<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
Exchange Act of 1934 for the quarterly period ended October 31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
Exchange Act of 1934 for the transition period from ____ to ____.
Commission file number 0-21177
NETSILICON, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
MASSACHUSETTS 04-2826579
(State of incorporation) (I.R.S. Employer Identification No.)
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411 WAVERLEY OAKS RD., SUITE 227, WALTHAM, MASSACHUSETTS 02452
(Address of principal executive office)
(781) 647-1234
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
6,037,500 shares of Voting Common Stock, $0.01 par value, as of
November 30, 1999
7,500,000 shares of Non-Voting Common Stock, $0.01 par value, as of
November 30, 1999
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NETsilicon, Inc.
TABLE OF CONTENTS
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Page
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PART I. Financial Information................................................ 3
ITEM 1. Financial Statements................................................. 3
Condensed Balance Sheets
October 31, 1999 and January 31, 1999................................ 3
Condensed Statements of Operations
Three Months and Nine Months Ended October 31, 1999 and 1998......... 4
Condensed Statements of Cash Flows
Nine Months Ended October 31, 1999 and 1998.......................... 5
Notes to Condensed Financial Statements.............................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 7
PART II. Other Information.................................................... 14
ITEM 1. Legal Proceedings.................................................... 14
ITEM 2. Changes in Securities and Use of Proceeds............................ 14
ITEM 3. Defaults Upon Senior Securities...................................... 15
ITEM 4. Submission of Matters to a Vote of Security Holders.................. 15
ITEM 5. Other Information.................................................... 15
ITEM 6. Exhibits and Reports on Form 8-K..................................... 15
Signatures..................................................................... 15
Exhibit 27.1
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2
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
NETsilicon, Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
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<CAPTION>
October 31, 1999 January 31, 1999
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 19,949,100 $ 582,600
Accounts receivable, net 2,924,200 4,204,500
Due from affiliate 3,055,300 1,218,300
Inventory, net 3,961,700 3,769,300
Prepaid expenses and other current assets 389,400 238,600
------------ ------------
TOTAL CURRENT ASSETS 30,279,700 10,013,300
PROPERTY AND EQUIPMENT, NET 1,264,300 685,200
------------ ------------
OTHER ASSETS 525,600 949,900
------------ ------------
TOTAL ASSETS $ 32,069,600 $ 11,648,400
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Short-term debt $ 640,000 $ 3,191,500
Accounts payable 3,244,500 2,789,800
Due to affiliate 3,435,900 6,423,100
Other current liabilities 2,969,100 1,080,100
------------ ------------
TOTAL CURRENT LIABILITIES 10,289,500 13,484,500
CAPITAL LEASE OBLIGATION, less current portion 138,800 --
------------ ------------
TOTAL LIABILITIES 10,428,300 13,484,500
------------ ------------
STOCKHOLDER'S EQUITY (DEFICIT)
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
none issued -- --
Common stock, $0.01 par value; 35,000,000 shares authorized;
Issued and outstanding:
Voting, 6,037,500 and 1,000,000 shares 60,400 10,000
Non- Voting, 7,500,000 and 9,000,000 shares 75,000 90,000
Additional paid-in capital 24,676,700 2,463,000
Accumulated deficit (3,170,800) (4,399,100)
------------ ------------
TOTAL STOCKHOLDER'S EQUITY (DEFICIT) 21,641,300 (1,836,100)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) $ 32,069,600 $ 11,648,400
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
3
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NETsilicon, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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<CAPTION>
Three months ended Nine months ended
October 31, October 31,
----------------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 10,148,800 $ 3,030,100 $ 23,478,400 $ 8,414,000
COST OF SALES 4,550,600 2,117,400 11,385,500 4,651,800
------------ ------------ ------------ ------------
GROSS PROFIT 5,598,200 912,700 12,092,900 3,762,200
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling and marketing 2,206,400 1,008,000 5,260,600 2,262,300
Engineering, research and development 1,352,600 669,000 2,656,200 1,618,900
General and administrative 1,066,200 756,000 2,466,700 1,513,300
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 4,625,200 2,433,000 10,383,500 5,394,500
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) FROM
CONTINUING OPERATIONS 973,000 (1,520,300) 1,709,400 (1,632,300)
