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<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 11, 1999.
REGISTRATION NO. 333-62231
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
TO
REGISTRATION STATEMENT
ON
FORM S-1
UNDER
THE SECURITIES ACT OF 1933
------------------------
NETSILICON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
MASSACHUSETTS 3577 04-2826579
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
</TABLE>
411 WAVERLY OAKS ROAD,
SUITE 227
WALTHAM, MA 02154
(781) 647-1234
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CORNELIUS PETERSON VIII
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NETSILICON, INC.
411 WAVERLY OAKS ROAD, SUITE 227
WALTHAM, MA 02154
(781) 647-1234
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES OF ALL COMMUNICATIONS TO:
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<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
[CAPTION]
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<S> <C> <C> <C> <C>
PROPOSED MAXIMUM
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(3)
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per share........... 3,450,000 $14.00 $ 48,300,000 $13,427.40
</TABLE>
(1) Includes 450,000 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.
(3) The Company previously registered 3,340,750 shares of common stock at a unit
price of $5.00 pursuant to Rule 457(g). The shares registered hereby are the
same shares plus an additional 109,250 shares for a total of 3,450,000
shares, estimated to have a per share price of $14.00, pursuant to Rule
457(o), of which $4,927.61 was previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
________________________________________________________________________________
<PAGE>
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MARCH 11, 1999
INITIAL PUBLIC OFFERING
PROSPECTUS
3,000,000 SHARES OF COMMON STOCK
$12.00 TO $14.00 PER SHARE
[LOGO]
This is an initial public offering of NETsilicon, Inc. common stock.
NETsilicon is selling 2,000,000 shares and Osicom Technologies, Inc., the sole
stockholder of NETsilicon, is selling 1,000,000 shares. In addition, Osicom may
sell up to 450,000 shares depending on whether the Underwriters exercise their
over-allotment option. NETsilicon will not receive any of the proceeds from the
sale of shares by Osicom. Following the completion of this offering, Osicom will
own 75% (71% if the Underwriters' over-allotment option is exercised in full) of
the outstanding common stock of the Company.
Proposed Trading Symbol:
Nasdaq National Market 'NSIL'
INVESTING IN THIS STOCK INVOLVES CERTAIN RISKS. SEE 'RISK FACTORS'
BEGINNING ON PAGE 6.
------------------------
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<CAPTION>
TOTAL
--------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Price to Public.................................................
Underwriting Discounts & Commissions............................
NETsilicon's Proceeds...........................................
Selling Stockholder's Proceeds..................................
</TABLE>
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
DAIN RAUSCHER WESSELS TUCKER ANTHONY
a division of Dain Rauscher Incorporated Incorporated
<PAGE>
<PAGE>
'NET+ARM'TM'' is a trademark of ARM Limited and is licensed to the Company.
All other product names referred to herein are the property of their respective
owners.
Information contained on NETsilicon's website does not constitute a part of
this Prospectus.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY, INCLUDING INITIATING BIDS OR EFFECTING PURCHASES ON THE
NASDAQ NATIONAL MARKET FOR THE PURPOSE OF PREVENTING OR REGARDING A DECLINE IN
THE MARKET PRICE OF THE COMMON STOCK. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
'UNDERWRITING.'
------------------------
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary............................ 3
Risk Factors.................................. 6
The Company................................... 16
Use of Proceeds............................... 16
Dividend Policy............................... 17
Capitalization................................ 18
Dilution...................................... 19
Selected Financial Data....................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 21
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PAGE
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Business...................................... 29
Management.................................... 40
Principal and Selling Stockholders............ 46
Certain Relationships and Related Party
Transactions................................ 46
Description of Capital Stock.................. 47
Shares Eligible for Future Sale............... 48
Underwriting.................................. 50
Legal Matters................................. 51
Experts....................................... 51
Additional Information........................ 52
Index to Financial Statements................. F-1
</TABLE>
2
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including 'Risk Factors' and the Financial Statements of the
Company and the Notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in 'Risk
Factors' and elsewhere in 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 $13.00 per
share, and (iii) assumes a 100,000-for-one stock split of the Company's Common
Stock which will occur prior to the closing of this offering. The Company's
fiscal year ends on January 31. All references herein to a fiscal year refer to
the year ending January 31 of such year. Unless the context otherwise requires,
NETsilicon, Inc. is referred to herein as the 'Company.'
THE COMPANY
NETsilicon, Inc. (the 'Company') develops and markets embedded networking
solutions. The Company's products are incorporated into the design of embedded
systems to provide the ability to communicate over standards-based Local Area
Networks ('LANs'), Wide Area Networks ('WANs') and the Internet, enabling the
development of completely new embedded systems applications. The Company
believes that it provides the first standards-based embedded networking system
to offer a single chip solution that, in conjunction with the physical interface
and memory, encompasses all of the required hardware and software necessary to
network-enable virtually any electronic device. 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 20 original
equipment manufacturers ('OEMs'), including Minolta Corporation, NEC
Corporation, Sharp Corporation and Xerox Corporation. The Company's products are
also in various stages of being incorporated by 43 OEMs into the design of
products in other markets, such as industrial automation equipment,
communication devices, data acquisition and test equipment, Internet devices and
utility monitoring equipment.
Over the past decade, manufacturers have increasingly incorporated embedded
systems into a wide variety of products to provide enhanced features and
functionality. Products that incorporate embedded systems include automobiles,
vending machines, children's toys, and medical devices. While increasingly
powerful, these embedded systems have traditionally been unable to communicate
with other devices. OEMs 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 networking 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 OEMs to reduce the cost and
improve the time to market of their end products that incorporate embedded
networking capability. The Company provides OEMs with an embedded networking
solution comprised of its NET+ software and application specific hardware in the
form of integrated circuits or network interface cards. The Company also
provides software development licenses and application engineering services to
OEMs to enable them to design products incorporating NET+ technology. The
Company believes its solution is comprehensive, standards-based, scalable and
extensible, and provides compelling value to OEMs relative to the cost and
effort of developing in-house expertise in the area of embedded networking
technology.
Key elements of the Company's strategy include (i) expanding its existing
OEM customer relationships in the imaging industry; (ii) identifying and
penetrate other OEM markets; (iii) influencing industry standards for network
connectivity in those other markets; and (iv) developing market-specific
versions of its products to reinforce its position in the other markets it has
entered.
3
<PAGE>
<PAGE>
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+ technology in 1996 and introduced its
initial NET+ product, NET+ARM'TM', in January 1998. To date, the Company
believes its products have been well received by OEMs, as evidenced by (i) the
increase in the Company's net sales to $13.4 million for the fiscal year ended
January 31, 1999 from $7.9 million in the prior fiscal year; (ii) the commitment
of 20 OEMs in the imaging market and 43 OEMs in other markets to design
NETsilicon products into their products; and (iii) the Company's product backlog
at January 31, 1999 of $7.8 million relative to its backlog of $1.9 million at
January 31, 1998.
The Company was incorporated in Massachusetts in 1984. Its executive office
is located at 411 Waverly Oaks Road, Suite 227, Waltham, Massachusetts 02154 and
its telephone number is (781) 647-1234. The Company's website address is
www.netsilicon.com.
THE OFFERING
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<S> <C>
COMMON STOCK OFFERED BY THE COMPANY............ 2,000,000 Shares
COMMON STOCK OFFERED BY THE SELLING
STOCKHOLDER.................................. 1,000,000 Shares
COMMON STOCK TO BE OUTSTANDING AFTER THE
OFFERING..................................... 12,000,000 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'
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4
<PAGE>
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OTHER OPERATING DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
-----------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................................. $ 7,445 $ 7,920 $13,373
Operating loss from continuing operations................................. (942) (1,228) (1,581)
Loss from continuing operations before income tax benefit................. (1,078) (1,346) (2,132)
Net loss from continuing operations....................................... (109) (853) (2,132)
Net loss from continuing operations per share(1):
Basic................................................................... $ (0.02) $ (0.09) $ (0.21)
Diluted................................................................. $ -- $ -- $ --
Weighted average number of shares outstanding(1):
Basic................................................................... 7,158 10,000 10,000
Diluted................................................................. -- -- --
</TABLE>
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
-------------------------------------------------------------------------------------
APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $2,471 $2,703 $ 890 $1,856 $2,185 $3,199 $ 3,030 $4,959
Operating income (loss) from
continuing operations............... (172) (7) (818) (231) (280) 168 (1,520) 52
Income (loss) from continuing
operations before income taxes...... (192) (41) (864) (249) (340) 91 (1,718) (165)
Net income (loss) from continuing
operations.......................... $ (80) $ 68 $ (833) $ (8) $ (340) $ 91 $(1,718) $ (165)
OTHER OPERATING DATA:
Design wins(2):
Imaging market........................ 1 4 5 5 9 8 8 9
Other markets......................... 0 0 0 0 11 11 12 14
-------- -------- -------- -------- -------- -------- -------- --------
Total............................. 1 4 5 5 20 19 20 23
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Shipping customers(3):
Imaging market........................ 7 7 7 7 11 14 16 17
Other markets......................... 0 0 0 0 0 0 2 3
-------- -------- -------- -------- -------- -------- -------- --------
Total............................. 7 7 7 7 11 14 18 20
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
AS OF
JANUARY 31, 1999
----------------------------
AS
ACTUAL ADJUSTED(4)
------------ ------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................ $ 583 $ 15,241
Working capital (deficit)........................................................ (3,471) 19,264
Total assets..................................................................... 11,648 26,307
Due to Osicom(5)................................................................. 5,885 --
Short-term debt.................................................................. 3,191 1,000
Stockholders' equity (deficit)................................................... (1,836) 20,899
</TABLE>
- - - ------------
(1) See Notes to the Company's Financial Statements for the years ended January
31, 1997, 1998 and 1999 regarding computations of net income (loss) per
share.
(2) Represents new OEM products being designed incorporating the Company's
products.
(3) Represents the number of customers to which product was shipped during the
period indicated.
(4) The 'As Adjusted' balances reflect the sale by the Company of 2,000,000
shares of Common Stock and the receipt of approximately $23.2 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.'
(5) Reflects advances from Osicom to the Company as of January 31, 1999. As of
February 28, 1999, such balance was $5.7 million. The Company anticipates
repayment of all outstanding amounts due to Osicom from the proceeds of the
offering. See Note F to the Notes to the Financial Statements.
5
<PAGE>
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. Prospective purchasers of the Common Stock
offered hereby should carefully consider the following risk factors, as well as
all other information in this Prospectus. This Prospectus contains
'forward-looking' statements within the meaning of Section 27A of the Securities
Act. Discussions containing forward-looking statements may be found in the
material set forth under 'Business' and 'Management's Discussion and Analysis of
Financial Condition and Results of Operations,' as well as within this
Prospectus generally. In addition, when used in this Prospectus, the words
'believes,' 'intends,' 'anticipates,' 'expects,' and similar expressions are
intended to identify forward-looking statements. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this Prospectus.
HISTORY OF LOSSES AND ACCUMULATED DEFICIT
The Company incurred net losses for fiscal years 1997, 1998 and 1999. At
January 31, 1999, the Company had an accumulated deficit of $4.4 million. The
Company continues to invest significant financial resources in product
development, marketing and sales, and a failure of such expenditures to result
in significant increases in revenue could have a material adverse effect on the
Company's business, operating results and financial condition. Due to the
limited history and undetermined market acceptance of the Company's new
products, the rapidly evolving nature of the Company's business and markets,
potential changes in product standards that significantly influence many of the
markets for the Company's products, the high level of competition in the
industries in which the Company operates and the other factors described
elsewhere in 'Risk Factors,' there can be no assurance that the Company's
investment in these areas will result in increases in revenue or that any
revenue growth that is achieved can be sustained. Any revenue growth that the
Company has achieved or may achieve may not be indicative of future operating
results. In addition, the Company's history of losses, 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. Future operating results will depend on
many factors, including the growth of the markets for the Company's products,
the acceptance of the Company's products, the level of competition, the ability
of the Company to develop and market new products and general economic
conditions. In view of the uncertainties identified herein, the Company believes
that period-to-period comparisons of financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
See the Company's Financial Statements and the Notes thereto and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations.'
