies Inc. dated November 14, 1997,
as amended................................................
*10.12 -- License Agreement between Peerless Systems Corporation
and Osicom Technologies Incorporated, DPI Print Server
Division for Peerless Standard Input/Output (PSIO) dated
August 10, 1998...........................................
*10.13 -- Novell Embedded Systems Technology Master Agreement
between Novell, Inc. and Digital Products, Inc., dated
December 1, 1995, as amended..............................
*10.14 -- Letter Agreement Amendment to Intercompany Agreement
between Osicom Technologies, Inc. and the Company.........
*10.15 -- Letter Agreement between the Company and Cornelius
Peterson VIII.............................................
23.1 -- Consent of BDO Seidman, LLP..............................
23.3 -- Consent of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel
LLP (to be included in Exhibit 5.1).......................
24.1 -- Power of Attorney (included on signature page)...........
27.1 -- Financial Data Schedule..................................
</TABLE>
- ------------
* Previously filed.
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as..........'TM'
<PAGE>
<PAGE>
ML&B DRAFT 1/JUL/99
5,750,000 Shares
NETsilicon, Inc.
Common Stock
UNDERWRITING AGREEMENT
July __, 1999
CIBC World Markets Corp.
U.S. Bancorp Piper Jaffray Inc.
c/o CIBC World Markets Corp.
One World Financial Center
New York, New York 10281
On behalf of the Several
Underwriters named on
Schedule I attached hereto.
Ladies and Gentlemen:
NETsilicon, Inc., a Massachusetts corporation (the "Company"),
and Osicom Technologies, Inc., a New Jersey corporation and the sole stockholder
of the Company (the "Selling Stockholder"), propose, subject to the terms and
conditions contained herein, to sell to you and the other underwriters named on
Schedule I to this Agreement (the "Underwriters") for whom you are acting as
Representatives (the "Representatives"), an aggregate of 5,000,000 shares (the
"Firm Shares") of the Company's Voting Common Stock, $0.01 par value per share
(the "Common Stock"). Of the 5,000,000 Firm Shares, 3,000,000 Firm Shares are to
be issued and sold by the Company and 2,000,000 Firm Shares are to be sold by
the Selling Stockholder. The respective amounts of the Firm Shares to be
purchased by each of the several Underwriters are set forth opposite their names
on Schedule I hereto. In addition, the Selling Stockholder proposes to grant to
the Underwriters an option to purchase up to an additional 500,000 shares of
Common stock from it and the Company proposes to grant the Underwriters an
option to purchase 250,000 shares of Common Stock from it (the 500,000 shares
together with the 500,000 shares are collectively the "Option Shares") for the
purpose of covering over-allotments in connection with the sale of the Firm
Shares. The Firm Shares and the Option Shares are together called the "Shares."
1
<PAGE>
1. Sale and Purchase of the Shares.
On the basis of the representations, warranties and agreements
contained in, and subject to the terms and conditions of, this Agreement:
(a) The Company agrees to sell to each of the Underwriters, and
each of the Underwriters agrees, severally and not jointly, to purchase
from the Company, at a price of $____ per share (the "Initial Price"),
the number of Firm Shares of Common Stock set forth opposite the name of
such Underwriter under the column "Number of Firm Shares to be Purchased
from the Company" on Schedule I to this Agreement, subject to adjustment
in accordance with Section 11 hereof. The Selling Stockholder agrees to
sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Selling Stockholder, at
the "Initial Price", the number of Firm Shares of Common Stock set forth
opposite the name of such Underwriter under the column "Number of Firm
Shares to be Purchased from the Selling Stockholder" on Schedule I to
this Agreement, subject to adjustment in accordance with Section 11
hereof.
(b) The Company and the Selling Stockholder each grant
individually to the several Underwriters an option to purchase,
severally and not jointly, all or any part of the Option Shares at the
Initial Price. The number of Option Shares to be purchased by each
Underwriter shall be the same percentage (adjusted by the
Representatives to eliminate fractions) of the total number of Option
Shares to be purchased by the Underwriters as such Underwriter is
purchasing of the Firm Shares. Such options may be exercised only to
cover over-allotments in the sales of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time and
from time to time on or before 12:00 noon, New York City time, on the
business day before the Firm Shares Closing Date (as defined below), and
thereafter, within thirty (30) days, from time to time after the date of
this Agreement, in each case upon written or telegraphic notice, or
verbal or telephonic notice confirmed by written or telegraphic notice,
by the Representatives to the Company no later than 12:00 noon, New York
City time, on the business day before the Firm Shares Closing Date or at
least two business days before an Option Shares Closing Date (as defined
below), as the case may be, setting forth the number of Option Shares to
be purchased and the time and date (if other than the Firm Shares
Closing Date) of each such purchase.
2. Delivery and Payment. Delivery by the Company and the Selling
Stockholder of the Firm Shares to the Representatives for the respective
accounts of the Underwriters, and payment of the purchase price by
certified or official bank check or checks payable in New York Clearing
House (same day) funds drawn to the order of the Company for the shares
purchased from the Company, or by wire transfer to the Company, and
drawn to the order of the Selling Stockholder for the shares purchased
from the Selling Stockholder, or by wire transfer to the Selling
Stockholder against delivery of the respective certificates therefor to
the Representatives, shall take place at the offices of CIBC World
Markets Corp., at One World Financial Center, New York, New York 10281,
at 10:00 a.m., New York City time,
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on the third business day following the date of this Agreement, or at
such time on such other date, not later than ten (10) business days
after the date of this Agreement, as shall be agreed upon by the Company
and the Representatives (such time and date of delivery and payment are
called the "Firm Shares Closing Date").
In the event the options with respect to the Option Shares are
exercised, delivery by the Selling Stockholder and the Company of the Option
Shares to the Representatives for the respective accounts of the Underwriters
and payment of the purchase price by certified or official bank check or checks
payable in New York Clearing House (same day) funds to the order of the Company
for the shares purchased from the Company or by wire transfer to the Company,
and drawn to the order of the selling Stockholder for the shares purchased from
the Selling Stockholder or by wire transfer to the Selling Stockholder shall
take place at the offices of CIBC World Markets Corp. specified above at the
time and on the date (which may be the same date as, but in no event shall be
earlier than, the Firm Shares Closing Date) specified in the notice referred to
in Section l(b) (each such time and date of delivery and payment is called an
"Option Shares Closing Date"). The Firm Shares Closing Date and each Option
Shares Closing Date are called, individually, a "Closing Date" and, together,
the "Closing Dates."
Certificates evidencing the Shares shall be registered in such
names and shall be in such denominations as the Representatives shall request at
least two full business days before the Firm Shares Closing Date or, in the case
of Option Shares, on the day of notice of exercise of the option as described in
Section l(b) and shall be made available to the Representatives for checking and
packaging, at such place as is designated by the Representatives, on the full
business day before the Firm Shares Closing Date (or the Option Shares Closing
Date in the case of the Option Shares).
3. Registration Statement and Prospectus; Public Offering. The
Company has prepared and filed in conformity with the requirements of
the Securities Act of 1933, as amended (the "Securities Act"), and the
published rules and regulations thereunder (the "Rules") adopted by the
Securities and Exchange Commission (the "Commission") a Registration
Statement (as hereinafter defined) on Form S-1 (No. 333-62231),
including a preliminary prospectus relating to the Shares, and such
amendments thereof as may have been filed prior to the date of this
Agreement. Copies of such Registration Statement (including all
amendments thereof) and of the related Preliminary Prospectus (as
hereinafter defined) have heretofore been delivered by the Company to
you. The term "Preliminary Prospectus" means any preliminary prospectus
(as described in Rule 430 of the Rules) included at any time as a part
of the Registration Statement or filed with the Commission by the
Company with the consent of the Representatives pursuant to Rule 424(a)
of the Rules. The term "Registration Statement" as used in this
Agreement means the initial registration statement (including all
exhibits and financial schedules), as amended at the time and on the
date it becomes effective (the "Effective Date") and as thereafter
amended by post-effective amendments. If the Company has filed an
abbreviated registration statement to register additional Shares
pursuant to Rule 462(b) under the Rules (the "462(b) Registration
Statement"), then any reference herein to the Registration Statement
shall also be deemed to include such 462(b) Registration Statement. The
term "Prospectus" as used in this Agreement means the prospectus in the
form included in the Registration Statement at the
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time of effectiveness or, if Rule 430A of the Rules is relied on, the
term Prospectus shall also include the final prospectus filed with the
Commission pursuant to Rule 424(b) of the Rules.
The Company and the Selling Stockholder understand that the
Underwriters propose to make a public offering of the Shares, as set forth in
and pursuant to the Prospectus, as soon after the Effective Date and the date of
this Agreement as the Representatives deem advisable. The Company and the
Selling Stockholder hereby confirm that the Underwriters and dealers have been
authorized to distribute or cause to be distributed each Preliminary Prospectus
and are authorized to distribute the Prospectus (as from time to time amended or
supplemented if the Company furnishes amendments or supplements thereto to the
Underwriters).
4. Representations and Warranties of the Company and the Selling
Stockholder. The Company and the Selling Stockholder hereby, jointly and
severally, represent and warrant to each Underwriter as follows:
(a) On the Effective Date, the Registration Statement complied,
and on the date of the Prospectus, the date any post-effective amendment
to the Registration Statement becomes effective, the date any supplement
or amendment to the Prospectus is filed with the Commission and each
Closing Date, the Registration Statement and the Prospectus (and any
amendment thereof or supplement thereto) will comply, in all material
respects, with the applicable provisions of the Securities Act and the
Rules and the rules and regulations of the Commission thereunder. The
Registration Statement did not, as of the Effective Date, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading; and on the other dates referred to
above, neither the Registration Statement nor the Prospectus, nor any
amendment thereof or supplement thereto, contained or will contain any
untrue statement of a material fact or omitted or will omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein not misleading. When any related preliminary
prospectus was first filed with the Commission (whether filed as part of
the Registration Statement or any amendment thereto or pursuant to Rule
424(a) of the Rules) and when any amendment thereof or supplement
thereto was first filed with the Commission, such preliminary prospectus
as amended or supplemented complied in all material respects with the
applicable provisions of the Securities Act and the Rules and did not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein not misleading. Notwithstanding the
foregoing, none of the representations and warranties in this paragraph
4(a) shall apply to statements in, or omissions from, the Registration
Statement or the Prospectus made in reliance upon, and in conformity
with, information herein or otherwise furnished in writing by the
Representatives on behalf of the several Underwriters for use in the
Registration Statement or the Prospectus. With respect to the preceding
sentence, the Company acknowledges that the only information furnished
in writing by the Representatives on behalf of the several Underwriters
for use in the Registration Statement or the Prospectus are the
statements contained in paragraph four (but not the first sentence),
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paragraph ten and paragraph twelve (collectively the "Underwriters'
Information") under the caption "Underwriting"in the Prospectus.