Interest expense (68,100) (198,000) (481,100) (335,100)
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 904,900 (1,718,300) 1,228,300 (1,967,400)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS 904,900 (1,718,300) 1,228,300 (1,967,400)
LOSS FROM DISCONTINUED OPERATIONS -- -- -- (310,700)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 904,900 $ (1,718,300) $ 1,228,300 $ (2,278,100)
============ ============ ============ ============
INCOME (LOSS) PER COMMON SHARE
From continuing operations
Basic $ 0.08 $ (0.17) $ 0.12 $ (0.20)
------------ ------------ ------------ ------------
Diluted $ 0.07 $ (0.17) $ 0.11 $ (0.20)
------------ ------------ ------------ ------------
From discontinued operations
Basic -- -- -- (0.03)
------------ ------------ ------------ ------------
Diluted -- -- -- (0.03)
------------ ------------ ------------ ------------
Income (loss) per common share
Basic $ 0.08 $ (0.17) $ 0.12 $ (0.23)
------------ ------------ ------------ ------------
Diluted $ 0.07 $ (0.17) $ 0.11 $ (0.23)
------------ ------------ ------------ ------------
SHARES USED IN PER SHARE CALCULATION
Basic 11,768,800 10,000,000 10,589,600 10,000,000
Diluted 12,434,800 10,000,000 10,814,000 10,000,000
</TABLE>
See accompanying notes to condensed financial statements.
4
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NETsilicon, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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<CAPTION>
Nine months ended
October 31,
-------------------------------
1999 1998
---- ----
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CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,228,300 $(2,278,100)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 941,400 365,700
Changes in current assets and liabilities:
Decrease in accounts receivable 1,280,300 535,700
Increase in inventories (192,400) (1,508,500)
Increase in other current assets (150,800) (133,400)
Increase in accounts payable 454,700 1,703,100
Increase in other current liabilities 1,889,000 688,700
------------ -----------
Net cash provided by (used in) operating activities 5,450,500 (626,800)
------------ -----------
CASH FLOW USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (907,600) (281,200)
Software development costs (668,100) (356,300)
Capitalized software transferred to Osicom -- 577,400
Other assets 479,500 (33,200)
------------ -----------
Net cash used in investing activities (1,096,200) (93,300)
------------ -----------
CASH FLOW PROVIDED BY FINANCING ACTIVITIES:
Proceeds (repayments) of affiliates advances (4,824,200) 1,382,200
Repayments of short-term debt (2,551,500) (800,600)
Proceeds (repayments) of long-term debt 138,800 (17,900)
Proceeds from issuance of stock (net of issuance costs) 22,249,100 --
------------ -----------
Net cash provided by financing activities 15,012,200 563,700
------------ -----------
INCREASE (DECREASE) IN CASH 19,366,500 (156,400)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 582,600 185,100
------------ -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 19,949,100 $ 28,700
============ ===========
Supplemental disclosure of cash flow information -
Cash paid for:
Interest $ 257,300 $ 208,231
Income taxes $ -- $ --
</TABLE>
See accompanying notes to condensed financial statements.
5
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NETsilicon, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of presentation:
In the opinion of management, the accompanying condensed financial
statements include all adjustments necessary for a fair presentation
of the Company's financial position, results of operations and cash
flows for this interim period. This quarterly information should be
read in conjunction with the audited financial statements included in
the Company's Registration Statement on Form S-1.
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, and the disclosure of contingent assets and
liabilities. Actual results could differ from these estimates.
Operating results for the interim period are not necessarily
indicative of results that may be expected for the entire fiscal year.
2. Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or
market. Cost is computed using standard costs which approximated
actual cost on a first-in, first-out basis. Inventories consist of:
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Inventory October 31, 1999 January 31, 1999
-----------------------------------
<S> <C> <C>
Raw material $1,249,000 $1,552,100
Work in process 2,366,100 2,081,300
Finished Goods 346,600 135,900
---------- ----------
Total Inventory $3,961,700 $3,769,300
---------- ----------
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3. Earnings per share:
Basic earnings per share is computed based on the weighted average
number of shares outstanding during the period. Diluted earnings per
share is computed based on the weighted average number of shares
outstanding during the period increased by the effect of dilutive
potential common shares which consist of shares issuable under stock
benefit plans.