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company's net sales and operating results 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 such as the
cancellation or postponement of orders, the timing and amount of significant
orders from the Company's largest customers, the Company's success in
developing, introducing and shipping product enhancements and new products, the
product mix sold by the Company, new product introductions by competitors,
pricing actions by the Company or its competitors, the timing of delivery and
availability of components from suppliers, changes in material costs and general
economic conditions. Public market analysts may make quarterly financial
projections for the Company based upon the Company's historical operating
results and other factors; failure to meet such targets may adversely affect the
market price of the Common Stock of the Company. See 'Management's Discussion
and Analysis of Financial Condition and Results of Operations.'
The Company's backlog at the beginning of each quarter typically is not
sufficient to achieve expected sales for the quarter. To achieve its sales
objectives, the Company is dependent upon obtaining orders during each quarter
for shipment that quarter. Furthermore, the Company's agreements with its
6
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<PAGE>
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, financial
condition, cash flows and results of operations in periods in which the
inventory is reduced. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations' and 'Business -- Backlog.'
Delays or lost sales have been and 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 embedded networking solutions. In the quarter ending 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, operating results, cash flows and
financial condition.
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 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 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, operating results, cash flows and financial condition.
'Business -- Products and Services' and 'Business -- OEM Product Cycle.'
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.
DEPENDENCE ON IMAGING MARKET
The imaging market has historically accounted for substantially all of the
Company's revenues. In fiscal year 1999, 96.4% 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. Any decline in sales to the imaging market would have a material adverse
effect on the Company's business, operating results, cash flows and financial
condition.
7
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<PAGE>
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, operating results, cash flows and
financial condition. See 'Business -- Manufacturing.'
RISKS ASSOCIATED WITH ENTERING OTHER MARKETS
A substantial portion of the Company's recent development efforts have been
directed toward the development of new products for use in other markets in
which embedded networking products 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 embedded networking
products 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 in 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 the OEMs in these industries to successfully develop and market networked
devices to end users. There can be no assurance that (i) the 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, operating
results, cash flows and financial condition.
COMPETITION
The markets for the products and services of the Company are intensely
competitive, highly fragmented and characterized by rapidly changing technology,
evolving industry standards, price competition and frequent new product
introductions. A number of companies offer products that compete with one or
more elements of the Company's solution. The Company's current and prospective
competitors include Echelon Corporation, Integrated Systems, Inc., Motorola
Inc., Samsung Electronics Co., Ltd. and Wind River Systems, Inc. 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 Application Specific Integrated Circuit ('ASIC') or
networking industries may seek to expand their product offerings by designing
and selling products using competitive technology that could render the
Company's products obsolete or have a material adverse effect on the Company's
sales. The markets in which the Company competes currently are subject to
intense competition and the Company expects additional price and product
competition as other established and emerging companies enter these markets and
new products and technologies are introduced. Increased competition may result
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,
operating results, cash flows and financial condition. The Company believes that
the competitive factors affecting the market for the Company's products include
product performance, price and quality; product functionality and features; the
availability of products for existing and future platforms; the ease of
integration 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
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on the Company's business, operating results, cash flows and financial
condition. See 'Business -- Competition.'
RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON LAN, WAN AND INTERNET TECHNOLOGIES
The networking industry is characterized by rapidly changing technologies,
evolving industry standards, frequent new product introductions, short product
life cycles and rapidly changing customer requirements. The introduction of
products embodying new technologies and the emergence of new industry standards
can render existing products obsolete and unmarketable. The Company's future
success will depend on its ability to enhance its existing products, to
introduce new products to meet changing customer requirements and emerging
technologies, and to demonstrate the performance advantages and
cost-effectiveness of its products over competing products. Any failure of the
Company to modify its products to support new LAN, 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, operating results, cash flows and financial
condition. The Company has in the past and may in the future experience delays
in developing and marketing product enhancements or new products that respond to
technological change, evolving industry standards and changing customer
requirements. There can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products or product enhancements, or that
its new products and product enhancements will adequately meet the requirements
of the marketplace and achieve any significant degree of market acceptance.
Failure of the Company, for technological or other reasons, to develop and
introduce new products and product enhancements in a timely and cost-effective
manner would have a material adverse effect on the Company's business, operating
results, cash flows and financial condition. In addition, the future
introductions or even announcements of products by the Company or one of its
competitors embodying new technologies or changes in industry standards or
customer requirements could render the Company's then-existing products obsolete
or unmarketable. There can be no assurance that the introduction or announcement
of new product offerings by the Company or one or more of its competitors will
not cause customers to defer the purchase of existing Company products. Such
deferment of purchases could have a material adverse effect on the Company's
business, operating results, cash flows and financial condition. See
'Business -- Industry Background.'
DEPENDENCE ON CONTRACT MANUFACTURERS AND LIMITED SOURCE SUPPLIERS
The Company relies upon independent contractors to manufacture its
components, subassemblies, systems and products. The Company also relies upon
limited-source suppliers for a number of components used in the Company's
products, including custom ASICs, certain key microprocessors and other
components. There can be no assurance that these independent contractors and
suppliers will be able to meet the Company's future requirements for
manufactured products, components and subassemblies in a timely fashion.
Recently, the Company experienced delays in the receipt of product from Atmel
Corporation which adversely affected the Company's operating results in the
quarter ending October 31, 1998. 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. Atmel is currently
the Company's sole source supplier for its silicon chip. 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 chips fails to meet the
Company's 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,
operating results, cash flows and financial condition. See 'Business --
Manufacturing.'
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CONTROL BY OSICOM
After the completion of the offering, Osicom will beneficially own
approximately 75% of the Company's outstanding Common Stock. As a result, Osicom
will have the voting power to elect the Board of Directors and approve other
matters presented for consideration by the stockholders. The interests of Osicom
may differ from the interests of the other stockholders of the Company.
Currently, two of the members of the Company's Board of Directors are also
directors of Osicom. See 'Management,' 'Principal and Selling Stockholders,'
'Certain Relationships and Related Party Transactions' and 'Shares Eligible for
Future Sale.'
BENEFITS OF OFFERING TO OSICOM
The offering will provide significant benefits to Osicom, which is
currently the sole stockholder of the Company, including (i) receipt of
approximately $12.1 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 $5.9 million.
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
and its holding of the Common Stock will have potentially greater value. In
addition, upon consummation of the offering, Osicom may be relieved of its
obligation as guarantor of the Company's line of credit. Osicom will
beneficially own 9,000,000 shares of the Company's Common Stock after the
completion of this offering. Based upon the initial public offering price of
$13.00 per share, such shares owned by Osicom will have an aggregate market
value of approximately $117 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, consisting of (i) a five
year supply agreement pursuant to which Osicom purchases products, including the
NET+ARM'TM' ASIC,at variable prices, structured to maintain the Company's gross
margin, established on the effective date of the agreement and Osicom provides
manufacturing services to the Company at prices to be agreed upon; (ii) a
sublease pursuant to which Osicom subleases office space at the Company's
facility in Waltham, Massachusetts; and (iii) an intercompany agreement 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 'Commercial Line') to Osicom,
and Osicom has the right to manufacture and sell stand-alone product services to
distributors. The Intercompany Agreement also states that the Company will
provide certain manufacturing and engineering services to Osicom in connection
with such business. The Company anticipates that, in accordance with the
Intercompany Agreement, on approximately May 1, 1999, Osicom will assume
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 Commercial Line
and cannot be transferred, resold, licensed or assigned by Osicom. After the
completion of this offering, Osicom will beneficially own 75% of the Company's
outstanding Common Stock. In addition, two of the members of the Osicom Board of
Directors also serve as directors of the Company. There can be no assurance that
the price, terms and conditions of any of these agreements are as favorable to
the Company as could have been obtained from unaffiliated third parties. In the
future, the Company may enter into additional agreements with Osicom or
subsidiaries of Osicom. There can be no assurance that such agreements will be
on terms at least as favorable as if they had been negotiated with unrelated
third parties. See 'Certain Relationships and Related Party Transactions.'
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
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in the public market could adversely affect the market price for the Company's
Common Stock and reported earnings per share.
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 controlling 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 Dain Rauscher Wessels. 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
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, and (ii)
9,000,000 shares of Common Stock beneficially owned by Osicom which will be
subject to lock-up agreements (the 'Lock-Up Agreements') prohibiting the sale or
other disposition of such shares until 365 days after the date of this
Prospectus (the 'Lock-Up Expiry Date') without the prior written consent of Dain
Rauscher Wessels. See 'Shares Eligible For Future Sale.'
It is anticipated that a registration statement (the 'Form S-8 Registration
Statement') covering the Common Stock that may be issued pursuant to the
exercise of options granted by the Company will be filed and become effective
prior to the Lock-Up Expiry Date, and that shares of Common Stock that are so
acquired or offered thereafter pursuant to the Form S-8 Registration Statement
generally may be resold in the public market without restriction or limitation.
See 'Management -- Stock Option Plan' and 'Management -- Director Stock Option
Plan,' 'Shares Eligible For Future Sale' and 'Underwriting.'
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 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, operating results, cash flows and financial condition. See
'Business -- Products and Services.'
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
In fiscal 1999 international sales constituted approximately 50.0% of the
Company's net sales, and approximately 18.5% 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.
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.
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Several countries in Asia have recently experienced currency devaluation and/or
reduced access to credit. There can be no assurance that the effect of this
economic condition on the Company's strategic partners and significant customers
or the exposure to variations in the respective value of the currency of all
of the Company's international partners or customers with that of the U.S.
dollar, will not have a material adverse effect on the Company's business,
operating results, cash flows and financial condition. The sale of the Company's
products internationally may be regulated by foreign governmental agencies.
The Company does not know the impact of such regulation, if any, on the Company,
and there can be no assurance that foreign regulation will not have a material
adverse effect on the Company's ability to sell its products in such countries.
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 currently conducts all of its business operations in United
States dollars. 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. If necessary, the Company will take appropriate
corrective actions based on the results of such assessment.
The Company's products are subject to restrictions on export to foreign
countries. These restrictions require the Company to obtain a validated export
license prior to the sale of its products to purchasers in such countries,
thereby making many of the Company's sales to purchasers in foreign countries
subject to the approval of the U.S. Department of Commerce. There can be no
assurance that the U.S. Department of Commerce will not mandate more
restrictions in the future towards the Company's products or, due to the
political or diplomatic climate or for human rights reasons, impose additional
restrictions on exports to one or more countries where the Company desires to
sell its products. Such a change could adversely affect the Company's ability to
sell its products in such countries, which, in turn, could have a material
adverse effect on the Company's business, operating results, cash flows and
financial condition. In addition, international sales are subject to inherent
risks, including changes in regulatory requirements, tariffs and other barriers,
fluctuating exchange rates associated with international sales by selling its
products in United States currency. There can be no assurance that any of these
factors will not have a material adverse effect on the Company's future
international sales and, consequently, on the Company's business, operating
results, cash flows and financial condition. See 'Management's Discussion and
Analysis of Financial Conditions and Results of Operations.'