(b) The Registration Statement is effective under the Securities
Act and no stop order preventing or suspending the effectiveness of the
Registration Statement or suspending or preventing the use of the
Prospectus has been issued and no proceedings for that purpose have been
instituted or are threatened under the Securities Act; any required
filing of the Prospectus and any supplement thereto pursuant to Rule
424(b) of the Rules has been or will be made in the manner and within
the time period required by such Rule 424(b).
(c) The financial statements of the Company (including all notes
and schedules thereto) included in the Registration Statement and
Prospectus present fairly the financial position, the results of
operations, the statements of cash flows and the statements of
stockholders' equity and the other information purported to be shown
therein of the Company at the respective dates and for the respective
periods to which they apply; and such financial statements and related
schedules and notes have been prepared in conformity with generally
accepted accounting principles, consistently applied throughout the
periods involved, and all adjustments necessary for a fair presentation
of the results for such periods have been made. The summary financial
data and selected financial data included in the Prospectus present
fairly the information shown therein at the respective dates and for the
respective periods specified and the summary and selected financial data
have been presented on a basis consistent with the financial statements
so set forth in the Prospectus and other financial information.
(d) BDO Seidman, LLP, whose reports are filed with the Commission
as a part of the Registration Statement, are and, during the periods
covered by their reports, are independent public accountants as required
by the Securities Act and the Rules.
(e) Each of the Company and the Selling Stockholder is a
corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation. The Company has no
subsidiary or subsidiaries and does not control, directly or indirectly,
any corporation, partnership, joint venture, association or other
business organization. The Company is duly qualified to do business and
is in good standing as a foreign corporation in each jurisdiction in
which the nature of the business conducted by it or location of the
assets or properties owned, leased or licensed by it requires such
qualification, except for such jurisdictions where the failure to so
qualify would not have a material adverse effect on the assets or
properties, business, results of operations, financial condition or
prospects of the Company (a "Material Adverse Effect"). The Company has
all requisite corporate power and authority, and all necessary
authorizations, approvals, consents, orders, licenses, certificates and
permits of and from all governmental or regulatory bodies or any other
person or entity (collectively, the "Permits"), to own, lease and
license its assets and properties and conduct its business, all of which
are valid and in full force and effect, as described in the Registration
Statement and the Prospectus, except where the lack of such Permits
would not have a Material Adverse Effect; the Company has fulfilled and
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<PAGE>
performed in all material respects all of its material obligations with
respect to such Permits and no event has occurred that allows, or after
notice or lapse of time would allow, revocation or termination thereof
or results in any other material impairment of the rights of the Company
thereunder. Except as may be required under the Securities Act and state
and foreign Blue Sky laws, no other Permits are required to enter into,
deliver and perform this Agreement and to issue and sell the Shares.
(f) The Company owns or possesses adequate and enforceable rights
to use all trademarks, trademark applications, trade names, service
marks, copyrights, copyright applications, licenses, know-how and other
similar rights and proprietary knowledge (collectively, "Intangibles")
described in the Prospectus as being necessary for the conduct of its
business. The Company has not received any notice of, or is not aware
of, any infringement of or conflict with asserted rights of others with
respect to any Intangibles.
(g) The Company has good and marketable title in fee simple to
all items of real property and good and marketable title to all personal
property described in the Prospectus as being owned by it and any real
property and buildings described in the Prospectus as being held under
lease by the Company is held by it under valid, existing and enforceable
leases, free and clear of all liens, encumbrances, claims, security
interests and defects, except such as are described in the Registration
Statement and the Prospectus or would not have a Material Adverse
Effect.
(h) There are no litigation matters or governmental proceedings
to which the Company is subject or which is pending or, to the knowledge
of the Company, threatened against the Company, which might have a
Material Adverse Effect, affect the consummation of this Agreement or
which is required to be disclosed in the Registration Statement and the
Prospectus and is not so disclosed.
(i) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
described therein, (i) there has not been any material adverse change
with regard to the assets or properties, business, results of
operations, financial condition, or prospects of the Company; (ii) the
Company has not sustained any loss of or interference with its assets,
businesses or properties (whether owned or leased) from fire, explosion,
earthquake, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or any court or legislative or
other governmental action, order or decree which would have a Material
Adverse Effect; and (iii) since the date of the latest balance sheet
included in the Registration Statement and the Prospectus, except as
reflected therein, the Company has not (i) issued any securities or
incurred any liability or obligation, direct or contingent, for borrowed
money, except such liabilities or obligations incurred in the ordinary
course of business, (ii) entered into any transaction not in the
ordinary course of business or (iii) declared or paid any dividend or
made any distribution on any shares of its stock or redeemed, purchased
or otherwise acquired or agreed to redeem, purchase or otherwise acquire
any shares of its stock.
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(j) There is no document, contract or other agreement of a
character required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement
which is not described or filed as required by the Securities Act or
Rules. Each description of a contract, document or other agreement in
the Registration Statement and the Prospectus accurately reflects in all
respects the terms of the underlying document, contract or agreement.
Each agreement described in the Registration Statement and Prospectus or
listed in the Exhibits to the Registration Statement is in full force
and effect and is valid and enforceable by and against the Company in
accordance with its terms. Neither the Company, nor to the Company's
knowledge, any other party is in default in the observance or
performance of any term or obligation to be performed by it under any
such agreement, and no event has occurred which with notice or lapse of
time or both would constitute such a default, in any such case which
default or event would have a Material Adverse Effect. No default
exists, and no event has occurred which with notice or lapse of time or
both would constitute a default, in the due performance and observance
of any term, covenant or condition, by the Company of any other
agreement or instrument to which the Company is a party or by which it
or its properties or business may be bound or affected which default or
event would have a Material Adverse Effect.
(k) The Company is not in violation of any term or provision of
its charter, articles of organization, or bylaws or of any franchise,
license, permit, judgment, decree, order, statute, rule or regulation,
which would have a Material Adverse Effect.
(l) Neither the execution, delivery and performance of this
Agreement by the Company nor the consummation of any of the transactions
contemplated hereby (including, without limitation, the issuance and
sale by the Company of the Shares) will give rise to a right to
terminate or accelerate the due date of any payment due under, or
conflict with or result in the breach of any term or provision of, or
constitute a default (or an event which with notice or lapse of time or
both would constitute a default) under, or require any consent or waiver
under, or result in the execution or imposition of any lien, charge or
encumbrance upon any properties or assets of the Company pursuant to the
terms of, any indenture, mortgage, deed of trust or other agreement or
instrument to which the Company is a party or by which it or any of its
properties or businesses is bound, or any franchise, license, permit,
judgment, decree, order, statute, rule or regulation applicable to the
Company or violate any provision of the charter, articles of
organization, or bylaws of the Company, except for such consents or
waivers which have already been obtained and are in full force and
effect.
(m) The Company has authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus. The
certificates evidencing the Shares are in due and proper legal form and
those to be issued by the Company have been duly authorized for issuance
by the Company. All of the issued and outstanding shares of Common Stock
have been duly and validly issued and are fully paid and nonassessable.
There are no statutory preemptive or other similar rights to subscribe
for or to purchase or acquire any shares of Common Stock of the Company
or any such rights pursuant to its charter, articles
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<PAGE>
of organization, or bylaws or any agreement or instrument to or by which
the Company is a party or bound. The Shares, when issued in the case of
the shares to be issued by the Company and sold pursuant to this
Agreement, will be duly and validly issued, fully paid and nonassessable
and none of them will be issued in violation of any preemptive or other
similar right. There is no outstanding option, warrant or other right
calling for the issuance of, any share of stock of the Company or any
security convertible into, or exercisable for, such stock. There is no
commitment, plan or arrangement to issue, any share of stock of the
Company or any security convertible into, or exercisable or exchangeable
for, such stock, except as disclosed in the Prospectus. The Common Stock
conforms in all material respects to all statements in relation thereto
contained in the Registration Statement and the Prospectus.
(n) No holder of any security of the Company has the right to
have any security owned by such holder included in the Registration
Statement or to demand registration of any security owned by such holder
during the period ending one hundred eighty (180) days after the date of
this Agreement. Each director, executive officer, and employee of the
Company has delivered to the Representatives his enforceable written
agreement that he will not, for a period of one hundred eighty (180)
days after the date of this Agreement, without the prior written consent
of CIBC World Markets Corp., make any offer, sale, assignment, transfer,
encumbrance or contract to sell, grant an option to purchase or other
disposition of any Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or enter into any swap or
other agreement that transfer in whole or in part any of the economic
consequences of ownership of the shares of Common Stock or any
securities exercisable or exchangeable for Common Stock ("Lock-Up
Agreement").
(o) All necessary corporate action has been duly and validly
taken by the Company and the Selling Stockholder to authorize the
execution, delivery and performance of this Agreement and the issuance
and sale of the Shares, by the Company. This Agreement has been duly and
validly authorized, executed and delivered by the Company and constitute
and will constitute legal, valid and binding obligations of the Company
enforceable against the Company in accordance with its terms, except (i)
as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general equitable
principles and (ii) to the extent that rights to indemnity or
contribution under this Agreement may be limited by Federal and state
securities laws or the public policy underlying such laws.
(p) The Company is not involved in any labor dispute nor, to the
knowledge of the Company, is any such dispute threatened, which dispute
would have a Material Adverse Effect. The Company is not aware of any
existing or imminent labor disturbance by the employees of any of its
principal suppliers or contractors which would have a Material Adverse
Effect. The Company is not aware of any threatened or pending litigation
between the Company and any of its officers which, if adversely
determined, could have a Material Adverse Effect and has no reason to
believe that such officers will not remain in the employment of the
Company.
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(q) No transaction has occurred between or among the Company and
any of its officers or directors or five percent shareholders or any
affiliate or affiliates of any such officer or director or five percent
shareholders that is required to be described in and is not described in
the Registration Statement and the Prospectus.
(r) The Company has not taken, nor will it take, directly or
indirectly, any action designed to or which might reasonably be expected
to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation
of the price of the Common Stock to facilitate the sale or resale of any
of the Shares.
(s) The Company has filed all Federal, state, local and foreign
tax returns which are required to be filed by it through the date
hereof, or has received extensions thereof, and has paid all taxes shown
on such returns and all assessments received by it to the extent that
the same are material and have become due, and there are no tax audits
or investigations pending, which if adversely determined would have a
Material Adverse Effect; nor are there any material proposed additional
tax assessments against the Company.
(t) The Shares have been duly authorized for quotation on the
National Market Segment of The Nasdaq Stock Market, subject to official
Notice of Issuance, and a registration statement has been filed on Form
8-A pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which registration statement complies in
all material respects with the Exchange Act.