The following is a reconciliation of weighted shares of the basic and
diluted per share computations:
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<CAPTION>
Three months ended Nine months ended
October 31, October 31,
----------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted-average shares for basic 11,768,800 10,000,000 10,589,600 10,000,000
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6
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<S> <C> <C> <C> <C>
earnings per share
Dilutive common stock equivalents 666,000 -- 224,400 --
---------- ---------- ---------- ----------
Weighted-average shares for diluted
earnings per share 12,434,800 10,000,000 10,814,000 10,000,000
---------- ---------- ---------- ----------
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4. Comprehensive Income:
Statement of Financial Accounting Standards ("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. During the periods presented, the Company had
no material transactions other than net income that should be reported
as comprehensive income.
5. Initial Public Offering:
The Company completed an initial public offering on September 15, 1999
in which 6,037,500 million shares were offered at $7 per share
(3,537,500 shares sold by the Company and 2,500,000 shares sold by
Osicom Technologies, Inc., former sole stockholder of the Company).
Net proceeds to the Company, net of offering costs, were approximately
$22 million.
The Company has 6,037,500 shares of voting common stock outstanding
and 7,500,000 shares of non-voting common stock held by Osicom
Technologies, Inc., the Company's former sole shareholder.
6. Recently issued accounting standards:
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 provides a
comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities and requires all
derivatives to be recorded on the balance sheet at fair value. SFAS
133, as amended, 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of
the Securities Exchange Act of 1934. The forward-looking statements
involve risks and uncertainties. Actual results could differ
materially from those projected in the forward looking statements as a
result of certain factors including those described herein and in the
Company's Registration Statement on Form S-1. The Company assumes no
obligation to update any forward-looking statements.
OVERVIEW
7
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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.
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 September 1996, Osicom Technologies
acquired all of the Company's outstanding capital stock. The Company
was a wholly-owned subsidiary of Osicom Technologies from the date of
the acquisition through the Company's initial public offering in
September of 1999.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of net sales for the three months and nine months ended October 31,
1999 and 1998.
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<CAPTION>
Three months ended Nine months ended
October 31, October 31,
----------------------------------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 44.8 69.9 48.5 55.3
----- ----- ----- -----
Gross profit 55.2 30.1 51.5 44.7
----- ----- ----- -----
Operating expenses:
Selling and marketing 21.7 33.3 22.4 26.9
Engineering, research and development 13.3 22.1 11.3 19.2
General and administrative 10.5 24.9 10.5 18.0
----- ----- ----- -----
Total operating expenses 45.5 80.3 44.2 64.1
----- ----- ----- -----
Operating income (loss) from continuing operations 9.7 (50.2) 7.3 (19.4)
Interest expense 0.7 6.5 2.0 4.0
----- ----- ----- -----
Income (loss) from continuing operations before
income taxes 9.0 (56.7) 5.3 (23.4)
Income taxes - - - -
Income (loss) from continuing operations 9.0% (56.7)% 5.3% (23.4)%
----- ----- ----- -----
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Three Months Ended October 31, 1999
Net sales. Net sales increased to $10.1 million for the three months
ended October 31, 1999 from $3.0 million for the three months ended
October 31, 1998, representing an increase of 235%. The increase in
net sales was due primarily to an increase in OEM customers to which
the Company shipped product from 18 for the three months ended October
31, 1998 to 30 for the three months ended October 31, 1999.
Furthermore, the increase is attributable to increased sales to
existing OEM imaging customers and a significant order from a new
imaging customer related to increased demand for its product as a
result of Year 2000 remediation. International sales accounted for 64%
of sales for the three months ended October 31, 1999 compared to 58%
of sales for the three months ended October 31, 1998. Backlog for the
Company's product and services was approximately $7.3 million and $4.8
million at October 31, 1999 and 1998, respectively.