DEPENDENCE ON PROPRIETARY RIGHTS AND TECHNOLOGY
The Company's ability to compete is dependent in part on its 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
Commercial Line to Osicom. Osicom's rights to such intellectual property are
limited to use in products manufactured by Osicom related to the Commercial
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 competitors of the Company. Furthermore,
there can
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be no assurance that others will not develop technologies that are superior to
the Company's. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or
to obtain and use information that the Company regards as proprietary. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights as fully as do the laws of the United States. There can be
no assurance that the Company's means of protecting its proprietary rights in
the United States or abroad will be adequate or that competing companies will
not independently develop similar technology. Failure of the Company to
adequately protect its proprietary rights could have a material adverse effect
on the Company's business, operating results, cash flows and financial
condition. In the future, third parties may assert that the Company's
products infringe their proprietary rights. Should litigation with respect to
any such claims commence, such litigation could be extremely expensive and time
consuming and could materially and adversely affect the Company's results of
operations regardless of the outcome of the litigation. There can be no
assurance that the Company will defend, or will be able to defend successfully
against third party infringement claims. See 'Business -- Intellectual Property,
Trademarks and Proprietary Rights.'
DEPENDENCE ON KEY PERSONNEL
The Company's business and prospects depend to a significant degree upon
the continuing contributions of its key personnel. The Company does not have
employment contracts with any of its key personnel, with the exception of its
Vice President, Worldwide Industrial Automation, EMEA New Markets 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, operating results, cash flows and financial condition. The Company
believes that its prospects depend in large part upon its ability to attract and
retain highly-skilled engineering, managerial, sales, marketing and
administrative personnel. Competition for such personnel is intense, and there
can be no assurance that the Company will be successful in attracting and
retaining such personnel. Failure to attract and retain key personnel could have
a material adverse effect on the Company's business, operating results, cash
flows and financial condition. See 'Business -- Employees' and 'Management.'
REGULATORY COMPLIANCE AND EVOLVING INDUSTRY STANDARDS
The market for the Company's products is 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, operating results, cash flows and financial condition.
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.
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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, which will need to accept four digit entries to distinguish 21st century
dates from 20th century 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, financial condition, cash flows and results of operations.
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 NET+ product family 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 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, financial
condition, cash flows and results of operations.
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price will be substantially higher than the
book value per share of the currently outstanding Common Stock. Purchasers of
the Common Stock offered hereby will suffer immediate and substantial dilution
of $11.30 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
$13.00 per share). Moreover, the Company may at any time in the future sell
additional securities and/or rights to purchase such securities, grant
additional warrants, stock options or other forms of equity-based incentive
compensation to the Company's management and/or employees to attract and retain
such personnel or in connection with the obtaining of financing, such as debt or
leasing arrangements accompanied by warrants to purchase equity securities of
the Company. Any of these actions, including the exercise of stock options
currently outstanding by officers, directors and employees of the Company, would
have a dilutive effect upon the holders of the Common Stock. See 'Dilution' and
'Management -- Executive Compensation.'
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BROAD DISCRETION IN APPLICATION OF PROCEEDS; ACQUISITION RISKS
The Company intends to use the net proceeds from this offering to reduce
the outstanding principal balance under its line of credit and certain other
indebtedness, including approximately $5.9 million of indebtedness to Osicom,
and approximately $2.2 million of the approximately $3.2 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 $15.1 million of the net
proceeds for any particular uses. Accordingly, the specific uses for a
substantial portion of the net proceeds will be at the complete discretion of
the Board of Directors of the Company and may be allocated from time to time
based upon a variety of circumstances. There can be no assurance that the
Company will deploy such funds in a manner that will enhance the financial
condition of the Company. Acquisitions present numerous risks, including
inaccurate assessment of the benefits to be provided by an acquired business,
the assumption of unexpected liabilities, significant transaction costs and
expenses, costs and expenses involved in the integration of the operations and
services of an acquired business, diversion of management's attention from other
business concerns and potential loss of key employees of the acquired business.
The realization of any of these risks could have a material adverse effect on
the Company's business, financial condition, cash flows and results of
operations. See 'Use of Proceeds.'
NO PRIOR 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, the Selling Stockholder 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 networking systems industry 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, financial condition, cash flows and results of
operations.
ANTI-TAKEOVER PROVISIONS
Shares of preferred stock may be issued by the Company in the future
without stockholder approval and upon such terms as the Board of Directors may
determine. The rights of the holders of the Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding stock of the Company and potentially prevent the
payment of a premium to stockholders in an acquisition transaction. There are no
shares of preferred stock outstanding and the Company has no present plans to
issue any shares of preferred stock. See 'Description of Capital Stock.'
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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.'
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 embedded networking systems
enabling the connection of electronic devices to networks. In 1994, the Company
introduced the Digital Products Option ('DPO') Interface Specification and
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 an embedded networking system
designed to network-enable a broad array of electronic devices in a variety of
product markets. In September 1996, the Company was acquired by Osicom, a
Nasdaq-listed designer and manufacturer of carrier, enterprise and customer
premise networking equipment. The Company has been a wholly-owned subsidiary of
Osicom since the acquisition. Supported by Osicom's funding of working capital,
the Company completed the development of its NET+ 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 Commercial Line to Osicom. Therefore, with respect to
the Company, the Commercial Line is treated as a discontinued operation.
However, the Company continues to provide significant manufacturing and
engineering services to Osicom for the Commercial Line for which Osicom pays the
Company on a cost basis. The Company anticipates that on approximately May 1,
1999, Osicom will assume manufacturing responsibility for the Commercial Line
products which it currently sells and that Osicom will assume responsibility for
engineering support of the Commercial Line on June 30, 1999. See 'Certain
Relationships and Related Party Transactions.' All references herein to the
'Company' refer to NETsilicon, Inc. and do not include the business and assets
of the Commercial Line unless the context otherwise requires.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby are estimated to be approximately $23.2 million at
an assumed initial offering price of $13.00 per share, after deducting the
underwriting discount of approximately $1.8 million and estimated offering
expenses of approximately $1.0 million. See 'Underwriting.' The Company will not
receive any of the proceeds from the sale of shares being offered by the Selling
Stockholder.
The Company expects to repay its indebtedness to Osicom in the approximate
amount of $5.9 million. This indebtedness bears interest at 11.5% per annum and
is payable upon demand by Osicom. The proceeds of the Company's borrowings from
Osicom were used primarily for research and development. In addition, the
Company intends to use a portion of the net proceeds from this offering to repay
approximately $2.2 million of the amounts due to Coast Business Credit under its
line of credit. As of January 31, 1999, the Company had $3.2 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 annum, not to be less than 8.0% per annum. The
Company intends to maintain a balance of $1.0 million under its line of credit
in order to meet the minimum balance requirements and avoid additional fees
under the terms of its agreement with Coast Business Credit. The Company's line
of credit expires 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
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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.
17
<PAGE>
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
January 31, 1999, (i) on an actual basis, and (ii) as adjusted to reflect the
sale of 2,000,000 shares of Common Stock offered by the Company hereby (at an
assumed offering price of $13.00 per share) and the application of approximately
$23.2 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>
AS OF JANUARY 31, 1999
--------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Short-term debt.............................................................. $ 3,192 $ 1,000
-------- --------------
-------- --------------
Due to Osicom(2)............................................................. $ 5,885 $ --
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; 12,000,000 issued and
outstanding as adjusted................................................. 100 120
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 25,178
Accumulated deficit........................................................ (4,399) (4,399)
-------- --------------
Total stockholders' equity (deficit).................................... (1,836) 20,899
-------- --------------
Total capitalization............................................... $ 4,049 $ 20,899
-------- --------------
-------- --------------
</TABLE>
- - - ------------
(1) Adjusted to give effect to the sale by the Company of 2,000,000 shares of
Common Stock and the application of approximately $23.2 million in net
proceeds from this offering, after deducting the underwriting discount with
respect to such shares of approximately $1.8 million and estimated offering
expenses of $1.0 million.
(2) Reflects advances from Osicom to the Company as of January 31, 1999. As of
February 28, 1999 such balance was $5.7 million. The Company anticipates
repayment of all outstanding amounts due to Osicom from the proceeds of this
offering. See Note F to the Notes to the Financial Statements.
18
<PAGE>
<PAGE>
DILUTION
The net tangible book value of the Company as of January 31, 1999, was
$(2,752,000), or $(0.28) 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 2,000,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$13.00 per share and receipt of the estimated net proceeds therefrom, the pro
forma adjusted net tangible book value of the Company as of January 31, 1999
would have been approximately $20,428,200, or $1.70 per share. This represents
an immediate increase in such net tangible book value of $1.91 per share to
existing stockholders and an immediate dilution of $11.30 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............................................... $13.00
Net tangible book value per share as of January 31, 1999........................ $(0.28)
Increase per share attributable to new investors(1)............................. 1.98
------
Pro forma net tangible book value per share as of January 31, 1999....................... 1.70
------
Dilution per share to new investors........................................................... $11.30
------
------
</TABLE>
- - - ------------
(1) Reflects the sale by the Company of 2,000,000 shares of Common Stock and the
receipt of approximately $23.2 million in net proceeds from this offering,
after deducting the underwriting discount with respect to such shares of
approximately $1.8 million and estimated offering expenses of $1.0 million.
------------------------
The following table summarizes, on an adjusted basis as of January 31,
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 $13.00 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) 83.3% $ 5,000,000(2) 15.6% $ 0.50
New investors.................................. 2,000,000 16.7% $26,000,000 84.4% $ 13.00
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Total..................................... 12,000,000 100.0% $32,000,000 100.0%
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
- - - ------------
(1) Sales by Osicom in this offering will reduce the number of shares held by it
to 9,000,000 shares or 75% (8,550,000 shares or approximately 71% 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 3,000,000 shares or 25% (3,450,000
shares or approximately 29% 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.
19
<PAGE>
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data set forth below should be read in conjunction
with 'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and the Financial Statements of the Company and the Notes thereto
included elsewhere in this Prospectus. The statement of operations and balance
sheet data for the fiscal years 1997, 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 and balance sheet data for
the fiscal year 1996 have been derived from the audited financial statements of
the Company. The statement of operations data for the fiscal year 1995 and the
balance sheet data as of January 31, 1995 have been derived from the Company's
unaudited financial statements which, in the opinion of management, include all
significant, normal and recurring adjustments necessary for a fair presentation
of the financial position and results of operations for such unaudited period.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
---------------------------------------------------
1995 1996 1997 1998 1999
----------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................................ $ 5,363 $ 4,598 $ 7,445 $ 7,920 $13,373
Cost of sales........................................................ 3,029 2,662 4,294 4,060 7,271
----------- ------- ------- ------- -------
Gross profit......................................................... 2,334 1,936 3,151 3,860 6,102
Operating expenses:
Selling and marketing........................................... 1,498 915 1,563 1,810 3,336
Engineering, research and development........................... 635 1,698 1,028 1,483 2,153
General and administrative...................................... 409 2,294 1,502 1,795 2,194
----------- ------- ------- ------- -------
Total operating expenses............................................. 2,542 4,906 4,093 5,087 7,683
----------- ------- ------- ------- -------
Operating loss from continuing operations............................ (208) (2,970) (942) (1,228) (1,581)
Interest expense..................................................... (66) (99) (136) (119) (552)
----------- ------- ------- ------- -------
Loss from continuing operations before income taxes.................. (274) (3,069) (1,078) (1,346) (2,132)
Provision for income tax benefit..................................... 446 643 969 493 --
----------- ------- ------- ------- -------
Net income (loss) from continuing operations......................... $ 172 $(2,426) $ (109) $ (853) $(2,132)
----------- ------- ------- ------- -------
----------- ------- ------- ------- -------
Net income (loss) from continuing operations per share:
Basic........................................................... $ 0.02 $ (0.34) $ (0.02) $ (0.09) $ (0.21)
Diluted......................................................... $ 0.02 $ -- $ -- $ -- $ --
Supplemental net income (loss) per share(1).......................... 0.02 (0.31) (0.01) (0.08) (0.20)
Weighted average number of shares outstanding:
Basic........................................................... 7,161 7,176 7,158 10,000 10,000
Diluted......................................................... 10,000 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF JANUARY 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
----------- ------- ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................................... $ -- $ 19 $ 394 $ 185 $ 583
Working capital................................................... (852) (1,261) (241) (787) (3,471)
Total assets...................................................... 7,318 7,033 7,615 7,933 11,648
Due to Osicom(2).................................................. 0 0 948 1,812 5,885
Total debt (including short-term debt)............................ 6,190 2,863 3,338 3,005 3,191
Stockholders' equity (deficit).................................... 1,076 (458) 763 586 (1,836)
</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 621,231 shares, the proceeds of which would
be necessary to reduce borrowings by $8.1 million.