(u) The books, records and accounts of the Company accurately and
fairly reflect, in reasonable detail, the transactions in, and
dispositions of, the assets of, and the results of operations of, the
Company. The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with management's
general or specific authorization and (iv) the recorded accountability
for assets is compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences.
(v) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
customary in the businesses in which it is engaged or propose to engage
after giving effect to the transactions described in the Prospectus; and
the Company has no reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a Material Adverse
Effect. The Company has not been denied any insurance coverage which it
has sought or for which it has applied.
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(w) Each approval, consent, order, authorization, designation,
declaration or filing of, by or with any regulatory, administrative or
other governmental body necessary in connection with the execution and
delivery by the Company of this Agreement and the consummation of the
transactions herein contemplated required to be obtained or performed by
the Company (except such additional steps as may be required by the
National Association of Securities Dealers, Inc. (the "NASD") or may be
necessary to qualify the Shares for public offering by the Underwriters
under the state securities or Blue Sky laws) has been obtained or made
and is in full force and effect.
(x) There are no affiliations with the NASD among the Company's
officers, directors or any five percent or greater stockholder of the
Company, except as set forth in the Registration Statement or otherwise
disclosed in writing to the Representatives of the Underwriters.
(y) (i) The Company is in compliance in all material respects
with all rules, laws and regulation relating to the use, treatment,
storage and disposal of toxic substances and protection of health or the
environment ("Environmental Law") which are applicable to its business;
(ii) the Company has not received any notice from any governmental
authority or third party of an asserted claim under Environmental Laws;
(iii) the Company has received all permits, licenses or other approvals
required of it under applicable Environmental Laws to conduct its
business and is in compliance with all terms and conditions of any such
permit, license or approval; (iv) to the Company's knowledge, no facts
currently exist that will require the Company to make future material
capital expenditures to comply with Environmental Laws; and (v) no
property which is or has been owned, leased or occupied by the Company
has been designated as a Superfund site pursuant to the Comprehensive
Environmental Response, Compensation of Liability Act of 1980, as
amended (42 U.S.C. Section 9601, et. seq.) or otherwise designated as a
contaminated site under applicable state or local law.
(z) The Company is not and, after giving effect to the offering
and sale of the Shares and the application of proceeds thereof as
described in the Prospectus, will not be an "investment company" within
the meaning of the Investment Company Act of 1940, as amended (the
"Investment Company Act").
(aa) Neither the Company nor any other person associated with or
acting on behalf of the Company including, without limitation, any
director, officer, agent or employee of the Company has, directly or
indirectly, while acting on behalf of the Company (i) used any corporate
funds for unlawful contributions, gifts, entertainment or other unlawful
expenses relating to political activity; (ii) made any unlawful payment
to foreign or domestic government officials or employees or to foreign
or domestic political parties or campaigns from corporate funds; (iii)
violated any provision of the Foreign Corrupt Practices Act of 1977, as
amended; or (iv) made any other unlawful payment.
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5. Representations and Warranties of the Selling Stockholder. The
Selling Stockholder hereby represents and warrants to each Underwriter
as follows:
(a) This Agreement has been duly authorized, executed and
delivered by or on behalf of the Selling Stockholder and, assuming due
authorization, execution and delivery by the other parties hereto,
constitutes the valid and legally binding agreement of the Selling
Stockholder, enforceable against the Selling Stockholder in accordance
with its terms, except (i) as the enforceability thereof may be limited
by bankruptcy, insolvency, reorganization, moratorium, or other similar
laws affecting the enforcement of creditors rights generally and by
general equitable principles and (ii) to the extent that rights to
indemnity or contribution under this Agreement may be limited by federal
and state securities laws or the public policy underlying such laws.
(b) The execution and delivery by the Selling Stockholder of this
Agreement and the performance by the Selling Stockholder of its
obligations under this Agreement (i) will not contravene any provision
of applicable law, statute, regulation or filing or any agreement or
other instrument binding upon the Selling Stockholder or any judgment,
order or decree of any governmental body, agency or court having
jurisdiction over the Selling Stockholder, (ii) does not require any
consent, approval, authorization or order of or registration or filing
with any court or governmental agency or body having jurisdiction over
it, except such as may be required by the Blue Sky laws of the various
states in connection with the offer and sale of the Shares which have
been or will be effected in accordance with this Agreement, (iii) does
not and will not violate any statute, law, regulation or filing or
judgment, injunction, order or decree applicable to the Selling
Stockholder or (iv) will not result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Selling
Stockholder pursuant to the terms of any agreement or instrument to
which the Selling Stockholder is a party or by which the Selling
Stockholder may be bound or to which any of the property or assets of
the Selling Stockholder is subject.
(c) The Selling Stockholder has, and on the Closing Date will
have, valid and marketable title to the Shares to be sold by the Selling
Stockholder on such Closing Date free and clear of any lien, claim,
security interest or other encumbrance, including, without limitation,
any restriction on transfer, except as otherwise described in the
Registration Statement and Prospectus.
(d) The Selling Stockholder has, and on each Closing Date will
have, full legal fight, power and authorization, and any approval
required by law, to sell, assign, transfer and deliver the Shares to be
sold by the Selling Stockholder on such Closing Date in the manner
provided by this Agreement.
(e) Upon delivery of and payment for the Shares to be sold by the
Selling Stockholder pursuant to this Agreement, the several Underwriters
will receive valid and marketable title to such Shares free and clear of
any lien, claim, security interest or other encumbrance.
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(f) On the Effective Date, the Registration Statement complied,
and on the date of the Prospectus, the date any post-effective amendment
to the Registration Statement becomes effective, the date any supplement
or amendment to the Prospectus is filed with the Commission and each
Closing Date, the Registration Statement and the Prospectus (and any
amendment thereof or supplement thereto) will comply, in all material
respects, with the applicable provisions of the Securities Act and the
Rules and the rules and regulations of the Commission thereunder. The
Registration Statement did not, as of the Effective Date, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading; and on the other dates referred to
above, neither the Registration Statement nor the Prospectus, nor any
amendment thereof or supplement thereto, contained or will contain any
untrue statement of a material fact or omitted or will omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein not misleading. When any related preliminary
prospectus was first filed with the Commission (whether filed as part of
the Registration Statement or any amendment thereto or pursuant to Rule
424(a) of the Rules) and when any amendment thereof or supplement
thereto was first filed with the Commission, such preliminary prospectus
as amended or supplemented complied in all material respects with the
applicable provisions of the Securities Act and the Rules and did not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein not misleading. Notwithstanding the
foregoing, none of the representations and warranties in this paragraph
5(f) shall apply to statements in, or omissions from, the Registration
Statement or the Prospectus made in reliance upon, and in conformity
with the Underwriters' Information.
(g) The sale of Shares by the Selling Stockholder pursuant to
this Agreement is not prompted by the Selling Stockholder's knowledge of
any material information concerning the Company which is not set forth
in the Prospectus.
(h) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably
be expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
the Shares.
(i) The Selling Stockholder has no actual knowledge that any
representation or warranty of the Company set forth in Section 4 above
is untrue or inaccurate in any material respect.
(j) The Selling Stockholder has filed all Federal, state, local
and foreign tax returns which are required to be filed by it through the
date hereof, or has received extensions thereof, and has paid all taxes
shown on such returns and all assessments received by it to the extent
that the same are material and have become due, and there are no tax
audits or investigations pending, which if adversely determined would
have a Material Adverse Effect;
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nor are there any material proposed additional tax assessments against
the Selling Stockholder.
6. Conditions of the Underwriters' Obligations. The obligations
of the Underwriters under this Agreement are several and not joint. The
respective obligations of the Underwriters to purchase the Shares are
subject to each of the following terms and conditions:
(a) Notification that the Registration Statement has become
effective shall have been received by the Representatives and the
Prospectus shall have been timely filed with the Commission in
accordance with Section 7(a) of this Agreement.
(b) No order preventing or suspending the use of any preliminary
prospectus or the Prospectus shall have been or shall be in effect and
no order suspending the effectiveness of the Registration Statement
shall be in effect and no proceedings for such purpose shall be pending
before or threatened by the Commission, and any requests for additional
information on the part of the Commission (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been
complied with to the satisfaction of the Commission and the
Representatives.
(c) The representations and warranties of the Company and the
Selling Stockholder contained in this Agreement and in the certificates
delivered pursuant to Sections 6(d) and 6(e) shall be true and correct
when made and on and as of each Closing Date as if made on such date and
the Company and the Selling Stockholder shall have performed all
covenants and agreements and satisfied all the conditions contained in
this Agreement required to be performed or satisfied by them at or
before such Closing Date.
(d) The Representatives shall have received on each Closing Date
a certificate, addressed to the Representatives and dated such Closing
Date, of the chief executive officer or chief operating officer and the
chief financial officer or chief accounting officer of the Company to
the effect that (i) the signers of such certificate have carefully
examined the Registration Statement, the Prospectus and this Agreement
and that the representations and warranties of the Company in this
Agreement are true and correct on and as of such Closing Date with the
same effect as if made on such Closing Date and the Company has
performed all covenants and agreements and satisfied all conditions
contained in this Agreement required to be performed or satisfied by it
at or prior to such Closing Date, and (ii) no stop order suspending the
effectiveness of the Registration Statement has been issued and to the
best of their knowledge, no proceedings for that purpose have been
instituted or are pending under the Securities Act.
(e) The Representatives shall have received on each Closing Date
a certificate, addressed to the Representatives and dated such Closing
Date, of the Selling Stockholder, to the effect that the Selling
Stockholder has carefully examined the Registration Statement,
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the Prospectus and this Agreement and that the representations and
warranties of the Company and the Selling Stockholder in this Agreement
are true and correct on and as of such Closing Date with the same effect
as if made on such Closing Date and each of the Company and the Selling
Stockholder has performed all covenants and agreements and satisfied all
conditions contained in this Agreement required to be performed or
satisfied by it at or prior to such Closing Date.