8
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Cost of sales; gross profit. Costs of goods sold consists principally
of the cost of raw material components and subcontract labor assembly
from outside manufacturers and suppliers. Gross profit increased to
$5.6 million, or 55.2% of net sales, for the three months ended
October 31, 1999 from $913,000, or 30.1% of net sales, for the three
months ended October 31, 1998, representing an increase of 513%. The
increase in gross margin percent for the three months ended October
31, 1999 from the prior year period was due primarily to material and
subcontract labor cost reductions and the increased sales volume, in
addition to non-recurring inventory charges recorded in the three
month period ended October 31, 1998.
Selling and marketing expenses. Selling and marketing expenses consist
mainly of employee-related expenses, commissions to sales
representatives, trade shows and travel expense. Selling and marketing
expenses increased from $1 million, or 33.3% of net sales, for the
three months ended October 31, 1998 to $2.2 million, or 21.7% of net
sales, for the three months ended October 31, 1999, representing an
increase of 119%. The increase was the result of expenses incurred due
to increased sales volume, such as sales commissions and additional
headcount expenses, including recruiting costs. The increase is also
due to costs associated with the opening of a European sales office,
and increased level of general selling and marketing activities
including greater participation in trade shows and costs associated
with internet and web activities.
Engineering, research and development. Engineering, research and
development expenses consist primarily of salaries and the related
costs of employees engaged in research, design and development
activities. Engineering, research and development expenses increased
to $1.4 million, or 13.3% of net sales, for the three months ended
October 31, 1999 from $669,000, or 22.1% of net sales, for the three
months ended October 31, 1998, representing an increase of 102%. This
increase was due to increased expenditures associated with the
development of the Company's NET+ Works family of products, including
expenses related to increased headcount.
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 $1.1million, or 10.5%
of net sales, for the three months ended October 31, 1999 from
$756,000, or 24.9% of net sales, for the three months ended October
31, 1998, an increase of 41%. The increase in these expenses is due
primarily to costs associated with a newly formed MIS group as well as
expenses resulting from increased sales and headcount and certain new
and increased costs associated with becoming a public entity,
including investor relations, insurance, and legal expenses.
Interest expense. Interest expense includes interest on borrowings
against its line of credit and interest charged on amounts due to
Osicom. Interest expense decreased to $68,000, or 0.7% of net sales,
for the three months ended October 31, 1999 from $198,000, or 6.5% of
net sales, for the three months ended October, 31, 1998, a decrease of
66%. The decrease is due to a decrease in borrowing from the line of
credit and a significant repayment of amounts due Osicom, both a
result of the proceeds raised by the sale of the Company's stock in
conjuntion with its initial public offering on September 15, 1999. The
line of credit balance was $640,000 at October 31, 1999 compared to
$2.2 million at October 31, 1998 and the net amount due Osicom was
approximately $300,000 at October 31, 1999 compared to $3.6 million at
October 31, 1998.
Provision for income taxes. There was no net provision for income
taxes for the three months ended October 31, 1998 because of the
Company's net loss position. The provision for the three months ended
October 31, 1999 was offset by available net operating loss
carryforwards.
9
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Nine Months Ended October 31, 1999
Net sales. Net sales increased to $23.5 million for the nine months
ended October 31, 1999 from $8.4million for the nine months ended
October 31, 1998, representing an increase of 179%. The increase in
net sales was due primarily to an increase in OEM customers to which
the Company shipped, increased sales to existing OEM imaging customers
and a significant order from a new imaging customer related to
increased demand for its product as a result of Year 2000 remediation.
International sales accounted for 60% of sales for the nine months
ended October 31, 1999 compared to 47% of sales for the nine months
ended October 31, 1998.
Cost of sales; gross profit. Gross profit increased to $12.1 million,
or 51.5% of net sales, for the nine months ended October 31, 1999 from
$3.8 million, or 44.7% of net sales, for the nine months ended October
31, 1998, an increase of 221%. The increase in gross margin percent
for the nine months ended October 31, 1999 from the prior year period
was due primarily to material and subcontract labor cost reductions
and the increased sales volume. The margin for the 1998 period was
also adversely effected by costs resulting from the late delivery of
the NET+ ARM chip from a vendor.