(2) Reflects advances from Osicom to the Company as of January 31, 1999. As of
February 28, 1999, such balance was $5.7 million. The Company anticipates
repayment of all outstanding amounts due to Osicom with the proceeds of the
offering. See Note F to the Notes to the Financial Statements.
20
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the information included elsewhere in this Prospectus. Certain information
contained herein may include 'forward-looking statements' within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts included in this Prospectus, are forward-looking
statements. Such statements are subject to certain risks and uncertainties,
which include but are not limited to those discussed in the section entitled
'Risk Factors.' Should one or more of these risks or uncertainties, among others
as set forth in this Prospectus, materialize, actual results may vary materially
from those estimated, anticipated or projected. Although the Company believes
that the expectations reflected by such forward-looking statements are
reasonable based on information currently available to the Company, no assurance
can be given that such expectations will prove to have been correct. Cautionary
statements identifying important factors that could cause actual results to
differ materially from the Company's expectations are set forth in this
Prospectus. All forward-looking statements included in this Prospectus and all
subsequent oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by these
cautionary statements.
OVERVIEW
The Company develops and markets embedded networking solutions. The
Company's products are incorporated into the design of embedded systems to
provide the ability to communicate over standards-based LANs, WANs and the
Internet, enabling the development of completely new embedded systems
applications. The Company believes that it provides the first standards-based
embedded networking system to offer a single chip solution that, in conjunction
with the physical interface and memory, encompasses all of the required hardware
and software necessary to network-enable virtually any electronic device. The
Company's technology is designed to have broad applicability and therefore may
be incorporated into virtually any electronic device. 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
20 OEMs such as Minolta Corporation, NEC Corporation, Sharp Corporation and
Xerox Corporation. The Company's products are also in various stages of being
incorporated by 43 OEMs into the design of products in other 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 embedded
networking systems enabling the connection of electronic devices 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 an
embedded networking system designed to network-enable a broad array of
electronic devices in a variety of product 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+
family of products, and began shipping that family of products in March 1998.
Effective as of May 1, 1998, the Company transferred its Commercial Line to
Osicom. Therefore, the Company treats the Commercial 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 Commercial Line for
which Osicom pays the Company on a cost basis. The Company anticipates that on
approximately May 1, 1999, Osicom will assume responsibility for all
manufacturing of the Commercial Line products which it currently sells and that
on approximately July 1, 1999 Osicom will assume responsibility for providing
engineering support for the Commercial Line. See 'Certain Relationships and
Related Party Transactions.' The financial data discussed below does not include
the operations of the Commercial Line.
21
<PAGE>
<PAGE>
The Company generates revenues from the sales of embedded networking
products, software development tools and application engineering services. The
Company's embedded networking products are sold to OEMs which incorporate them
into electronic devices that are sold to end users. The Company generally
recognizes product and software license revenue upon shipment to its OEM
customers. 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 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 fiscal year 1999, international sales constituted approximately 50.0% of
the Company's net sales, and approximately 18.5% of its domestic sales were to
customers headquartered in Asia. Approximately 96.4% of the Company's net sales
in fiscal year 1999 were made to OEM customers in the imaging market, many of
which are headquartered in Japan.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years 1997, 1998 and 1999,
information derived from the Company's Statement of Operations expressed as a
percentage of net sales.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
FISCAL YEAR ENDED JANUARY 31,
-----------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net sales........................................................................ 100.0% 100.0% 100.0%
Cost of sales.................................................................... 57.7 51.3 54.4
----- ----- -----
Gross profit..................................................................... 42.3 48.7 45.6
Operating expenses:
Selling and marketing....................................................... 21.0 22.9 24.9
Engineering, research and development....................................... 13.8 18.7 16.1
General and administrative.................................................. 20.2 22.7 16.4
----- ----- -----
Total operating expenses......................................................... 55.0 64.3 57.4
Operating income (loss) from continuing operations............................... (12.7) (15.5) (11.8)
Interest expense................................................................. (1.8) (1.5) (4.1)
----- ----- -----
Income (loss) from continuing operations before income taxes..................... (14.5) (17.0) (15.9)
Provision for income taxes....................................................... 13.0 6.2 --
----- ----- -----
Net income (loss) from continuing operations..................................... (1.5) (10.8) (15.9)
----- ----- -----
----- ----- -----
</TABLE>
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Net sales. Net sales increased from $7.9 million in fiscal year 1998 to
$13.4 million in fiscal year 1999. 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 fiscal year 1999
compared to $606,000 or 7.6% of net sales in fiscal year 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. Cost of sales consists principally of the cost
of raw material components and subcontract labor assembly from outside
manufacturers and suppliers. Gross profit increased from $3.9 million, or 48.7%
of net sales, in fiscal year 1998, to $6.1 million, or 45.6% of net sales in
fiscal year 1999. The gross margin decrease in fiscal year 1999, was due
primarily to costs resulting from the late delivery of the NET+ARM chip as well
as slower than anticipated general raw material cost reductions due to cash
constraints. In addition, average sales prices decreased slightly from fiscal
year 1998 to fiscal year 1999.
Selling and marketing expenses. Selling and marketing expenses consist
mainly of employee-related expenses, commissions to sales representatives, trade
shows and travel expenses. These expenses
22
<PAGE>
<PAGE>
increased from $1.8 million, or 22.9% of net sales, in fiscal year 1998 to $3.3
million, or 24.9% of net sales, in fiscal year 1999. This increase was the
result of (i) additional sales commissions due to the increased net sales
volume, (ii) increased marketing efforts, including the addition of two senior
marketing employees, associated with the introduction and brand identification
efforts related to the NET+ family of products subsequent to its introduction in
January 1998, and (iii) expanded efforts to increase the Company's OEM customer
base.
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. These expenses increased from $1.5 million or 18.7%
of net sales in fiscal year 1998 to $2.2 million, or 16.1% of net sales, in
fiscal year 1999. This increase was due to the increased expenditures associated
with the development of the Company's NET+ family of products. Software
development costs of $724,000 and $556,000 in fiscal years 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 fiscal year 1999 and fiscal year 1998 were
$227,300, and $277,300 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 from $1.8 million, or 22.7% of net sales, for fiscal year
1998 to $2.2 million, or 16.4% of net sales, for fiscal year 1999. 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 fiscal year 1999, as well as from an expansion of the
Company's infrastructure to facilitate anticipated growth.
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 from $119,000, or 1.5% of net sales, in
fiscal year 1998 to $552,000, or 4.1% of net sales, in fiscal year 1999. During
fiscal year 1999, approximately $353,000 was attributable to interest charges on
advances to the Company from Osicom. During fiscal year 1998, Osicom did not
charge any interest on advances to the Company. The interest rate on the
Company's short-term debt has remained constant at 11.0% since February 1997.
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 fiscal years 1999 and 1998 because the tax provision attributable to
discontinued operations offset the tax benefits attributable to continuing
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 1998 COMPARED TO FISCAL YEAR 1997
Net sales. Net sales increased from $7.4 million for the fiscal year 1997
to $7.9 million for fiscal year 1998. This increase in net sales resulted from
an increased number of OEM customers and moderately increased volume in units
sold, offset in part by declining sales prices. Backlog for the Company's
products and services was approximately $1.9 million and $1.8 million at
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 from $3.2 million, or
42.3% of net sales, for fiscal year 1997 to $3.9 million, or 48.7% of net sales,
for the fiscal year 1998. The gross margin increase reflected primarily
reductions in the costs of raw materials as well as a higher margin product mix.
23
<PAGE>
<PAGE>
Selling and marketing expenses. Selling and marketing expenses increased
from $1.6 million, or 21.0% of net sales, for fiscal year 1997 to $1.8 million,
or 22.9% of net sales, for fiscal year 1998. This increase resulted from
expanded efforts to increase the Company's OEM customer base.
Engineering, research and development expenses. Engineering, research and
development expenses increased from $1.0 million, or 13.8% of net sales, for
fiscal year 1997 to $1.5 million, or 18.7% of net sales, for fiscal year 1998.
The increase in these expenses resulted from the cash constraints of the Company
during fiscal year 1997 and the increased expenditures associated with the
development of the Company's NET+ family of products in fiscal year 1998.
Software development costs of $556,000 and $369,500 in fiscal years 1998 and
1997, respectively were capitalized and are being amortized over the products'
useful lives. Amortization expenses related to capitalized software development
costs for fiscal years 1998 and 1997 were $277,300 and $321,900, respectively.
General and administrative expenses. General and administrative expenses
increased from $1.5 million, or 20.2% of net sales, in fiscal year 1997 to $1.8
million, or 22.7% of net sales, in fiscal year 1998. The increase in these
expenses resulted primarily from an expansion of the Company's infrastructure to
facilitate growth.
Interest expense. Interest expense decreased from $136,000 or 1.8% of net
sales, for fiscal year 1997 to $119,000, or 1.5% of net sales, for fiscal year
1998. 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 1998 and 1997. Instead, the tax provision attributable to
discontinued operations created the tax benefit attributable to continuing
operations. At January 31, 1998 the Company had federal net operating losses of
approximately $1.5 million and research and development credits of approximately
$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 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.
UNAUDITED QUARTERLY RESULTS
The following tables set forth certain statement of operations data for
each quarter of fiscal years 1998 and 1999. 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. The operating
results for any quarter are not necessarily indicative of results for any future
period. See 'Risk Factors -- Potential Fluctuations in Operating Results.'
Fluctuations in the Company's operating results have occurred in the past
and are likely to occur in the future due to a variety of factors, any of which
may have a material adverse effect on the Company's operating results. The
Company believes that period-to-period comparisons are not necessarily
meaningful and should not be relied upon as indicative of future operating
results. The Company's operating results in a future quarter or quarters are
likely to fall below the expectations of public market analysts or investors. In
such an event, the price of the Company's Common Stock will be materially
adversely affected.
See 'Selected Financial Data,' the Financial Statements of the Company and
the Notes thereto, appearing elsewhere in this prospectus. The Company has
experienced and may in the future continue to experience fluctuations in its
quarterly operating results due to any one or combination of factors as
24
<PAGE>
<PAGE>
described in 'Risk Factors -- Potential Fluctuations in Operating Results'
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
--------------------------------------------------------------------------------
APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31,
1997 1997 1997 1998 1998 1998 1998
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................................ $2,471 $2,703 $ 890 $1,856 $2,185 $3,199 $ 3,030
Cost of sales............................ 1,369 1,376 441 875 1,037 1,497 2,117
-------- -------- -------- -------- -------- -------- --------
Gross profit............................. 1,102 1,327 449 981 1,148 1,702 913
Operating expenses:
Selling and marketing................ 425 478 401 506 628 627 1,009
Engineering, research &
development........................ 398 402 424 259 448 502 669
General and administrative........... 451 454 442 448 352 405 756
-------- -------- -------- -------- -------- -------- --------
Total operating expenses................. 1,274 1,334 1,267 1,213 1,428 1,534 2,434
Operating income (loss) from continuing
operations............................. (172) (7) (818) (231) (280) 168 (1,520)
Interest expense......................... (20) (34) (46) (18) (60) (77) (198)
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes.................... (192) (41) (864) (249) (340) 91 (1,718)
Provision for income tax benefit......... 112 110 31 241 -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) from continuing
operations............................. $ (80) $ 68 $ (833) $ (8) $ (340) $ 91 $ (1,718)
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
<CAPTION>
JAN. 31,
1999
--------
<S> <C>
Net sales................................ $4,959
Cost of sales............................ 2,619
--------
Gross profit............................. 2,340
Operating expenses:
Selling and marketing................ 1,074
Engineering, research &
development........................ 534
General and administrative........... 681
--------
Total operating expenses................. 2,289
Operating income (loss) from continuing
operations............................. 52
Interest expense......................... (217)
--------
Income (loss) from continuing operations
before income taxes.................... (165)
Provision for income tax benefit......... --
--------
Net income (loss) from continuing
operations............................. $ (165)
--------
--------
</TABLE>
The Company's quarterly revenues for the quarters 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 quarter ended October 31, 1998, reducing
its quarterly revenues to below its expectations. Many such orders were filled
during the quarter ended January 31, 1999, generating unusually high revenues
for this period. Investors should not expect revenues during the April 30, 1999
quarter, or any future quarter, to exceed its unusually high level in the
quarter ended January 31, 1999.