(f) The Representatives shall have received on the Effective
Date, at the time this Agreement is executed and on each Closing Date a
signed letter from BDO Seidman LLP addressed to the Representatives and
dated, respectively, the Effective Date, the date of this Agreement and
each such Closing Date, in form and substance reasonably satisfactory to
the Representatives, confirming that they are independent accountants
within the meaning of the Securities Act and the Rules, that the
response to Item 10 of the Registration Statement is correct insofar as
it relates to them and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included in the Registration
Statement and the Prospectus and reported on by them comply as to
form in all material respects with the applicable accounting
requirements of the Securities Act and the Rules;
(ii) on the basis of a reading of the amounts included in
the Registration Statement and the Prospectus under the headings
"Summary Financial Data" and "Selected Financial Data," carrying
out certain procedures (but not an examination in accordance with
generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the
comments set forth in such letter, a reading of the minutes of
the meetings of the stockholders and directors of the Company,
and inquiries of certain officials of the Company who have
responsibility for financial and accounting matters of the
Company as to transactions and events subsequent to the date of
the latest audited financial statements, except as disclosed in
the Registration Statement and the Prospectus, nothing came to
their attention which caused them to believe that:
(A) the amounts in "Summary Financial Data," and
"Selected Financial Data" included in the Registration
Statement and the Prospectus do not agree with the
corresponding amounts in the audited and unaudited
financial statements from which such amounts were
derived; or
(B) with respect to the Company, there were, at a
specified date not more than five business days prior to
the date of the letter, any increases in the current
liabilities and long-term liabilities of the Company or
any decreases in net income or in working capital or the
stockholders' equity in the Company, as compared with the
amounts shown on the Company's audited balance sheet for
the fiscal year January 31, 1999 and the three months
ended April 30, 1999 included in the Registration
Statement; and
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<PAGE>
(iii) they have performed certain other procedures as may
be permitted under Generally Acceptable Auditing Standards,
including a review under Statement of Accounting Standards No. 71
of unaudited financial information included in the Prospectus, as
a result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company) set forth in the
Registration Statement and the Prospectus and reasonably
specified by the Representatives agrees with the accounting
records of the Company.
(iv) based upon the procedures set forth in clauses (ii)
and (iii) above and a reading of the amounts included in the
Registration Statement under the headings "Summary Financial
Data" and "Selected Financial Data" included in the Registration
Statement and Prospectus and a reading of the financial
statements from which certain of such data were derived, nothing
has come to their attention that gives them reason to believe
that the "Summary Financial Data" and "Selected Financial Data"
included in the Registration Statement and Prospectus do not
comply as to the form in all material respects with the
applicable accounting requirements of the Securities Act and the
Rules or that the information set forth therein is not fairly
stated in relation to the financial statements included in the
Registration Statement or Prospectus from which certain of such
data were derived are not in conformity with generally accepted
accounting principles applied on a basis substantially consistent
with that of the audited financial statements included in the
Registration Statement and Prospectus.
References to the Registration Statement and the
Prospectus in this paragraph (f) are to such documents as amended
and supplemented at the date of the letter.
(g) The Representatives shall have received on each Closing Date
from Greenbaum, Rowe, Smith, Ravin, Davis & Himmel LLP, counsel for the
Company, an opinion, addressed to the Representatives and dated such
Closing Date, and stating in effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the
Commonwealth of Massachusetts. To the best of such counsel's
knowledge, the Company has no subsidiary and does not control,
directly or indirectly, any corporation, partnership, joint
venture, association or other business organization. The Company
is duly qualified and in good standing as a foreign corporation
in each jurisdiction in which the character or location of its
assets or properties (owned, leased or licensed) or the nature of
its businesses makes such qualification necessary, except for
such jurisdictions where the failure to so qualify would not have
a Material Adverse Effect.
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<PAGE>
(ii) The Company has all requisite corporate power and
authority to own, lease and license its assets and properties and
conduct its business as now being conducted and as described in
the Registration Statement and the Prospectus and to enter into,
deliver and perform this Agreement and to issue and sell the
Shares other than those required under the Securities Act and
state and foreign Blue Sky laws.
(iii) The Company has authorized and issued capital stock
as set forth in the Registration Statement and the Prospectus
under the caption "Capitalization"; the certificates evidencing
the Shares are in due and proper legal form and have been duly
authorized for issuance by the Company; all of the outstanding
shares of Common Stock of the Company have been duly and validly
authorized and issued and are fully paid and nonassessable and
none of them was issued in violation of any preemptive or other
similar right. The Shares when issued and sold pursuant to this
Agreement will be duly and validly issued, outstanding, fully
paid and nonassessable and none of them will have been issued in
violation of any preemptive or other similar right. To the best
of such counsel's knowledge, except as disclosed in the
Registration Statement and the Prospectus, there are no
preemptive rights or any restriction upon the voting or transfer
of any securities of the Company pursuant to the Company's
charter, articles of organization, or bylaws or other governing
documents or any other instrument to which the Company is a party
or by which it may be bound. To the best of such counsel's
knowledge, except as disclosed in the Registration Statement and
the Prospectus, there is no outstanding option, warrant or other
right calling for the issuance of, and no commitment, plan or
arrangement to issue, any share of stock of the Company or any
security convertible into, exercisable for, or exchangeable for
stock of the Company.
(iv) All necessary corporate action has been duly and
validly taken by the Company to authorize the execution, delivery
and performance of this Agreement, and the issuance and sale of
the Shares. This Agreement has been duly and validly authorized,
executed and delivered by the Company and constitutes the legal,
valid and binding obligation of the Company and the Selling
Stockholder enforceable against the Company and the Selling
Stockholder in accordance with its terms except (A) as such
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and by
general equitable principles and (B) to the extent that rights to
indemnity or contribution under this Agreement may be limited by
Federal or state securities laws or the public policy underlying
such laws.
(v) Neither the execution, delivery and performance of
this Agreement by the Company nor the consummation of any of the
transactions contemplated hereby (including, without limitation,
the issuance and sale by the Company of the Shares) will give
rise to a right to terminate or accelerate the due date of any
payment due under, or conflict with or result in the breach of
any term or provision of, or constitute a default (or any event
which with notice or lapse of time, or both, would
16
<PAGE>
constitute a default) under, or require consent or waiver under,
or result in the execution or imposition of any lien, charge or
encumbrance upon any properties or assets of the Company pursuant
to the terms of any indenture, mortgage, deed trust, note or
other agreement or instrument of which such counsel is aware and
to which the Company is a party or by which it or any of its
properties or businesses is bound, or any franchise, license,
permit, judgment, decree, order, statute, rule or regulation of
which such counsel is aware or violate any provision of the
charter, articles of organization, or bylaws of the Company.
(vi) To the best of such counsel's knowledge, no default
exists, and no event has occurred which with notice or lapse of
time, or both, would constitute a default, in the due performance
and observance of any term, covenant or condition by the Company
of any indenture, mortgage, deed of trust, note or any other
agreement or instrument to which the Company is a party or by
which it or any of its assets or properties or businesses may be
bound or affected, where the consequences of such default would
have a Material Adverse Effect.
(vii) To the best of such counsel's knowledge, the
Company is not in violation of any term or provision of its
charter, articles of organization, or bylaws or any franchise,
license, permit, judgment, decree, order, statute, rule or
regulation, where the consequences of such violation would have a
Material Adverse Effect.
(viii) No consent, approval, authorization or order of
any court or governmental agency or regulatory body is required
for the execution, delivery of performance of this Agreement by
the Company or the consummation of the transactions contemplated
hereby or thereby, except such as have been obtained under the
Securities Act and such as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution
of the Shares by the several Underwriters.
(ix) To the best of such counsel's knowledge, there is no
litigation or governmental or other proceeding or investigation,
before any court or before or by any public body or board pending
or threatened against, or involving the assets, properties or
businesses of, the Company which would have a Material Adverse
Effect.
(x) The statements in the Prospectus under the captions
"Description of Capital Stock," "The Company," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources,"
"Business-Intellectual Property, Trademarks and Proprietary
Rights" "Shares Eligible for Future Sale," "Management-Employment
Agreements," "Management-Stock Option Plan, ""Management-Director
Stock Option Plan, " " Management-Osicom Stock Options" and
"Certain Relationships and Related Party Transactions," insofar
as such statements constitute a summary of documents referred to
therein or matters
17
<PAGE>
of law, are fair summaries in all material respects and
accurately present the information called for with respect to
such documents and matters. Accurate copies of all contracts and
other documents required to be filed as exhibits to, or described
in, the Registration Statement have been so filed with the
Commission or are fairly described in the Registration Statement,
as the case may be.
(xi) The Registration Statement, all preliminary
prospectuses and the Prospectus and each amendment of supplement
thereto (except for the financial statements and schedules and
other financial and statistical data included therein, as to
which such counsel expresses no opinion) comply as to form in all
material respects with the requirements of the Securities Act and
the Rules.
(xii) The Registration Statement is effective under the
Securities Act, and no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for
that purpose have been instituted or are threatened, pending or
contemplated. Any required filing of the Prospectus and any
supplement thereto pursuant to Rule 424(b) under the Securities
Act has been made in the manner and within the time period
required by such Rule 424(b).
(xiii) The Shares have been approved for listing on the
Nasdaq National Market.
(xiv) The capital stock of the Company conforms in all
material respects to the description thereof contained in the
Prospectus under the caption "Description of Capital Stock."
(xv) The Company is not an "investment company" or an
entity controlled by an "investment company" as such terms are
defined in the Investment Company Act of 1940, as amended.
(xvi) To the best of such counsel's knowledge, (A) The
Company is in compliance in all material respects with any and
all applicable Environmental Laws; (B) the Company has not
received any notice from any governmental authority or third
party of an asserted claim under any Environmental Law; (C) the
Company has received all permits, licenses or other approvals
required of it under applicable Environmental Laws to conduct its
business and is in compliance with all terms and conditions of
any such permit, license or approval, except where such failure
to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits,
licenses or other approvals would not, singly or in the
aggregate, have a Material Adverse Effect; and (D) no property
which is or has been owned, leased or occupied by the Company has
been designated as a Superfund site pursuant to the Comprehensive
Environmental Response, Compensation of Liability Act of 1980, as
amended (42 U.S.C. Section 9601, et
18
<PAGE>
seq.), or otherwise designated as a contaminated site under
applicable state or local law.
To the extent deemed advisable by such counsel, they may
rely as to matters of fact on certificates of responsible officers of the
Company and public officials and on the opinions of other counsel satisfactory
to the Representatives as to matters which are governed by laws other than the
laws of the State of New York, and the Federal laws of the United States;
provided that such counsel shall state that in their opinion the Underwriters
and they are justified in relying on such other opinions. Copies of such
certificates and other opinions shall be furnished to the Representatives and
counsel for the Underwriters.
In addition, such counsel shall state that such counsel
has participated in conferences with officers and other representatives of the
Company, representatives of the Representatives and representatives of the
independent certified public accountants of the Company, at which conferences
the contents of the Registration Statement and the Prospectus and related
matters were discussed and, although such counsel is not passing upon and does
not assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectus (except as
specified in the foregoing opinion), on the basis of the foregoing, no facts
have come to the attention of such counsel which lead such counsel to believe
that the Registration Statement at the time it became effective and on the date
of the opinion (except with respect to the financial statements and notes and
schedules thereto and other financial data, as to which such counsel need
express no belief) contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus as amended or
supplemented (except with respect to the financial statements, notes and
schedules thereto and other financial data, as to which such counsel need make
no statement) on the date thereof and on the date of the opinion contained any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(h) The Representatives shall have received on each Closing Date
from Greenbaum, Rowe, Smith, Ravin, Davis & Himmel LLP, counsel for the
Selling Stockholder, an opinion, addressed to the Representatives and
dated such Closing Date. and stating in effect that:
(i) This Agreement has been duly and validly executed and
delivered by or on behalf of the Selling Stockholder.