Selling and marketing expenses. Selling and marketing expenses
increased to $5.3 million, or 22.4% of net sales, for the nine months
ended October 31, 1999 from $2.3 million, or 26.9% of net sales, for
the nine months ended October 31, 1998, an increase of 133%. The
increase was the result of additional sales commissions due to
increased sales volume, increased marketing costs associated with the
introduction of the NET+ Works family of product and the addition of
two senior marketing employees, and increased level of general selling
and marketing activities, including greater participation in trade
shows and costs associated with internet and web marketing activities.
Engineering, research and development. Engineering, research and
development expenses increased to $2.7 million, or 11.3% of net sales,
for the nine months ended October 31, 1999 from $1.6 million, or 19.2%
of net sales, for the nine months ended October 31, 1998, an increase
of 64%. This increase was due to increased expenditures associated
with the development of the Company's NET+ Works family of products,
including expenses related to increased headcount.
General and administrative expenses. General and administrative
expenses increased to $2.5 million, or 10.5% of net sales, for the
nine months ended October 31, 1999 from $1.5 million, or 18.0% of net
sales, for the nine months ended October 31, 1998, an increase of 63%.
The increase in these expenses is due primarily to costs associated
with a newly formed MIS group as well as expenses resulting from
increased sales and headcount and certain new and increased costs
associated with becoming a public entity, including investor
relations, insurance, and legal expenses.
Interest expense. Interest expense increased to $481,000, or 2% of net
sales, for the nine months ended October 31, 1999 from $335,000, or 4%
of net sales, for the nine months ended October 31, 1998, an increase
of 44%. The increase in interest expense is attributable to greater
average outstanding balances due on the Company's credit line and to
Osicom during the nine months ended October 31, 1999 compared to the
same period in 1998.
Provision for income taxes. There was no net provision for income
taxes for the nine months ended October 31, 1998 because of the
Company's net loss position. The provision for the nine months ended
October 31, 1999 was offset by available net operating loss
carryforwards.
10
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Liquidity and Capital Resources
Prior to the Company's public offering in September, 1999, the Company
financed its operations through advances from Osicom and borrowings
under its short-term bank line of credit. The Company received
proceeds, net of offering costs, of approximately $22 million as a
result of the initial public offering and sale of its stock. At
October 31, 1999, the Company had working capital of $20 million and
cash and cash equivalents of $20 million. Cash and cash equivalents
were $583,000 at January 31, 1999.
The Company's operating activities provided cash of $5.5 million
during the nine months ended October 31, 1999 due primarily to net
income of $1.2 million, a decrease in accounts receivable of $1.3
million and an increase in other liabilities of $1.9 million.
In order to support the Company's anticipated growth, the Company
expects that its sales and marketing expenses, engineering, 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 investing activities used $1.1 million of cash during
the nine months ended October 31, 1999. The cash used in the nine
month period ended October 31, 1999 of $1.1 million related mainly to
the purchase of property and equipment of $908,000 to support the
Company's expanding operations and $668,000 of capitalized software
development costs, offset in part by a decrease in other assets of
$480,000.
Cash provided by financing activities was $15 million for the nine
months ended October 31, 1999, primarily from net proceeds from the
sale of the Company's stock of $22 million, offset by repayments of
borrowings under the Company's short-term bank line of credit and
advances from Osicom.
As of October 31, 1999, the balance due to Osicom from loans was
approximately $3.3 million, offset by a receivable due to the Company
from Osicom of $3.0 million. The Company repaid the loan to Osicom
subsequent to October 31, 1999. 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 approximately $4.4 million was unused at
October 31, 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 on February 1, 2001.
The Company anticipates that its available cash resources will be
sufficient to meet its presently anticipated capital requirements
through at least 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. To the extent that the
funds currently available are insufficient to fund the Company's
future activities, the Company may need to raise additional funds
through public or private financing or borrowings. No assurance can be
given that the additional financing will be available or that, if
available, such financing can be obtained on terms favorable to the
Company and its shareholders. If adequate funds are not available to
satisfy short or long term capital requirements, the Company may be
required to limit its operations significantly.