During the quarter 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 quarter 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 primarily
through advances from Osicom and borrowings under its short term bank line of
credit. The Company believes its cash from operations and the proceeds of this
offering will be sufficient to meet its projected working capital needs for at
least twelve months following the consummation of this offering. However, there
can be no assurance that the Company's working capital requirements will not
exceed the Company's ability to generate sufficient cash to support its
requirements. The Company cannot give any assurances that sufficient capital
will be available when needed on terms acceptable to the Company, if at all.
The Company had an operating cash flow deficit of $1.9 million during
fiscal year 1999, as compared to operating cash flow of $45,300 for fiscal year
1998. This increase in the net operating cash flow outlays reflects the
significant growth in accounts receivable (from $3.6 million at January 31, 1998
to $4.2 million at January 31, 1999) and inventory (from $2.6 million at
January 31, 1998 to $3.8 million at January 31, 1999) caused by the growth in
demand for the Company's OEM products. While the Company anticipates positive
cash flows from its operating activities during its next fiscal year, there can
be no assurance that positive cash flows from operations will be achieved.
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
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expenses each will increase in fiscal year 2000 and thereafter compared to the
amounts of such expenses in fiscal year 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.
Investing activities during the fiscal year ended January 31, 1999
consisted of property and equipment of $328,100 and expenditures for capitalized
software development costs of $723,600. During fiscal year 1998, the Company's
investing activities included $604,800 for purchases of property and equipment
and $556,000 in expenditures for capitalized software development.
Financing activities of the Company during fiscal year 1999 provided net
cash inflows of $3.2 million as compared with $891,000 during fiscal year 1998.
Financing activities during fiscal year 1999 consisted of net proceeds from
loans by Osicom of $3.0 million and net proceeds from short-term debt of
$186,500, net of long-term debt repayments of $17,900. During fiscal year 1998
the Company's financing activities included net proceeds from loans by Osicom of
$854,400 and net proceeds from short-term debt of $291,000 net of long-term debt
repayments of $254,700.
From time to time the Company has received loans, including payment of
expenses on behalf of the Company, from Osicom which are subordinate to bank
debt. As of January 31, 1999, the balance due Osicom was approximately $5.8
million. As of January 31, 1998, Osicom began accruing interest on the
outstanding balance 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 have further loans from Osicom subsequent to this offering.
The Company has a credit facility of $5.0 million, of which $1.8 million
was unused at January 31, 1999, provided by Coast Business Credit, a division of
Southern Pacific Bank, an asset based lender, collateralized by accounts
receivable, inventory and equipment and a guarantee by Osicom. The loan bears
interest at 2.5% over the bank's prime rate, but not less than 8.0%, and expires
February 1, 2001.
The Company's standard payment terms are net 30 days. Historically, 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. This can
artificially raise the days sales outstanding calculation for the fiscal years
1998 and 1997.
YEAR 2000 CONVERSION
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-sensitive 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
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 flow and results of operations.
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The Company's internal systems include both information technology ('IT')
and non-IT systems. The Company has initiated an assessment of its material
internal IT and non-IT systems, including software and hardware technology, and
plans to complete such assessment in 1999. 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 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 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 flow 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 material.
The Company has not fully developed a contingency plan to address
situations that may result if it is unable to achieve Year 2000 compliance for
its critical operations. The cost of developing and implementing such a plan may
itself be material. Moreover, 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.
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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, 1999. 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.
During 1998, Statement of Position ('SOP') No. 98-9 was issued. The
provisions of SOP No. 98-9 amend certain provisions of SOP No. 98-4 and SOP No.
97-2.
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BUSINESS
The following Business Section contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth under
'Risk Factors' and elsewhere in this Prospectus.
OVERVIEW
NETsilicon, Inc. (the 'Company') develops and markets embedded networking
solutions. The Company's products are incorporated into the design of embedded
systems to provide the ability to communicate over standards-based LANs, WANs
and the Internet, enabling the development of completely new embedded systems
applications. The Company believes that it provides the first standards-based
embedded networking system to offer a single chip solution that, in conjunction
with the physical interface and memory, encompasses all of the required hardware
and software necessary to network-enable virtually any electronic device. 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 20 original equipment manufacturers ('OEMs'), including Minolta
Corporation, NEC Corporation, Sharp Corporation and Xerox Corporation. The
Company's products are also in various stages of being incorporated by 43 OEMs
into the design of products in other markets, such as industrial automation
equipment, communication devices, data acquisition and test equipment, Internet
devices and utility monitoring equipment.
INDUSTRY BACKGROUND
Virtually any electronic device that does not require a person's constant
presence is a candidate for network connectivity. Connection to a network
affords the operators of these devices the convenience of controlling or
monitoring them from where the operators are rather than from where the devices
are. Device networking can be as simple as a home security company receiving a
message that a door in a subscriber's house is open, or as complex as the
control of a multi-step chemical process through a refinery. Other examples of
existing device networks include ATM machines and heating, ventilation and air
conditioning systems. Despite the many benefits of networking, and the vast
number of devices that are potential candidates to be networked, few such
devices are currently connected to a network.
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
convergence on common transmission protocols for computer networks. Imaging
device networking solutions, like those manufactured and sold by the Company,
incorporated those common transmission protocols.
In markets other than imaging, network connectivity has generally been
based upon the unique or 'proprietary' communication protocols of manufacturers
of devices to be networked. Creating and upgrading proprietary networks
generally has been costly and time consuming for these OEMs. In addition, this
OEM-specific approach generally has been restrictive for end users. End users
have been unable to gain the benefits of new, add-on products and software
developed by third-party vendors based on networking industry standards,
resulting in out-dated and sub-optimal systems requiring costly upgrades.
With the recent convergence on common networking protocols, such as TCP/IP
and Ethernet, OEMs have increasingly attempted to develop standards-based
networking solutions for incorporation into their products. These solutions are
designed to integrate multiple hardware and software sub-systems commercially
available from numerous and distinct third-party vendors. A multi-source
solution requires the engineering and integration of components including a CPU
chip, an Ethernet chip, a direct memory access ('DMA') controller, a memory
controller, a Web server, a Hyper Text Transfer Protocol
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('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 and users 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 device or devices 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 when OEMs and end-users have sought remote management
and control of devices. As a result, most non-imaging devices have not been
connected to networks. In situations in which OEMs have achieved network
connectivity in their devices, they have sacrificed time, effort and expense to
create proprietary solutions, board-based solutions or solutions assembled from
numerous and distinct vendors. 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 embedded networking solutions based on its
15 years of experience in providing networking connectivity for a wide array of
electronic devices. The Company's solutions are designed to enable OEMs to
reduce cost and improve the time to market of their end products that
incorporate embedded networking capability. The Company delivers an embedded
networking system comprised of its NET+ software and application specific
hardware in the form of integrated circuits or network interface cards. The
Company also provides software development licenses and application engineering
services to OEMs to enable them to design products incorporating NET+
technology. The Company believes that it offers a superior networking solution
to OEMs because its products are:
STANDARDS-BASED. The Company's products are based on existing LAN, WAN
and Internet networking standards. This makes it possible for electronic
devices to communicate with other standards-based equipment, thus enabling
the free exchange of information, distributed processing and remote
maintenance. Furthermore, this makes it possible for third-party software
developers to readily design new products or enhancements for use in NET+
equipped devices. The Company believes that end-user demand will be higher
for NET+ equipped, standards-based products than for comparable products
containing solutions based on non-standard transmission protocols.
COMPREHENSIVE. The Company offers a comprehensive solution that
consolidates the software and hardware necessary to network enable
electronic devices. 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 devices. OEMs
that adopt the Company's NET+ technology do not need to develop in-house
networking expertise in order to offer advanced connectivity in their
products. This enables them to focus their engineering resources on
developing other aspects of their products. Furthermore, OEMs incorporating
NET+ solutions into their products do not need to acquire networking
hardware or software from multiple third-party vendors and perform the
associated highly complex and lengthy integration and maintenance.
SCALABLE AND EXTENSIBLE. The NET+ technology is based on a design
platform that allows software extensibility across a wide range of hardware
platforms and performance levels. Scalability is achieved through a design
which enables pin-compatible chips from 5 MIPS (million instructions per
second) to 120 MIPS performance levels to be used in the same OEM device
without redesigning the hardware or reprogramming the software.
PROVEN. Since its inception, the Company has designed, marketed and
sold products 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 shipped more
than 80,000 units in fiscal year 1999 in a range of applications including
network printers, copiers and modems.
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[graph]
BUSINESS STRATEGY
Key elements of the Company's strategy include (i) expanding on its
existing OEM customer relationships in the imaging industry; (ii) identifying
and penetrate new OEM markets; (iii) influencing industry standards for network
connectivity in those new markets; and (iv) developing market-specific versions
of its products to reinforce its position in the markets it has entered.
EXPAND EXISTING CUSTOMER RELATIONSHIPS IN THE IMAGING INDUSTRY. Twenty
OEMs in the imaging industry have adopted the Company's device networking
solutions over the past four years. OEMs are currently commercially
shipping 34 imaging products incorporating the NET+ technology. In
addition, OEMs are in various stages of designing 23 other products which
will incorporate the NET+ solution. The Company believes that it has
demonstrated, and plans to continually strengthen, its high level of
performance and reliability to these imaging customers. The Company seeks
to capitalize on its existing relationships to design its solution into its
customers' other products that will require embedded networking capability.
IDENTIFY AND PENETRATE OTHER 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 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 solution. As of January 31, 1999, the Company had
achieved seven design wins in this market. The Company's ability to target
multiple other markets results from the basic design of the Company's
products, specifically their suitability for incorporation into a very wide
variety of electronic devices 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
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. Expanding on its
strategy to penetrate new markets, the Company intends to bolster its
competitive position within those markets by
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developing value-added versions and features of the NET+ solution,
specifically tailored to each markets' unique requirements. The Company
believes that this approach to product development will increase the
attractiveness of the NET+ solution over the more generic, less function-
rich solutions of existing competitors, and increase the necessar
investment of new competitors seeking to enter that market.
INFLUENCE INDUSTRY STANDARDS IN OTHER MARKETS. The Company believes
that each market it targets is likely to have one or more OEMs that will be
early adopters of device networking 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 thereby position the
Company's products as the leading embedded networking technology in each
market it enters. 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 by taking a leading role in the growth of
the Alliance, it will establish its reputation in the industry of
industrial automation.
PRODUCTS AND SERVICES
The Company's technology solution is comprised of products and application
engineering services. The Company's products comprise NET+ value added software
integrated with a hardware ASIC containing a core microprocessor. The Company's
products are sold as complete systems and include both the hardware and a
license to use the full array of NET+ software. The Company's NET+ software
provides all of the functionality needed to implement LAN, WAN and Internet
connectivity. 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 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 network interface can function with networks
comprised of multiple protocols and operating systems, including Novell NetWare,
AppleTalk, UNIX, TCP/IP and Windows NT. In addition, DPO 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.