(ii) This Agreement constitutes the legal, valid and
binding obligation of the Selling Stockholder enforceable against
the Selling Stockholder in accordance with its terms except (A)
as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and by
general equitable principles and (B) to the extent that rights to
indemnity or contribution under this Agreement may be limited by
Federal or state securities laws or the public policy underlying
such
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<PAGE>
laws; and the Selling Stockholder has full legal right and
authority to enter into this Agreement and to sell, transfer and
deliver in the manner provided in this Agreement, the Shares to
be sold by the Selling Stockholder hereunder.
(iii) The transfer and sale by the Selling Stockholder of
the Shares to be sold by the Selling Stockholder as contemplated
by this Agreement will not conflict with, result in a breach of,
or constitute a default under any agreement or instrument known
to such counsel to which the Selling Stockholder is a party or by
which the Selling Stockholder or any of its properties may be
bound, or any franchise, license, permit, judgment, decree,
order, statute, rule or regulation.
(iv) All of the Selling Stockholder's rights in the
Shares to be sold by the Selling Stockholder pursuant to this
Agreement, have been transferred to the Underwriters who have
severally purchased such Shares pursuant to this Agreement, free
and clear of adverse claims, assuming for purposes of this
opinion that the Underwriters purchased the same in good faith
without notice of any adverse claims.
(v) No consent, approval, authorization, license,
certificate, permit or order of any court, governmental or
regulatory agency, authority or body or financial institution is
required in connection with the performance of this Agreement by
the Selling Stockholder or the consummation of the transactions
contemplated hereby, including the delivery and sale of the
Shares to be delivered and sold by the Selling Shareholder,
except such as may be required under state securities or blue sky
laws in connection with the purchase and distribution of the
Shares by the several Underwriters.
To the extent deemed advisable by such counsel, they may rely as to
matters of fact on certificates of the Selling Stockholder and on the opinions
of other counsel satisfactory to the Representatives as to matters which are
governed by laws other than the laws of the State of New York, the laws of the
State of New Jersey or the Federal laws of the United States; provided that such
counsel shall state that in their opinion the Underwriters and they are
Justified in relying on such other opinions. Copies of such certificates and
other opinions shall be furnished to the Representatives and counsel for the
Underwriters.
(i) All proceedings taken in connection with the sale of the Firm
Shares and the Option Shares as herein contemplated shall be reasonably
satisfactory in form and substance to the Representatives and their
counsel, and the Underwriters shall have received from Morgan, Lewis &
Bockius LLP a favorable opinion, addressed to the Representatives and
dated such Closing Date, with respect to the Shares, the Registration
Statement and the Prospectus, and such other related matters, as the
Representatives may reasonably request, and the Company shall have
furnished to Morgan, Lewis & Bockius LLP such documents as they may
reasonably request for the purpose of enabling them to pass upon such
matters.
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<PAGE>
(j) The Representatives shall have received copies of the Lock-up
Agreements executed by each entity or person described in Section 4(n).
(k) The Company and the Selling Stockholder shall have furnished
or caused to be furnished to the Representatives such further
certificates or documents as the Representatives shall have reasonably
requested.
7. Covenants of the Company and the Selling Stockholder.
(a) The Company covenants and agrees as follows:
(i) The Company shall prepare the Prospectus in a form
approved by the Representatives and file such Prospectus pursuant
to Rule 424(b) under the Securities Act not later than the
Commission's close of business on the second business day
following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule
430A(a)(3) under the Securities Act.
(ii) The Company shall promptly advise the
Representatives in writing (A) when any amendment to the
Registration Statement shall have become effective, (B) of any
request by the Commission for any amendment of the Registration
Statement or the Prospectus or for any additional information,
(C) of the prevention or suspension of the use of any preliminary
prospectus or the Prospectus or of the issuance by the Commission
of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any
proceeding for that purpose and (D) of the receipt by the Company
of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose. The
Company shall not file any amendment of the Registration
Statement or supplement to the Prospectus unless the Company has
furnished the Representatives a copy for its review prior to
filing and shall not file any such proposed amendment or
supplement to which the Representatives reasonably object. The
Company shall use its best efforts to prevent the issuance of any
such stop order and, if issued, to obtain as soon as possible the
withdrawal thereof.
(iii) If, at any time when a prospectus relating to the
Shares is required to be delivered under the Securities Act and
the Rules, any event occurs as a result of which the Prospectus
as then amended or supplemented would include any untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it
shall be necessary to amend or supplement the Prospectus to
comply with the Securities Act or the Rules, the Company promptly
shall prepare and file with the Commission, subject to the second
sentence of paragraph (ii) of this Section 7(a), an amendment or
supplement which shall correct such statement or omission or an
amendment which shall effect such compliance.
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(iv) The Company shall make generally available to its
security holders and to the Representatives as soon as
practicable, but not later than forty-five (45) days after the
end of the twelve month period beginning at the end of the fiscal
quarter of the Company during which the Effective Date occurs (or
ninety (90) days if such twelve month period coincides with the
Company's fiscal year), an earning statement (which need not be
audited) of the Company, covering such twelve month period, which
shall satisfy the provisions of Section 11(a) of the Securities
Act or Rule 158 of the Rules.
(v) The Company shall furnish to the Representatives and
counsel for the Underwriters, without charge, signed copies of
the Registration Statement (including all exhibits thereto and
amendments thereof) and to each other Underwriter a copy of the
Registration Statement (without exhibits thereto) and all
amendments thereof and, so long as delivery of a prospectus by an
Underwriter or dealer may be required by the Securities Act or
the Rules, as many copies of any preliminary prospectus and the
Prospectus and any amendments thereof and supplements thereto as
the Representatives may reasonably request.
(vi) The Company shall cooperate with the Representatives
and their counsel in endeavoring to qualify the Shares for offer
and sale in connection with the offering under the laws of such
jurisdictions as the Representatives may designate and shall
maintain such qualifications in effect so long as required for
the distribution of the Shares; provided, however, that the
Company shall not be required in connection therewith, as a
condition thereof, to qualify as a foreign corporation or to
execute a general consent to service of process in any
Jurisdiction or subject itself to taxation as doing business in
any jurisdiction.
(vii) For a period of five years after the date of this
Agreement, the Company shall supply to the Representatives, and
to each other Underwriter who may so request in writing, copies
of such financial statements and other periodic and special
reports as the Company may from time to time distribute generally
to the holders of any class of its capital stock and to furnish
to the Representatives a copy of each annual or other report it
shall be required to file with the Commission (including the
Report on Form SR required by Rule 463 of the Rules).
(viii) Without the prior written consent of CIBC World
Markets Corp., for a period of three hundred sixty-five (365)
days after the date of this Agreement, the Company shall not
issue, sell or register with the Commission (other than on Form
S-8 or on any successor form), or otherwise dispose of, directly
or indirectly, any equity securities of the Company (or any
securities convertible into, exercisable for or exchangeable for
equity securities of the convertible Company), except for the
issuance of the Shares pursuant to the Registration Statement and
the issuance of shares pursuant to the Company's existing stock
option plans as described in the
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Registration Statement and the Prospectus. In the event that
during this period, (i) any shares are issued pursuant to the
Company's existing stock option plans that are exercisable during
such three hundred sixty-five (365) day period or (ii) any
registration is effected on Form S-8 or on any successor form
relating to shares that are exercisable during such three hundred
sixty-five (365) day period, the Company shall obtain the written
agreement of such grantee or purchaser or holder of such
registered securities that, for a period of one hundred eighty
(180) days after the date of this Agreement, such person will
not, without the prior written consent of CIBC World Markets
Corp., offer for sale, sell, distribute, grant any option for the
sale of, or otherwise dispose of, directly or indirectly, or
exercise any registration rights with respect to, any shares of
Common Stock (or any securities convertible into, exercisable
for, or exchangeable for any shares of Common Stock) owned by
such person. Without the prior written consent of CIBC World
Markets Corp., the Company shall not file any registration
statement on Form S-8 or any successor form with the Commission
for a period of one hundred eighty (180) days after the date of
this Agreement.
(ix) On or before completion of this offering, the
Company shall make all filings required under applicable
securities laws and by the Nasdaq National Market (including any
required registration under the Exchange Act).
(x) The Company will apply the net proceeds from the
offering of the Shares in the manner set forth under "Use of
Proceeds" in the Prospectus.
(b) The Company agrees to pay, or reimburse if paid by the
Representatives, whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated, all costs and expenses
incident to the public offering of the Shares and the performance of the
obligations of the Company under this Agreement including those relating
to: (i) the preparation, printing, filing and distribution of the
Registration Statement including all exhibits thereto, each preliminary
prospectus, the Prospectus, all amendments and supplements to the
Registration Statement and the Prospectus, and the printing, filing and
distribution of this Agreement; (ii) the preparation and delivery of
certificates for the Shares to the Underwriters; (iii) the registration
or qualification of the Shares for offer and sale under the securities
or Blue Sky laws of the various jurisdictions referred to in Section
7(a)(vi), including the reasonable fees and disbursements of counsel for
the Underwriters in connection with such registration and qualification
and the preparation, printing, distribution and shipment of preliminary
and supplementary Blue Sky memoranda; (iv) the furnishing (including
costs of shipping and mailing) to the Representatives and to the
Underwriters of copies of each preliminary prospectus, the Prospectus
and all amendments or supplements to the Prospectus, and of the several
documents required by this Section to be so furnished, as may be
reasonably requested for use in connection with the offering and sale of
the Shares by the Underwriters or by dealers to whom Shares may be sold;
(v) the filing fees of the NASD in connection with its review of the
terms of the public offering and reasonable fees and disbursements of
counsel for the Underwriters in connection with such review; (vi) the
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furnishing (including costs of shipping and mailing) to the
Representatives and to the Underwriters of copies of all reports and
information required by Section 7(a)(vii); (vii) inclusion of the Shares
for quotation on the Nasdaq National Market; and (viii) all transfer
taxes, if any, with respect to the sale and delivery of the Shares by
the Company to the Underwriters. Subject to the provisions of Section
10, the Underwriters agree to pay, whether or not the transactions
contemplated hereby are consummated or this Agreement is terminated, all
costs and expenses incident to the performance of the obligations of the
Underwriters under this Agreement not payable by the Company pursuant to
the preceding sentence, including, without limitation, the fees and
disbursements of counsel for the Underwriters.