11
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Factors That May Affect Future Results
The Company's quarterly and annual 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 and demand for the
Company's products 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 cost 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 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 cost 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
it 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 certain customers can cancel orders,
within specified time frames, typically 30 days or more prior to the
scheduled shipment date pursuant to the Company's policy, without
specific 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
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.
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
12
<PAGE>
solutions for embedded systems. 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 could result in a
significant reduction in the market price of the shares of common
stock.
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 effect 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 by 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 has begun 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
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 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 product
13
<PAGE>
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.
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. 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.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities and Use of Proceeds
On September 15, 1999 the Company completed a public offering of its Common
Stock $0.01 par value. The managing underwriters in the offering were CIBC
World Markets and U.S. Bancorp Piper Jaffray (the "Underwriters"). The
shares of Common Stock sold in the offering were registered under the
Securities Act of 1933 on a Registration Statement on From S-1 (Reg. No.
333-62231) that was declared effective by the SEC on September 15, 1999.
The offering commenced on September 15, 1999 after all 5,250,000 shares (of
which 3,250,000 shares were offered by the Company and 2,000,000 were
offered by the Company's former sole shareholder, Osicom Technologies,
Inc.) of Common Stock registered under the Registration Statement were sold
at a price of $7.00 per share. The aggregate price of the offering amount
registered was $36,750,000. The Company did not receive any of the proceeds
from the sale of shares being offered by Osicom. In connection with the
offering, the Company and Osicom paid an aggregate of approximately $2.6
million in underwriting discounts and commissions to the Underwriters. In
addition, the following table sets forth an estimate of all expenses
incurred in connection with the offering, other than underwriting discounts
and commissions.
<TABLE>
<S> <C>
SEC Registration fee $15,000
NASD filing fee 5,000
Nasdaq National Market listing fee 87,000
Printing expenses 433,000
Legal and accounting fees and expenses 481,000
Other 314,000
----------
Total $1,335,000
----------
</TABLE>
All expenses incurred in connection with the offering were allocated
between the Company and Osicom based on the ratio of total shares sold by
each to the total number of shares sold. The Company received proceeds from
the offering of approximately $22 million which were net of the
14
<PAGE>
Company's share of offering costs and included proceeds from the sale of
287,000 over-allotment shares sold by the Underwriters in connection with
an over-allotment option granted by the Company and Osicom. As of October
31, 1999, the Company had used some of the proceeds from its public
offering to repay a portion of its indebtedness to Osicom and amounts due
to Coast Business Credit under its line of credit. 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 to expand its business through
acquisition or to invest in complementary business or products. The Company
does not currently have any acquisition or investment commitments. None of
the Company's net proceeds were paid directly or indirectly to any
director, officer or general partner of the Company, persons owning 10% or
more of any class of equity securities of the Company, or to an affiliate
of the Company.
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit Number Description
-------------- -----------
27.1 Financial Data Schedule
b) Reports on 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
NETsilicon, Inc.
-----------------------------------------------------
(Registrant)
Date December 14, 1999 By Cornelius Peterson
----------------- -----------------------------------------------------
(Cornelius Peterson, Chief Executive Officer,
President)
Date December 14, 1999 By Daniel J. Sullivan
----------------- -----------------------------------------------------
(Daniel J. Sullivan, Vice President, Finance, Chief
Financial Officer)
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from SEC From 10Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> OCT-31-1999
<CASH> 19,949,100
<SECURITIES> 0
<RECEIVABLES> 5,979,500
<ALLOWANCES> 0
<INVENTORY> 3,961,700
<CURRENT-ASSETS> 30,279,700
<PP&E> 1,264,300
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,069,600
<CURRENT-LIABILITIES> 10,289,500
<BONDS> 0
0
0
<COMMON> 135,400
<OTHER-SE> 21,505,900
<TOTAL-LIABILITY-AND-EQUITY> 32,069,600
<SALES> 23,478,400
<TOTAL-REVENUES> 23,478,400
<CGS> 11,385,500
<TOTAL-COSTS> 11,385,500
<OTHER-EXPENSES> 10,383,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 481,100
<INCOME-PRETAX> 1,228,300
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,228,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,228,300
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.11
</TABLE>