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These components allow customers to develop prototypes on a network,
transfer data and configure their devices in a matter of days, versus the six
months generally required with alternative approaches and all without any
sacrifice in system performance or memory requirements.
The Company offers its NET+ software integrated with ASICs containing
embedded microprocessors from either ARM or Motorola. These ASICs are then
incorporated directly onto the embedded controller or integrated into a network
interface card ('NIC'). Other required components of the solution include memory
modules and physical interfaces, 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 chips into their controllers and such sales will represent an
increasing percentage of future sales. Currently, a majority of the Company's
NICs include the NET+ARM'TM' chip.
NET+ARM'TM', the Company's most frequently sold chip, operates at a speed
of 12 million instructions per second ('MIPS'). Because of the extensibility of
the NET+ software, 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
NET+ARM'TM' is available to OEM customers represents a significant cost savings
relative to the cost of currently available components necessary to achieve
functionality equivalent to that of NET+ARM'TM'. Though the Company plans to
offer products containing embedded processors other than ARM and Motorola, it
has no such commitments as of the date of this prospectus.
NET+ARM'TM''s processing speed is enhanced by NET+DMA, an interface between
the Ethernet MAC 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.
A key component of the Company's strategy is to leverage its proven
NET+ARM'TM' products by adding application-specific software that is focused on
the unique needs of vertical industry markets. The Company's first customized
vertical-market application of NET+ARM'TM' is an embedded networking solution
designed for use by manufacturers of imaging devices, such as printers, copiers,
faxes, scanners and multifunction peripherals. Known as NET+ARM'TM'NCC, this
product utilizes the same core technology found in NET+ARM'TM' and adds
NET+Applications software developed by the Company specifically for use in
imaging devices. NET+ARM'TM'NCC 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. Like NET+ARM'TM', it
is available for installation directly on the controller board, thereby
eliminating the need for a separate NIC. The Company developed NET+ARM'TM'NCC 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.
SOFTWARE DEVELOPMENT TOOLS
NET+ARM'TM' is 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.
The Company also provides to customers target development boards with
schematics and computer aided design ('CAD') electronic format files which
assist OEM hardware and software application developers in the debugging process
of their product-specific applications being ported to and developed on
NET+ARM'TM'. Developers also receive an embedded In Circuit Emulator ('ICE')
debugging tool to enable testing and evaluation of hardware and their software
after it has been ported to NET+ARM'TM'. 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 'getting
started,' hardware and software reference manuals, development board jumpers and
a components guide.
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The development tools also include additional cost options such as the ARM
tools and ISI's pRISM+'TM' or Wind River's Tornado open, graphical development
environments. ISI's pRISM+'TM' 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.'
APPLICATION ENGINEERING SERVICES
The Company believes its OEM customers place significant emphasis on high
quality 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 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 provides
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
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 in which OEMs are
taught to install the Company's products (both hardware and software), set
up and configure all network operating systems and protocols, and
understand Ethernet and Token Ring topology. OEM staff are also trained to
provide 'help desk' support, configure the product and diagnose end-user
problems over the phone. OEM managers are trained for 'second level'
support, in which a senior staff member 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.
PRODUCT UPDATES. Updates on all releases of NET+ software are
available to OEMs initially under warranty and thereafter on an optional
service and maintenance contract basis.
The Company receives revenue from the foregoing services although it
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 software development efforts on addressing
industry needs, developing industry-specific applications and integrating
additional operating systems and protocols into its solution. The Company
focuses its hardware development efforts on improving the performance of its
exclusive products, simplifying the integration process for its products and
introducing new products with a variety of speeds, capabilities and price
points.
The Company has made and expects to continue to make substantial
investments in product development. For fiscal years 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. As of January 31, 1999, the Company had
29 full-
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<PAGE>
time employees who have substantial embedded 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 January 31, 1999, the Company employed a total of 26 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 has an extensive set of marketing programs designed to build
NETsilicon and NET+ awareness and generate new sales leads. The Company's
primary marketing activities include advertising, direct mail, customer
communications, trade show participation and press / media / 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 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 more than 20
members, including GE Fanuc, Sun Microsystems, Inc., and Siemens AG.
The Company and its printer controller partners actively engage in joint
marketing efforts, presenting their individual products as a fully compatible,
comprehensive imaging/networking solution to imaging OEMs.
Manufacturers Representatives
Manufacturers representatives act as local sales agents for the Company and
work on a commission basis. There are seven manufacturers representatives in the
United States, three in Europe/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.
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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 January 31, 1999, the Company had approved ten consulting
firms as 'authorized developers' of its products, all of which had already
achieved at least one design win.
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 electronic devices
in which they seek to incorporate embedded networking capability. OEMs typically
select core components such as the Company's products early in the device design
process. When the Company's products are selected to be incorporated by an OEM,
the Company achieves what is known as a 'design win.' At such time, the OEM
typically purchases development tools and application engineering services from
the Company to facilitate the integration of its product into the design. Once
the Company's product is designed in, the OEM typically cannot substitute an
alternative to the Company's product without incurring significant cost or
development time. Therefore, the Company is generally the sole supplier of
embedded networking technology throughout the life cycle of a particular OEM
product design.
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
forecasted demand. 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 design win and shipping
customer activity over the prior eight quarters:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
--------------------------------------------------------------------------------
APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31,
1997 1997 1997 1998 1998 1998 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Design Wins(1):
Imaging market....................... 1 4 5 5 9 8 8
Other markets........................ 0 0 0 0 11 11 12
-- -- -- -- --- --- --
Total............................ 1 4 5 5 20 19 20
-- -- -- -- --- --- ---
-- -- -- -- --- --- ---
Shipping Customers(2):
Imaging market....................... 7 7 7 7 11 14 16
Other markets........................ 0 0 0 0 0 0 2
-- -- -- -- --- --- ---
Total............................ 7 7 7 7 11 14 18
-- -- -- -- --- --- ---
-- -- -- -- --- --- ---
<CAPTION>
JAN. 31,
1999
--------
<S> <C>
OPERATING DATA:
Design Wins(1):
Imaging market....................... 9
Other markets........................ 14
---
Total............................ 23
---
---
Shipping Customers(2):
Imaging market....................... 17
Other markets........................ 3
---
Total............................ 20
---
---
</TABLE>
- - - ------------
(1) Represents new OEM products being designed incorporating the Company's
products.
(2) Represents the number of customers to which product was shipped during the
period indicated.
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DESIGN WIN CASE STUDIES
Two examples of recent design wins are provided below.
Industrial Automation. A developer of embedded software for
mission-critical industrial automation applications is currently developing an
embedded valve control system. The system consists of a NET+ARM'TM' processor
that resides on top of a valve/actuator package and provides an Ethernet
connection directly to the valve without the need for any additional gateways.
The system provides continuous control of valve position, as well as monitoring
of diagnostic parameters such as friction, response speed, flowmeter output and
air pressure. NET+ARM'TM''s eighty percent 'headroom' (processing power on the
ASIC for OEM-specific software applications) is being utilized by the customer
to incorporate computer-intensive monitoring and analytical applications that
provide operators with real-time data to more accurately predict maintenance
schedules and quickly respond to valve problems. NET+ARM'TM' was selected for
the computing power it will provide to analyze valve data. NET+ARM'TM' will also
provide the Ethernet connection to alert the control room of critical
situations, such as incomplete valve shut-off. NET+ARM'TM''s small footprint and
low cost were also factors in the decision to design NET+ARM'TM' into the valve
control system. The customer estimated that the incorporation of NET+ARM'TM'
made possible a very significant unit cost savings over other solutions.
Time-to-market was also a factor. The customer estimated that NET+ARM'TM''s
built-in networking capabilities reduced development time by at least four
months.
Internet Telephony. A communications company selected NET+ARM'TM' for its
new switch product. The switch is targeted to medium-sized offices and acts as a
combination PBX and Ethernet switch/LAN router. The system consists of a single
wire to the desktop that provides a LAN connection for a PC, as well as the
voice communications link to the PBX telephone system. The NET+ARM'TM' serves
several functions on the central switch, such as handling all the call
processing for the voice component and routing capabilities to and from a WAN
connection for the data portion. NET+ARM'TM' enables the company to get its
product to market quicker than would be possible with other available solutions.
Using the Company's development tools, the customer was able to get its entire
Web page up and running on the NET+ARM'TM' development board in one day.
IMAGING CUSTOMERS
The Company sells its products for incorporation into OEM devices.
Representative customers from the Company's twenty imaging OEMs who incorporated
the Company's solution into their products include:
<TABLE>
<S> <C>
DIMATECH Corporation NEC Corporation
Fuji Xerox Co. Ltd. New Generation Computing, Inc.
Kyocera Communications Sharp Electronics Corporation
Minolta Corporation Xerox Corporation
</TABLE>
The Company's twenty imaging OEM customers have designed its solution into
57 imaging products currently available for sale or in development. All of the
Company's net sales for fiscal year 1998 and 96.4% of net sales for fiscal year
1999 were derived from the imaging device market. DIMATECH Corporation, Konica
Business Systems, Kyocera Communications and Minolta Corporation, each
represented greater than 10% of the Company's net sales for fiscal year 1999.
MANUFACTURING
The Company engages Atmel Corporation ('Atmel') to manufacture the
NET+ARM'TM' chip. Shipments of the chip are first delivered to the Company,
where its staff performs quality assurance testing. 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'TM' chips. Additionally, the Company obtains price quotes from
possible second sources for chips in order to ensure that the Company is
receiving competitive price terms from its current manufacturer.
The Company contracts with domestic qualified assemblers and with Uni
Precision Industrial, Ltd. ('Uni'), a Hong Kong-based subsidiary of Osicom, to
assemble printed circuit boards. The Company performs some final assembly of
printed circuit boards and, for quality assurance purposes, randomly
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<PAGE>
tests boards assembled by third parties. The Company believes that the terms of
its arrangement with Uni are at least as favorable as 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. See 'Certain
Relationships and Related Party Transactions.'
The Company has 26 full-time employees in Waltham, Massachusetts performing
manufacturing-related activities, including purchasing, final assembly, testing,
quality assurance, packaging and shipping. The Company currently performs
manufacturing services for Osicom pursuant to an intercompany agreement although
such agreement is expected to expire on May 1, 1999. See 'Certain Relationships
and Related Party Transactions.'
PRODUCT BACKLOG
The Company's business is characterized by short-term shipment schedules.
Orders constituting the Company's current backlog are subject to changes in
delivery schedules or to cancellation at the option of the purchaser in
accordance with the Company's policies without significant penalty. The backlog
at a particular time can be affected by a number of factors, including the
implementation priorities of its OEM customers. Accordingly, although useful for
scheduling production, backlog as of any particular time may not be a reliable
measure of sales for any future period. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations.'
As of January 31, 1999, the Company's backlog was approximately $7.8
million, as compared to $1.9 million as of January 31, 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's principal competition comes from products developed in-house
by current and prospective OEM customers, as well as hardware-only and
software-only products of other vendors combined by OEMs and other third-parties
into single, multi-sourced networking solutions. Echelon Corporation, a supplier
of a proprietary networking solution, also offers a product which combines both
hardware and software. The Company believes it is the only supplier of embedded
networking products to offer a single-vendor, standards-based solution which
consolidates on one chip all necessary networking hardware and software
subsystems. The Company believes that the competitive factors affecting the
market for the Company's products include product performance, price and
quality; product functionality and features; the availability of products for
existing and future platforms; the ease of integration of the products with
other hardware and software components of the customer's products; and the
quality of support services, product documentation and training.