(c) The Selling Stockholder agrees that without the prior written
consent of CIBC World Markets Corp., the Selling Stockholder will not
directly or indirectly, (i) make any offer, sale, assignment, transfer,
encumbrance or contract to sell, grant an option to purchase or other
disposition of any Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter into any swap
or other agreement that transfers in whole or in part any of the
economic consequences of ownership of the shares of Common Stock or any
securities convertible into, or exercisable or exchangeable for, shares
of Common Stock beneficially owned (within the meaning of Rule 13d-3
promulgated under the Exchange Act) by the undersigned on the date
hereof or hereafter acquired for a period of 365 days subsequent to
the date of the Underwriting Agreement. The Selling Stockholder further
agrees with the Underwriters that, for a period of 365 days subsequent
to the date of the Underwriting Agreement, neither it nor any of its
subsidiaries, but not including the Company, shall acquire any shares
of Voting Common Stock of the Company or engage in any transaction that
would result in the Selling Stockholder or any of its subsidiaries,
but not including the Company, holding Voting Common Stock of the
Company.
8. Indemnification.
(a) The Company and the Selling Stockholder agree, jointly and
severally, to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act
against any and all losses, claims, damages and liabilities, joint or
several (including any reasonable investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement
of, any action, suit or proceeding or any claim asserted), to which
they, or any of them, may become subject under the Securities Act, the
Exchange Act or other Federal or state law or regulation, at common law
of otherwise, insofar as such losses, claims, damages or liabilities
arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in any preliminary
prospectus, the Registration Statement or the Prospectus or any
amendment thereof or supplement thereto, or arise out of or are based
upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, (ii) in whole or in part any breach of the
representations and
24
<PAGE>
warranties set forth in Section 4 hereof, or (iii) in whole or in part
any failure of the Company or the Selling Stockholder to perform any of
its respective obligations hereunder or under law; provided, however,
that such indemnity shall not inure to the benefit of any Underwriter
(or any person controlling such Underwriter) on account of any losses,
claims, damages or liabilities arising from the sale of the Shares to
any person by such Underwriter if such untrue statement or omission or
alleged untrue statement or omission was made in such preliminary
prospectus, the Registration Statement or the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with the
Underwriters' Information.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, the Selling Stockholder and
each person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, each
director of the Company, and each officer of the Company who signs the
Registration Statement, to the same extent as the foregoing indemnity
from the Company and the Selling Stockholder to each Underwriter, but
only insofar as such losses, claims, damages or liabilities arise out of
or are based upon any untrue statement or omission or alleged untrue
statement or omission which was made in any preliminary prospectus, the
Registration Statement or the Prospectus, or any amendment thereof or
supplement thereto in reliance upon or in conformity with the
Underwriters' Information under the caption "Underwriting" in the
Prospectus; provided, however, that the obligation of each Underwriter
to indemnify the Company or the Selling Stockholder (including any
controlling person, director or officer thereof) shall be limited to the
net proceeds received by the Company from such Underwriter.
(c) Any party that proposes to assert the right to be indemnified
under this Section will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in
respect of which a claim is to be made against an indemnifying party or
parties under this Section, notify each such indemnifying party of the
commencement of such action, suit or proceeding, enclosing a copy of all
papers served. No indemnification provided for in Section 8(a) or 8(b)
shall be available to any party who shall fail to give notice as
provided in this Section 8(c) if the party to whom notice was not given
was unaware of the proceeding to which such notice would have related
and was prejudiced by the failure to give such notice but the omission
so to notify such indemnifying party of any such action, suit or
proceeding shall not relieve it from any liability that it may have to
any indemnified party for contribution or otherwise than under this
Section. In case any such action, suit or proceeding shall be brought
against any indemnified party and it shall notify the indemnifying party
of the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof and the approval by the
indemnified party of such counsel, the indemnifying party shall not be
liable to such indemnified party for any legal or other expenses, except
as provided below and except for
25
<PAGE>
the reasonable costs of investigation subsequently incurred by such
indemnified party in connection with the defense thereof. The
indemnified party shall have the right to employ its counsel in any such
action, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the employment of counsel
by such indemnified party has been authorized in writing by the
indemnifying parties, (ii) the indemnified party shall have reasonably
concluded that there may be a conflict of interest between the
indemnifying parties and the indemnified party in the conduct of the
defense of such action (in which case the indemnifying parties shall not
have the right to direct the defense of such action on behalf of the
indemnified party) or (iii) the indemnifying parties shall not have
employed counsel to assume the defense of such action within a
reasonable time after notice of the commencement thereof, in each of
which cases the fees and expenses of counsel shall be at the expense of
the indemnifying parties. An indemnifying party shall not be liable for
any settlement of any action, suit, proceeding or claim effected without
its written consent, which consent shall not be unreasonably withheld or
delayed.
9. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for
in Section 8(a) or 8(b) is due in accordance with its terms but for any
reason is held to be unavailable to or insufficient to hold harmless an
indemnified party under Section 8(a) or 8(b), then each indemnifying
party shall contribute to the aggregate losses, claims, damages and
liabilities (including any investigation, legal and other expenses
reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted,
but after deducting any contribution received by any person entitled
hereunder to contribution from any person who may be liable for
contribution) to which the indemnified party may be subject in such
proportion as is appropriate to reflect the relative benefits received
by the Company and the Selling Stockholder on the one hand and the
Underwriters on the other from the offering of the Shares or, if such
allocation is not permitted by applicable law or indemnification is not
available as a result of the indemnifying party not having received
notice as provided in Section 8 hereof, in such proportion as is
appropriate to reflect not only the relative benefits referred to above
but also the relative fault of the Company and the Selling Stockholder
on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company, the
Selling Stockholder and the Underwriters shall be deemed to be in the
same proportion as (x) the total proceeds from the offering (net of
underwriting discounts but before deducting expenses) received by the
Company or the Selling Stockholder, as set forth in the table on the
cover page of the Prospectus, bear to (y) the underwriting discounts
received by the Underwriters, as set forth in the table on the cover
page of the Prospectus. The relative fault of the Company and the
Selling Stockholder or the Underwriters shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement
of a material fact related to information supplied by the Company and
the Selling Stockholder or the Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, the Selling Stockholder
and the Underwriters agree that it would not be just and
26
<PAGE>
equitable if contribution pursuant to this Section 9 were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 9, (i) in no case shall
any Underwriter (except as may be provided in the Agreement Among
Underwriters) be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such
Underwriter hereunder and (ii) the Company and the Selling Stockholder
shall be liable and responsible for any amount in excess of such
underwriting discount; provided, however, that no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. For purposes of
this Section 9, each person, if any, who controls an Underwriter within
the meaning of Section 15 of the Securities Act or Section 20(a) of the
Exchange Act shall have the same rights to contribution as such
Underwriter, and each person, if any, who controls the Company within
the meaning of the Section 15 of the Securities Act or Section 20(a) of
the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the
same rights to contribution as the Company, subject in each case to
clauses (i) and (ii) in the immediately preceding sentence of this
Section 9. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding
against such party in respect of which a claim for contribution may be
made against another party or parties under this Section, notify such
party or parties from whom contribution may be sought, but the omission
so to notify such party or parties from whom contribution may be sought
shall not relieve the party or parties from whom contribution may be
sought from any other obligation it or they may have hereunder or
otherwise than under this Section. No party shall be liable for
contribution with respect to any action, suit, proceeding or claim
settled without its written consent. The Underwriter's obligations to
contribute pursuant to this Section 9 are several in proportion to their
respective underwriting commitments and not joint.
10. Termination. This Agreement may be terminated with respect to
the Shares to be purchased on a Closing Date by the Representatives by
notifying the Company and the Selling Stockholder at any time
(a) in the absolute discretion of the Representatives at or
before any Closing Date: (i) if on or prior to such date, any domestic
or international event or act or occurrence has materially disrupted, or
in the opinion of the Representatives will in the future materially
disrupt, the securities markets; (ii) if there has occurred any new
outbreak or material escalation of hostilities or other calamity or
crisis the effect of which on the financial markets of the United States
is such as to make it, in the judgment of the Representatives,
inadvisable to proceed with the offering; (iii) if there shall be such a
material adverse change in general financial, political or economic
conditions or the effect of international conditions on the financial
markets in the United States is such as to make it, in the judgment of
the Representatives, inadvisable or impracticable to market the Shares;
(iv) if trading in the Shares has been suspended by the Commission or
trading generally on the New York Stock
27
<PAGE>
Exchange, Inc., on the American Stock Exchange, Inc. or the Nasdaq
National Market has been suspended or limited, or minimum or maximum
ranges for prices for securities shall have been fixed, or maximum
ranges for prices for securities have been required, by said exchanges
or by order of the Commission, the National Association of Securities
Dealers, Inc., or any other governmental or regulatory authority; or (v)
if a banking moratorium has been declared by any state or Federal
authority; or (vi) if, in the judgment of the Representatives, there has
occurred a Material Adverse Effect, or
(b) at or before any Closing Date, that any of the conditions
specified in Section 6 shall not have been fulfilled when and as
required by this Agreement.
If this Agreement is terminated pursuant to any of its
provisions, neither the Company nor the Selling Stockholder shall be under any
liability to any Underwriter, and no Underwriter shall be under any liability to
the Company, except that (y) if this Agreement is terminated by the
Representatives or the Underwriters because of any failure, refusal or inability
on the part of the Company or the Selling Stockholder to comply with the terms
or to fulfill any of the conditions of this Agreement, the Company will
reimburse the Underwriters for all out-of-pocket expenses (including the
reasonable fees and disbursements of their counsel) incurred by them in
connection with the proposed purchase and sale of the Shares or in contemplation
of performing their obligations hereunder and (z) no Underwriter who shall have
failed or refused to purchase the Shares agreed to be purchased by it under this
Agreement, without some reason sufficient hereunder to justify cancellation or
termination of its obligations under this Agreement, shall be relieved of
liability to the Company, the Selling Stockholder or to the other Underwriters
for damages occasioned by its failure or refusal.