The products of certain hardware-only and software-only vendors are
currently combined by some OEMs and other third-parties into multi-sourced
network solutions, and they therefore represent competition to the Company. It
is possible that one or more hardware-only vendors could choose to acquire or
develop a networking software capability and thus offer a comprehensive solution
similar to the Company's. Conversely, one or more software-only vendors could
choose to acquire or develop networking hardware capability. The Company
believes that the impetus to offer a comprehensive embedded networking solution
may allow the Company to establish product alliances with large hardware-only
vendors, making the Company's products the networking solution the designed in
networking solution for these vendors' microprocessors. This would allow the
Company to leverage the extensive sales and marketing reach of these large
hardware-only vendors and thus turn this potential competitive threat to the
Company's advantage. The key hardware-only vendors are Axis
Communications, Emulex Corporation, Motorola Corporation, Hitachi, Ltd., HBM-UK,
Intel Corporation and Samsung Electronics Co., Ltd. Key software-only vendors
are Integrated Systems, Inc., and Wind River Systems, Inc.
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<PAGE>
INTELLECTUAL PROPERTY, TRADEMARKS AND PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright, distribution
software license agreements, trademark and trade secret law, employee and
third-party nondisclosure agreements, and other methods to safeguard its
proprietary rights and technology. 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. The Company
has one patent application pending with the United States Patent and Trademark
Office and plans to file various additional applications. It may be possible,
however, that any patents, once issued, may be circumvented by competitors of
the Company. Despite these precautions, it may be possible for unauthorized
third parties to copy certain portions of the Company's products or obtain and
use information the Company regards as proprietary. While the Company's
competitive position may be affected by its ability to protect its proprietary
information, the Company believes that trademark and copyright protections are
not material to the Company's success.
Pursuant to an 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 the Commercial Line to Osicom.
Osicom's rights in such intellectual property are limited to use in certain
products manufactured by Osicom related to the Commercial Line, and cannot be
transferred, resold, licensed or assigned by Osicom.
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 licenses the right to use the NET+ARM trademark from ARM
Limited pursuant to a royalty-free agreement expiring in 2008.
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 square feet of this office space to Osicom. The Company believes
that its current facilities are adequate to meet its needs for the foreseeable
future. See 'Certain Relationships and Related Party Transactions.'
EMPLOYEES
As of January 31, 1999, the Company had approximately 92 full-time
employees, of which 54 were engaged in product development,
manufacturing-related duties and customer support, 26 in sales and marketing,
and 12 in finance, administration, human resources, and internal systems
support. The Company believes its future success will depend, in part, on its
continued ability to attract and retain highly qualified personnel in a
competitive market for experienced and talented software engineers, chip
designers and sales and marketing personnel. None of the Company's employees are
represented by a labor union or subject to a collective bargaining agreement.
The Company believes that its relations with employees are good.
LEGAL PROCEEDINGS
There are currently no claims or actions pending against the Company.
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MANAGEMENT
The following table sets forth information with respect to each person who
serves as an executive officer or director of the Company and their ages as of
January 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- - - ------------------------------------ --- ----------------------------------------------------------
<S> <C> <C>
Cornelius 'Pete' Peterson VIII...... 62 Chief Executive Officer, President, Director
Renn Zaphiropoulos.................. 72 Chairman of the Board of Directors(1)(2)
John K. Brennan..................... 45 Vice President, Manufacturing
Michael Evensen..................... 34 Vice President, Worldwide Industrial Automation, EMEA New
Markets
William E. Peisel................... 55 Vice President, Engineering Chief Technical Officer
Cornelius 'Neil' Peterson IX........ 38 Vice President, Sales and Marketing
Michael E. Romanies................. 36 Vice President, Marketing and New Markets USA
Daniel J. Sullivan.................. 42 Vice President, Finance, Chief Financial Officer
Leonard N. Hecht.................... 62 Director(1)(2)(3)
Bruce B. Roesner.................... 51 Director
Yechiam Yemini...................... 51 Director(3)
</TABLE>
- - - ------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of the Executive Committee
------------------------
Each director will hold office until the next annual meeting of
stockholders of the Company or until his successor has been elected and
qualified. Officers of the Company are elected by the Company's Board and serve
at the Board's discretion.
EXECUTIVE OFFICERS AND DIRECTORS
Cornelius 'Pete' Peterson VIII has served as President and 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.
Renn Zaphiropoulos has been a director of the Company since August 1998. He
is an Adjunct Professor of Business Administration at Southern Utah University
and is a frequent lecturer at the graduate school level on a variety of
management subjects. Mr. Zaphiropoulos is a pioneer in the development of the
electrostatic writing techniques for the production of hard copy. In 1969 he
co-founded Versatec, a leading manufacturer of electrostatic plotters, which was
merged into Xerox Corporation in December 1975. Mr. Zaphiropoulos became a
director of Osicom in March 1998. Mr. Zaphiropoulos also serves as a director of
Optical Coating Laboratories, Inc., and as a director and consultant to a number
of private, development stage, high-tech firms. He holds a B.S. in Engineering
Physics and M.S. in Physics, both from Lehigh University, a Doctor of Science
from Rose Hurlman Institute of Technology and a Doctor of Humanities from
Southern University.
John K. Brennan joined the Company in 1996 as Vice President,
Manufacturing. From January 1996 to July 1996, Mr. Brennan served as a Vice
President of Manufacturing for Leaf Systems, Inc., a manufacturer of high-end
digital cameras. From 1995 to 1996, Mr. Brennan served as director of materials
for MA-Com, Inc., a division of Amp, Inc. From 1993 to 1995, Mr. Brennan served
as director of materials of Leaf Systems, Inc. From 1986 to 1993, Mr. Brennan
served as Manufacturing Operations Manager for Whistler Corporation, a consumer
electronics manufacturer in the automotive industry. He holds a B.S. in Business
Administration from Merrimack College and an M.B.A. from Boston University.
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Michael Evensen has been Vice President, Worldwide Industrial Automation,
EMEA New Markets 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 Dataco De Rex, Inc., where he was responsible for
European sales. Mr. Evensen holds a B.S. in Electronic Engineering 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, Sales and Marketing, since 1993. From 1986 to 1993, Mr. Peterson
served as Regional Manager and Vice President of Commercial Sales. Mr. Peterson
has over 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.
Michael E. Romanies has been Vice President, Marketing and New Markets USA
since September 1998. Mr. Romanies was Vice President of Marketing of Number
Nine Visual Technologies from October 1996 to August 1998. From November 1995
through September 1996, Mr. Romaines served as President of World Color New
Media, a subsidiary of World Color Press, and from January 1988 to November
1995, he served as Vice President and General Manager of Reed Technology
Information Services, a division of Reed Elsevier Plc Group.
Daniel J. Sullivan has been Vice President, Finance, and Chief Financial
Officer since August 1998. Mr. Sullivan was Vice President, Finance and
Operations at ITK International (formerly Telebit) from 1996 to August 1998.
From 1995 to 1996, Mr. Sullivan served as corporate controller and from 1989 to
1995 as operations controller, of ITK. From 1985 to 1989, Mr. Sullivan served as
Corporate Manufacturing Financial Planning Manager at Apollo Computers. He holds
a B.S. in biology from Merrimack College and an M.B.A. from New Hampshire
College.
Leonard N. Hecht has been a director of the Company since August 1998.
Since January 1994, he has been President of Chrysalis Capital Group, an
investment banking company specializing in mergers, acquisitions and financing
which he founded. From 1987 to 1993, Mr. Hecht was Managing Director of the
Investment Banking Group and head of the Technology Assessment Group of Houlihan
Lokey Howard & Zukin, a financial advisory firm. From 1984 to 1987, Mr. Hecht
was Vice Chairman of the Board and Chief Executive Officer of Quantech
Electronics Corp., a diversified publicly-held electronics company. Prior to
joining Quantech, Mr. Hecht was a founding principal of Xerox Development
Corporation, a wholly-owned subsidiary of the Xerox Corporation. Xerox
Development Corporation was active in strategic planning, mergers and
acquisitions, divestitures, licensing, joint ventures and venture investing for
the Xerox Corporation. Mr. Hecht has been a director of Osicom since 1996 and is
a director of DCC Compact Classics.
Bruce B. Roesner, Ph.D. has been a director of the Company since August
1998. He is Chief Technical Officer and Chairman of SCS Corporation, a maker of
programmable, radio frequency identification systems. Dr. Roesner co-founded SCS
in 1992 and served as its President and Chief Executive Officer until May 1995.
Prior to SCS, he was founder of Instant Circuit Holdings, Inc., vice president
of Array Devices, Inc. (a division of Solitron Corporation), an executive of
Applied Micro Circuits Corporation, and a manager of advanced integrated circuit
technologies for Burroughs Corporation (now Unisys Corporation). Prior to
Burroughs, Dr. Roesner was a senior member of the technical staff at Hughes
Aircraft Corporation. Dr. Roesner received his M.S. and Ph.D. degrees in
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<PAGE>
electrical engineering from Purdue University. He holds more than 20 patents in
the field of integrated circuits.
Yechiam Yemini has been a director of the Company since August 1998. Since
1980, he has been a Professor of Computer Science at Columbia University, where
he directs the Distributed Computing and Communications (DCC) lab which he also
founded. Technologies created at DCC lab have been widely exported to thousands
of network sites and commercialized by several companies. Professor Yemini is a
co-founder of Comverse Technology Inc., a supplier of computer and
telecommunications systems and software for multi-media communications and
information processing applications for telecommunication networks. He is also
co-founder and Director of System Management Arts, Inc., a leading technology
vendor of software that automates root-cause diagnosis of network problems.
Professor Yemini serves as a director of several high-tech companies, advises a
major venture fund on high-tech investments, and serves on the US-Israel Science
& Technology Commission. He is the author of over 150 publications and five
patents.
COMMITTEES OF THE BOARD OF DIRECTORS
EXECUTIVE COMMITTEE
The Board of Directors of the Company has appointed an Executive Committee,
which currently consists of Leonard Hecht and Yechiam Yemini. The Executive
Committee's duties include reviewing all financial budgets, performance targets
and business plans and objectives.
AUDIT COMMITTEE
The Board of Directors of the Company has appointed an Audit Committee,
which currently consists of Leonard Hecht and Renn Zaphiropoulos. The Audit
Committee's duties include engaging and discharging the Company's independent
accountants; reviewing and approving the engagement of the independent
accountants for audit and non-audit services requested; reviewing with the
independent accountants the scope and timing of the audit and non-audit
services; reviewing the completed audit with the independent accountants
regarding their report, the conduct of the audit, accounting adjustments,
recommendations for improving internal accounting and auditing procedures with
the Company's financial staff; and initiating and supervising any special
investigations it deems necessary.
COMPENSATION COMMITTEE
The Board of Directors of the Company has also appointed a Compensation
Committee which currently consists of Renn Zaphiropoulos and Leonard Hecht. The
Compensation Committee's duties include reviewing and making recommendations to
the Board of Directors regarding compensation and benefit plan matters,
including executive officer compensation, director compensation, employee stock
option grants, 401(k) plan matters, employee stock purchase plan matters and
other defined benefit plan matters.
COMPENSATION OF DIRECTORS
The Company compensates each director who is not an employee of the Company
$1,000 for each meeting of the Board or a committee attended in person, but not
if the director attends by telephone. The Chairman of the Board is compensated
$1,500 for each meeting of the Board he attends in person and the Chairman of
each committee is compensated $1,500 for each committee meeting attended in
person. The Company reimburses the out-of-pocket expenses incurred by directors
for attendance at Board or committee meetings.
Pursuant to the Company's Director Stock Option Plan, the Company will
grant options to purchase 25,000 shares of Common Stock per year to each
independent director, and options to purchase 40,000 shares of Common Stock per
year to the Chairman of the Board, 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.
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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 executive
officers 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.