11. Substitution of Underwriters. If one or more of the
Underwriters shall fail (other than for a reason sufficient to justify
the cancellation or termination of this Agreement under Section 10) to
purchase on any Closing Date the Shares agreed to be purchased on such
Closing Date by such Underwriter or Underwriters, the Representatives
may find one or more substitute underwriters to purchase such Shares or
make such other arrangements as the Representatives may deem advisable
or one or more of the remaining Underwriters may agree to purchase such
Shares in such proportions as may be approved by the Representatives, in
each case upon the terms set forth in this Agreement. If no such
arrangements have been made by the close of business on the business day
following such Closing Date:
(a) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall not exceed 10% of the Shares
that all the Underwriters are obligated to purchase on such Closing
Date, then each of the nondefaulting Underwriters shall be obligated to
purchase such Shares on the terms herein set forth in proportion to
their respective obligations hereunder; provided, that in no event shall
the maximum number of Shares that any Underwriter has agreed to purchase
pursuant to Section 1 be increased pursuant to this Section 11 by more
than one-ninth of such number of Shares without the written consent of
such Underwriter, or
28
<PAGE>
(b) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall exceed 10% of the Shares that
all the Underwriters are obligated to purchase on such Closing Date,
then the Company shall be entitled to one additional business day within
which it may, but is not obligated to, find one or more substitute
underwriters reasonably satisfactory to the Representatives to purchase
such Shares upon the terms set forth in this Agreement.
In any such case, either the Representatives or the Company shall
have the right to postpone the applicable Closing Date for a period of not more
than five business days in order that necessary changes and arrangements
(including any necessary amendments or supplements to the Registration Statement
or Prospectus) may be effected by the Representatives and the Company. If the
number of Shares to be purchased on such Closing Date by such defaulting
Underwriter or Underwriters shall exceed 10% of the Shares that all the
Underwriters are obligated to purchase on such Closing Date, and none of the
nondefaulting Underwriters or the Company shall make arrangements pursuant to
this Section within the period stated for the purchase of the Shares that the
defaulting Underwriters agreed to purchase, this Agreement shall terminate with
respect to the Shares to be purchased on such Closing Date without liability on
the part of any nondefaulting Underwriter to the Company or the Selling
Stockholder and without liability on the part of the Company, except in both
cases as provided in Sections 7(b), 8, 9 and 10. The provisions of this Section
shall not in any way affect the liability of any defaulting Underwriter to the
Company or the nondefaulting Underwriters arising out of such default. A
substitute underwriter hereunder shall become an Underwriter for all purposes of
this Agreement.
12. Miscellaneous. The respective agreements, representations,
warranties, indemnities and other statements of the Company or its
officers, of the Selling Stockholder and of the Underwriters set forth
in or made pursuant to this Agreement shall remain in full force and
effect, regardless of any investigation made by or on behalf of any
Underwriter or the Company or the Selling Stockholder or any of the
officers, directors or controlling persons referred to in Sections 8 and
9 hereof, and shall survive delivery of and payment for the Shares. The
provisions of Sections 7(b), 8, 9 and 10 shall survive the termination
or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the Underwriters,
the Company and the Selling Stockholder and their respective successors and
assigns, and, to the extent expressed herein, for the benefit of persons
controlling any of the Underwriters, or the Company, and directors and officers
of the Company, and their respective successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser of Shares from any
Underwriter merely because of such purchase. The obligations of the Selling
Stockholder shall be valid, binding and enforceable obligations of the Selling
Stockholder notwithstanding any bankruptcy, receivership, or liquidation
proceedings that may commence with regard to the Selling Stockholder or its
assets.
29
<PAGE>
All notices and communications hereunder shall be in writing and
mailed or delivered or by telephone or telegraph if subsequently confirmed in
writing, (a) if to the Representatives, c/o CIBC World Markets Corp., One World
Financial Center, New York, New York 10281, Attention: ________________________,
with a copy to Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia,
Pennsylvania 19103, Attention: N. Jeffrey Klauder, Esq. and (b) if to the
Company, to its agent for service as such agent's address appears on the cover
page of the Registration Statement with a copy to ___________________and (c) if
to the Selling Stockholder to with a copy to _________________________________.
This Agreement shall be governed by and construed in accordance
with the laws of the State of New York without regard to principles of conflict
of laws.
This Agreement may be signed in any number of counterparts, each
of which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
30
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among us.
Very truly yours,
NETSILICON, INC.
By
_________________________________
Title:
OSICOM TECHNOLOGIES, INC.
By
_________________________________
Title:
Confirmed:
CIBC WORLD MARKETS CORP.
U.S. BANCORP PIPER JAFFRAY INC.
Acting severally on behalf of itself
and as representative of the several
Underwriters named in Schedule I annexed hereto.
By CIBC WORLD MARKETS CORP.
By
_________________________________
Title:
31
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Firm Shares to
Be Purchased
------------
Name
- ----
<S> <C>
CIBC World Markets Corp.
U.S. Bancorp Piper Jaffray Inc.
_________
Total 5,000,000
=========
</TABLE>
32
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
RESTATED ARTICLES OF ORGANIZATION
(GENERAL LAWS, CHAPTER 156B, SECTION 74)
We, Cornelius Peterson VIII, President, and Daniel J. Sullivan, Chief
Financial Officer of NETsilicon, Inc., located at 411 Waverly Oaks Road,
Waltham, MA 02154, do hereby certify that the following Restatement of the
Articles of Organization was duly adopted at a meeting held on July 1, 1999 by a
vote of the directors and 10,000,000 shares of common stock of 10,000,000 shares
outstanding, being at least a majority of each type, class or series outstanding
and entitled to vote thereon:
ARTICLE I
The name of the corporation is:
NETsilicon, Inc.
ARTICLE II
The purpose of the corporation is to engage in the following
business activities:
To purchase, import, lease, or otherwise acquire; to invest in, own,
hold, use, license the use of, install, handle, maintain, service or repair; to
sell, pledge, mortgage, exchange, export, distribute, lease, assign and
otherwise dispose of, and generally to trade and deal in and with, as principal
or agent, at wholesale, retail, on commission or otherwise, goods, wares,
merchandise, commodities, articles of commerce and property of every kind and
description, including, without limitation, computers and computer-related
equipment; and any and all products, machinery, equipment programs and supplies
used or useful in connection therewith.
To do any and all acts and things or carry on any business herein
described either for itself or as nominee or agent for others.
To have and to exercise, without limitation, all of the powers granted
by Massachusetts law to, and to carry on any other business or activity which
may lawfully be carried on by, business corporations organized under the
Business Corporation Law, as amended from time to time, of Massachusetts,
whether or not related to those referred to in the foregoing paragraphs.
<PAGE>
ARTICLE III
State the total number of shares and par value, if any, of each class of stock
which the corporation is authorized to issue:
<TABLE>
<CAPTION>
WITHOUT PAR VALUE WITH PAR VALUE
- ----------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C>
TYPE NUMBER OF TYPE NUMBER OF PAR VALUE
SHARES SHARES
Common: none Common: 35,000,000 $.01
Preferred: none Preferred: 5,000,000 $.01
</TABLE>
ARTICLE IV
If more than one class of stock is authorized, state a distinguishing
designation for each class. Prior to the issuance of any shares of a class, if
shares of another class are outstanding, the corporation must provide a
description of the preferences, voting powers, qualifications, and special or
relative rights or privileges of that class and of each other class of which
shares are outstanding and of each series then established within any class.
ARTICLE 4A. COMMON STOCK
1. The authorized shares of Common Stock of the Corporation shall be
divided into two classes, of which twenty-six million (26,000,000) shares shall
be designated Voting Stock and nine million (9,000,000) shares shall be
designated Non-Voting Stock, and are beneficially owned by Osicom Technologies,
Inc., a New Jersey corporation ("Osicom").
2. The rights, preferences and limitations of the Voting Stock and the
Non-Voting Stock shall be equal and identical in all respects except that,
(a) holders of Voting Stock shall have voting rights with
respect to the business, management or affairs of the
Corporation to the extent that the matters are
submitted to the Stockholders of the Corporation for
a vote, and
(b) holders of Non-Voting Stock shall not be entitled to
vote upon any matters submitted to the Stockholders
of the Corporation for a vote, or unless otherwise
provided by law, to amend the Articles of
Organization to change the terms of the Non-Voting
Stock.
3. Upon the transfer of Non-Voting Stock to a non-Affiliate of Osicom,
such Non-Voting Stock shall immediately convert to Voting Stock, and the holders
of such Voting Stock shall be therefore have all rights associated with the
Voting Stock.
2
<PAGE>
4. For purposes of this Article,
(a) "Affiliate" means an officer, director, a stockholder
that is the beneficial owner of five percent (5%) or
more of the outstanding stock of Osicom, or a person
that directly, or indirectly through one or more
intermediaries, controls or is controlled by, or is
under common control with, Osicom; and
(b) "Control" means the possession, direct or indirect,
of the power to direct or cause the direction of the
management and policies of a person, whether through
the ownership of voting securities, by contract, or
otherwise.
ARTICLE 4B. PREFERRED STOCK
1. The preferred shares shall have such designation and relative
voting, dividend, liquidation and other rights, preferences and limitations as
may be stated in further amendments to the Restated Articles of Organization.
2. Amendments to the Restated Articles of Organization to accomplish
any of the following actions may be made by action of the Board of Directors,
without shareholder approval:
(a) the division of shares into classes and into series
within any class;
(b) the determination of the designation and number of
shares of any class or series;
(c) the determination of the relative rights, preferences
and limitations of the shares of any class or series;
(d) the change in the designation or number of shares or
the relative rights, preferences and limitations of
the shares of any theretofore or established class or
series, no shares of which have been issued;
(e) issuance of shares of any class or series,
convertible, at the option of the holders, or of the
corporation or both, into shares of any other class
or classes or of any series of the same or any other
class or classes and to set the terms thereof;
(f) the reduction in the number of shares authorized or
the stated capital of the corporation effected by a
reverse stock split;
3
<PAGE>
provided, however, in no event shall the Board of Directors
have any power to reduce the number of common shares to less than the number of
shares then outstanding.
ARTICLE V
The restrictions, if any, imposed by the Articles of Organization upon the
transfer of shares of stock of any class are: None
ARTICLE VI
Other lawful provisions, if any, for the conduct and regulation of the business
and affairs of the corporation, for its voluntary dissolution, or for limiting,
defining, or regulating the powers of the corporation, or of its directors or
stockholders, or of any class of stockholders:
ARTICLE 6A. INDEMNIFICATION
1. Except as limited by law or as provided in Paragraphs 2 and 3, each
Officer of this Corporation (and his heirs and personal representatives) shall
be indemnified by this Corporation against all expense incurred by him in
connection with each Proceeding in which he is involved as a result of his
serving or having served as an Officer of this Corporation or, at the request of
this Corporation, as a director, officer, employee or other agent of any other
organization.
1. No indemnification shall be provided to an Officer with respect to a
matter as to which it shall have been adjudicated in any proceeding that he did
not act in good faith in the reasonable belief that his action was in the best
interests of this Corporation.
2. In the event that a Proceeding is compromised or settled so as to
impose any liability or obligation upon an Officer or upon this Corporation, no
indemnification shall be provided to said Officer with respect to a matter if
this Corporation has obtained an opinion of counsel that with respect to said
matter said Officer did not act in good faith in the reasonable belief that his
action was in the best interests of this Corporation.
3. To the extent authorized by the Board of Directors or the
stockholders, this Corporation may pay indemnification in advance of final
disposition of a Proceeding, upon receipt of an undertaking by the person
indemnified to repay such indemnification if it shall be established that he is
not entitled to indemnification by an adjudication under Paragraph 2 or by an
opinion of counsel under Paragraph 3 hereof.
4. For the purposes of this Article,
(a) "Officer" means any person who serves or has served
as a director or in any other office filled by
election or appointment by the stockholders or the
Board of Directors;
(b) "Proceeding" means any action, suit or proceeding,
civil or criminal, brought or threatened in or before
any court, tribunal, administrative or legislative
body or agency; and
4
<PAGE>
(c) "Expense" means any liability fixed by a judgment,
order, decree, or award in a Proceeding, any amount
reasonably paid in settlement of a Proceeding and any
professional fees and other disbursements reasonably
incurred in a Proceeding.
5. Nothing in this Article shall limit any lawful rights to
indemnification existing independently of this Article.
ARTICLE 6B. TRANSACTIONS WITH INTERESTED PERSONS
1. Unless entered into in bad faith, no contract or transaction by this
Corporation shall be void, voidable or in any way affected by reason of the fact
that it is with an Interested Person.
2. For the purposes of this Article, "Interested Person" means any
person or organization in any way interested in this Corporation whether as an
officer, director, stockholder, employee or otherwise, and any other entity in
which any such person or organization or this Corporation is in any way
interested.
3. Unless such contract or transaction was entered into in bad faith,
no Interested Person, because of such interest, shall be liable to this
Corporation or to any other person or organization for any loss or expense
incurred by reason of such contract or transaction or shall be accountable for
any gain or profit realized from such contract or transaction.
4. The provisions of this Article shall be operative notwithstanding
the fact that the presence of an Interested Person was necessary to constitute a
quorum at a meeting of directors or stockholders of this Corporation at which
such contract or transaction was authorized or that the vote of an Interested
Person was necessary for the authorization of such contract or transaction.
ARTICLE 6C. STOCKHOLDERS' MEETINGS
Meetings of Stockholders of this Corporation may be held anywhere in
the United States.
ARTICLE 6D. AMENDMENT OF BY-LAWS
The By-Laws may provide that the Board of Directors as well as the
stockholders may make, amend or repeal the By-Laws of this Corporation, except
with respect to any provision thereof which by law, by these Articles or by the
By-Laws requires action by the Stockholders.
ARTICLE 6E. ACTING AS A PARTNER
This Corporation may be a partner in any business enterprise which it
would have power to conduct by itself.
5
<PAGE>
ARTICLE VII
The effective date of the restated Articles of Organization of the corporation
shall be the date approved and filed by the Secretary of the Commonwealth. If a
later effective date is desired, specify such date which shall not be more than
thirty days after the date of filing.
ARTICLE VIII
THE INFORMATION CONTAINED IN ARTICLE VIII IS NOT A PERMANENT PART OF THE
ARTICLES OF ORGANIZATION.
a. The street address (post office boxes are not acceptable) of the principal
office of the corporation in Massachusetts is:
411 Waverley Oaks Road, Waltham, MA 02452
b. The name, residential address and post office address of each director and
officer of the corporation is as follows:
<TABLE>
<CAPTION>
POST OFFICE
NAME RESIDENCE ADDRESS
<S> <C> <C>
President: 25 Old Village Road Same
Cornelius Peterson, VIII Acton, MA 01720
Treasurer: 34 Pillsbury Pasture Road Same
Daniel Sullivan Kingston, NH 03848
Clerk: 34 Pillsbury Pasture Road Same
Daniel Sullivan Kingston, NH 03848
Directors: 25 Old Village Road Same
Cornelius Peterson, VIII Acton, MA 01720
</TABLE>
c. The Board of Directors shall be divided into three classes in respect of term
of office, each class to contain as near as may be one-third of the whole number
of the Board. Of the first Board of Directors, elected by the shareholders
subsequent to the adoption of these Amended and Restated Articles of
Organization, the members of one class shall serve until the annual meeting of
shareholders held in the year following their election, the members of the
second class shall serve until the annual meeting of shareholders held two years
following their election, and the members of the third class shall serve until
the annual meeting of shareholders held three years following their election;
provided, however, that in each case directors shall be elected and shall
qualify. At each annual meeting of shareholders following the first shareholders
meeting after adoption of these Amended and Restated Articles of Organization,
one class of directors shall be elected to serve until the annual meeting of
shareholders held three years next following and until their successors shall be
elected and shall qualify.
6
<PAGE>
c. The fiscal year (i.e., tax year) of the corporation shall end on the last day
of the month of: January
d. The name and business address of the resident agent, if any, of the
corporation is:
Corporation Service Company, 84 State Street, Boston, MA 02109
**We further certify that the foregoing Restated Articles of Organization affect
no amendments to the Articles of Organization of the corporation as heretofore
amended, except amendments to the following articles. Briefly describe
amendments below:
Article III: The number of authorized shares has been increased.
Article 4A: The authorized Common Stock has been further designated as
voting Common Stock and Non-Voting Common Stock, and the terms thereof set forth
Article VIII: The Board of Directors has been classified to provide for
staggered three (3)-year terms.
SIGNED UNDER THE PENALTIES OF PERJURY, this ______day of July, 1999.
-------------------------------------------
Cornelius Peterson VIII, President
-------------------------------------------
Daniel J. Sullivan, Chief Financial Officer
and Clerk
7
<PAGE>
EXHIBIT 5.1
Woodbridge
July 1, 1999
NETsilicon, Inc.
411 Waverly Oaks Road
Suite 227
Waltham, MA 02154
Re: NETsilicon, Inc.
Ladies and Gentlemen:
We have acted as counsel to NETsilicon, Inc., a Massachusetts
corporation (the "Company"), in connection with its filing of that certain
Registration Statement on Form S-1, as amended (Registration No.333-62231) with
respect to an aggregate of 5,000,000 shares (the "Offering Shares") of
common stock, $.01 par value of the Company (the "Common Stock") to be issued
and sold by the Company and Osicom Technologies, Inc. (the "Selling
Stockholder") to a group of underwriters (the "Underwriters") represented by
CIBC World Markets Corp., of which 3,000,000 shares of the Common Stock are
being issued and sold by the Company and 200,000 shares of the Common Stock
are being issued and sold by the Selling Stockholder. In addition, the
Underwriters have been granted options by the Selling Stockholder to purchase
up to an additional 500,000 shares of the Common Stock and by the Company to
purchase up to an additional 250,000 shares (the "Over-Allotment Shares"), for
the purpose of covering over-allotments in connection with the sale of the
Offering Shares. The Offering Shares and the Over-Allotment Shares are
hereinafter collectively referred to as the "Shares".
As counsel to the Company, we have examined the Articles of
Organization and By-Laws, as amended to date, and other corporate records of the
Company and have made such other investigations as we have deemed necessary in
connection with the opinion hereinafter set forth. We have relied, to the extent
we deem such reliance proper, upon certain factual representations
<PAGE>
NETsilicon, Inc.
July 1, 1999
Page 2
of officers and directors of the Company given in certificates, in answer to our
written inquiries and otherwise, and, although we have not independently
verified all the facts contained therein, nothing has come to our attention that
would cause us to believe that any of the statements contained therein are
untrue or misleading.
In making the aforesaid examinations, we have assumed the genuineness
of all signatures and the conformity to original documents of all copies
furnished to us.
Based solely upon and subject to the foregoing, we are of the opinion
that the Shares have been duly and validly authorized and, when issued and paid
for, will be duly and validly issued, fully paid, and non-assessable. The shares
to be sold by the Selling Stockholder are duly and validly issued, fully paid
and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
aforesaid Registration Statement, as amended and to the reference to our firm
under the caption "Legal Matters" in the Prospectus constituting a part of said
Registration Statement, as amended.
Very truly yours,
GREENBAUM, ROWE, SMITH, RAVIN,
DAVIS & HIMMEL LLP
<PAGE>
NETSILICON, INC.
AMENDED AND RESTATED
1998 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
1. PURPOSES OF PLAN. The purposes of the NETsilicon, Inc. 1998 Amended and
Restated Incentive and Non-Qualified 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 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 (from the group consisting of all employees of the Company)
and consultants to whom options are to be granted and the number of Shares to be
optioned to each employee and consultant; (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
<PAGE>
from voting on the grant of any options to himself, his spouse, his children,
grandchildren and parents. The grant of each option shall be 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 six million (6,000,000) 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
<PAGE>
with the date of exercise of such option, the optionee is an employee or
consultant of the Corporation, its parent or a subsidiary.
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:
<PAGE>
<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 25%
Beginning on the second anniversary
date from date of grant 50%
Beginning on the third anniversary
date from date of grant 75%
Beginning on the fourth 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 any options with any vesting schedules including those
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
<PAGE>
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.
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.
2. 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.
<PAGE>
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.
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 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 Plan from the
Board of Directors.
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
NETSILICON, INC.
AMENDED AND RESTATED
1998 DIRECTOR STOCK OPTION PLAN
I. 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
<PAGE>
date of determination, as reported in The Wall Street Journal or such other
source as the Board deems reliable, or;
(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 800,000 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:
- 2 -
<PAGE>
(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.
(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.
- 3 -
<PAGE>
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 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.
- 4 -
<PAGE>
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 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
- 5 -
<PAGE>
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.
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.
- 6 -
<PAGE>
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.
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
- 7 -
<PAGE>
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.
- 8 -
<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 February 26, 1999
(except for note I (ii) and (iii) as to which the date is June 30, 1999) on the
financial statements of NETsilicon, Inc. (the 'Company'), as of January 31, 1998
and 1999, and for each of the three years in the period then ended. We also
consent to the references to us under the headings 'Selected Financial Data' and
'Experts' in the Prospectus which are part of such Registration Statement.
BDO SEIDMAN, LLP
Boston, Massachusetts
July 1, 1999
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<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-1-1998
<PERIOD-END> JAN-31-1999
<CASH> 582,600
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<RECEIVABLES> 4,204,500
<ALLOWANCES> 380,000
<INVENTORY> 3,769,300
<CURRENT-ASSETS> 10,013,300
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<DEPRECIATION> 3,027,400
<TOTAL-ASSETS> 11,648,400
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0
0
<OTHER-SE> (1,936,100)
<TOTAL-LIABILITY-AND-EQUITY> 11,648,400
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<INCOME-PRETAX> (2,132,400)
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<INCOME-CONTINUING> (2,132,400)
<DISCONTINUED> (289,800)
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