STOCK OPTION PLAN
The Company has established an incentive and non-qualified stock option
plan (the 'Stock Option Plan') to become effective upon the closing of the
offering. The Stock Option Plan is to be administered by the Compensation
Committee (the 'Committee') of the Board of Directors. References herein to the
'Board' mean the Board of Directors or the Committee, as the case may be. A
total of 4,500,000 shares of Common Stock is reserved for issuance under the
Stock Option Plan. It is anticipated that the Company will grant options to
purchase 2,953,368 shares under the Stock Option Plan on or about the date of
the commencement of this offering.
The purpose of the Stock Option Plan is to advance the Company's interests
by enhancing its ability to attract and retain key employees and consultants.
All grants will be made at the discretion of the Board to such individuals and
in such amounts as the Board deems advantageous for compensation and incentive
purposes. The Company's employees are all eligible for the grant of options.
The Stock Option Plan will provide for the grant of both incentive stock
options as defined in Section 422 of the 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
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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.
In the Board's sole discretion, options granted under the Stock Option Plan
will also terminate in the event of certain mergers, consolidations or sales of
assets or public or private Common Stock offerings of the Company. However, in
such instances, the Stock Option Plan also provides that at least 30 days in
advance of such an event all outstanding vested and non-vested options shall
become exercisable for a limited period of time. Options not exercised during
that time period shall be forfeited.
The Board retains the right to amend the Stock Option Plan or any
outstanding option. An amendment adversely affecting the rights of an employee
under a previously granted option requires the employee's consent, and certain
Stock Option Plan amendments, including any increase in the number of shares
available under the Stock Option Plan, a change in the group of eligible
employees, a reduction in the minimum option price for incentive stock Options,
an extension of the term of the Stock Option Plan, or amendments affecting the
status of already granted incentive stock options, require stockholder approval.
The number of shares reserved for issuance under the Stock Option Plan, as
well as the number of shares subject to outstanding options, option price, and
other option provisions, including where relevant the kind of shares subject to
options, is subject to adjustment in the event of a stock dividend, stock split
or similar capital change or to take into consideration material changes in
accounting practice or principles or certain corporate transactions. The Board
may, at any time, discontinue granting options under the Stock Option Plan.
DIRECTOR STOCK OPTION PLAN
The Company has established a stock option plan for the members of its
Board of Directors (the 'Director Stock Option Plan') to become effective upon
the closing of the offering. The purpose of the Director Stock Option Plan is to
attract and retain the best available personnel for service as independent
directors of the Company. All grants under the Director Stock Option Plan are
automatic and nondiscretionary. A total of 400,000 shares of Common Stock is
reserved for issuance under the Director Stock Option Plan, of which options for
115,000 shares are outstanding as of the date of this Prospectus.
The Director Stock Option Plan will provide for the grant of non-qualified
options subject to the rules contained in Section 83 of the Code. No options may
be granted under the Director Stock Option Plan more than ten years after the
closing date of the Offering. All options under the Director Stock Option Plan
will be non-transferable except upon death. The exercise price of a stock option
granted under the Director Stock Option Plan may not be less than 100% of the
fair market value of the underlying stock at the time of grant.
The term of each option will be ten years from grant. Each option will
become exercisable in two installments: six months following the date of grant
as to 50%, and twelve months following the date of grant as to the remaining
50%. The exercise price of an option may be paid either in cash, certified
check, bank draft or money order or, if the Board so permits, by delivery of
previously owned Common Stock or a promissory note or a combination of the
foregoing.
If a director's status as a member of the Board of Directors terminates by
reason of death, each option held by the director immediately prior to death
will be exercisable, to the extent it was then exercisable, for the remaining
term of the option. The options which were not exercisable at the time of
death will immediately terminate upon death. If a director's status as a member
of the Board of
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<PAGE>
Directors terminates for any other reason, all of the director's options that
are not then exercisable will immediately terminate. The director's
options that were then exercisable will continue to be exercisable for the
remaining term of the option.
In the Board's sole discretion, options granted under the Director Stock
Option Plan will also terminate in the event of certain mergers, consolidations
or sales of assets or public or private Common Stock offerings of the Company.
However, in such instances, the Director Stock Option Plan also provides that at
least 30 days in advance of such an event all outstanding vested options shall
become exercisable for a limited period of time. Options not exercised during
that time period shall be forfeited.
The Board retains the right to amend the Director Stock Option Plan or any
outstanding option. An amendment adversely affecting the rights of a director
under a previously granted option requires the director's consent, and certain
Director Stock Option Plan amendments, including any increase in the number of
shares available under the Director Stock Option Plan, and an extension of the
term of the Director Stock Option Plan, require 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 40,000 shares of Common
Stock of the Company, of which 50% will vest at the end of his first year of
employment and the remaining 50% will vest at the end of his second year of
employment. 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. The Company is
negotiating with Mr. Evensen to revise this provision.
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
45
<PAGE>
<PAGE>
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 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 Leonard Hecht and Renn
Zaphiropoulos. There are currently no compensation committee interlocks with
other entities or insider participation on the Compensation Committee.
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. Unless otherwise noted
below, such stockholders have sole voting and investment power as to shares
shown.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING NUMBER AFTER THE OFFERING
-------------------------- OF SHARES -----------------------
NUMBER BEING NUMBER
NAME OF BENEFICIAL HOLDER OF SHARES PERCENTAGE OFFERED OF SHARES PERCENTAGE
- - - --------------------------------------------- ---------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Osicom Technologies, Inc..................... 10,000,000 100.0% 1,000,000 9,000,000 75.0%
2800 28th Street
Suite 100
Santa Monica, CA 90405
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The Company entered into three agreements with Osicom, which govern the
business relationship between the Company and Osicom.
The Company entered into a supply agreement, effective May 1, 1998 (the
'Supply Agreement') with Osicom pursuant to which the Company sells to Osicom
several products, including the NET+ARM'TM' ASIC for variable prices. Prices are
structured to maintain the Company's gross margin on the products established on
May 1, 1998, and are subject to change consistent with any changes in the
Company's costs for such products. The Supply Agreement also provides that
Osicom manufactures products for the Company at Osicom's best price, as
determined by agreement between Osicom and the Company from time to time. The
Supply Agreement has a term of five years and does not obligate Osicom to
purchase any products from the Company or the Company to utilize Osicom for
manufacturing.
The Company and Osicom entered into a sublease agreement dated as of August
1, 1998, for the sublease by the Company to Osicom of approximately 6,000 square
feet of space at the Company's offices in Waltham, Massachusetts (the
'Sublease'). The Sublease provides for the payment by Osicom to the Company of
rent in the amount of $88,000 per year, payable each October 1, January 1,
April 1 and July 1.
The Company and Osicom entered into 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
Commercial Line. The Intercompany Agreement
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<PAGE>
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'TM' to the Company.
The Intercompany Agreement further requires Osicom to use its best efforts to
obtain a consent in writing from ARM Limited to the assignment of the rights
to NET+ARM'TM'. 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 Commercial Line to Osicom.
Osicom's rights in such intellectual property are limited to use in certain
products manufactured by Osicom related to the Commercial Line, and cannot be
transferred, resold, licensed or assigned by Osicom. Pursuant to the
Intercompany Agreement, Osicom will assume responsibility for manufacturing the
Commercial Line on approximately May 1, 1999 and the Company expects Osicom to
assume responsibility for providing engineering support to the Commercial Line
on approximately July 1, 1999.
In the ordinary course of business, a wholly owned subsidiary of Osicom,
Uni Precision Industrial, Ltd. manufactures and assembles products for the
Company on a competitive bid basis.
From time to time the Company has received non-interest bearing advances
from Osicom. As of January 31, 1998, Osicom began accruing interest on the
outstanding balance at the prime rate plus three percent per year. As of
January 31, 1999, the balance of such advances was $5.9 million, which is the
highest amount borrowed by the Company from Osicom.
All future transactions between the Company and its officers, directors,
and Osicom or its affiliates will be approved by a majority of the unrelated
directors of the Company.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 35,000,000 shares
of Common Stock, par value $0.01 per share, and 5,000,000 shares of preferred
stock, par value $0.01 per share. As of the date of this Prospectus, there were
10,000,000 shares of Common Stock and no shares of preferred stock issued and
outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by the stockholders and do not have
cumulative voting rights. The election of directors is determined by a plurality
of the votes cast. The Company's Restated Articles of Organization (the
'Articles') require the approval of the holders of a majority of the Common
Stock. Except as otherwise required by law and as may be required by the terms
of the preferred stock, all other matters are determined by a majority of the
votes cast. The holders of Common Stock are entitled to receive dividends when,
as and if declared by the Company's Board of Directors out of funds legally
available for the payment thereof, subject to any preferential dividend rights
of outstanding preferred stock. 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.'
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<PAGE>
Holders of Common Stock do not have any preemptive or subscription rights,
nor any redemption or conversion rights.
PREFERRED STOCK
The Company has authorized 5,000,000 shares of preferred stock which the
Company's Board has discretion to issue in such series and with such preferences
and rights as it may designate without the approval of the holders of Common
Stock. Such preferences and rights may be superior to those of the holders of
Common Stock. For example, the holders of preferred stock may be given a
preference in payment upon liquidation of the Company or for the payment or
accumulation of dividends before any distributions are made to the holders of
Common Stock. As of the date of this Prospectus, no preferred stock has been
designated or issued by the Company, and the Company has no plans, agreements or
understandings for the issuance of preferred stock. For a description of the
possible anti-takeover effects of the preferred stock, see 'Risk
Factors -- Anti-Takeover Provisions' and ' -- Certain Anti-Takeover Provisions.'
LIMITATION ON LIABILITY
The Articles of Organization of the Company limit or eliminate the
liability of the Company's directors or officers to the Company or its
stockholders for monetary damages to the fullest extent permitted by the
Massachusetts General Corporation Law, as amended (the 'MGCL'). The MGCL
provides that a director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for a breach of fiduciary duty
as a director, except for liability (i) for any breach of such person's duty of
loyalty; (ii) for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law; (iii) for the payment of unlawful
dividends and certain other actions prohibited by Massachusetts corporate law;
and (iv) for any transaction resulting in receipt by such person of an improper
personal benefit.
The Company has directors' and officers' liability insurance to provide its
directors and officers with insurance coverage for losses arising from claims
based on breaches of duty, negligence, error and other wrongful acts. See
'Business -- Legal Proceedings' for a discussion of pending litigation.
CERTAIN ANTI-TAKEOVER PROVISIONS
The ability of the Company's Board to establish the rights of, and to
issue, substantial amounts of preferred stock without the need for stockholder
approval, upon such terms and conditions, and having such rights, privileges and
preferences as the Company's Board may determine in the exercise of its business
judgment, may, among other things, be used to create voting impediments with
respect to changes in control of the Company or to dilute the stock ownership of
holders of Common Stock seeking to obtain control of the Company. The rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, any preferred stock that may be issued in the future. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions, financings and other corporate transactions, may have the
effect of discouraging, delaying or preventing a change in control of the
Company. The Company has no present plans to issue any shares of preferred
stock. See 'Risk Factors -- Anti-Takeover Provisions,' 'Common Stock' and
' -- Preferred Stock.'
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company, 40 Wall Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
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 12,000,000 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 3,000,000 shares sold in the Offering
will be freely
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tradable without restriction or further registration under the Securities Act of
1933, as amended (the 'Securities Act'), 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 9,000,000 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 Dain Rauscher Wessels, 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, and (ii) 9,000,000 shares will
become eligible for sale 365 days after the date of this Prospectus (assuming no
release from the lock-up agreement) upon expiration of lock-up agreements. Dain
Rauscher Wessels 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.
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 (120,000 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.
After the completion of this offering, the Company intends to file a
Registration Statement on Form S-8 (the 'Form S-8') under the Securities Act to
register the 4,500,000 shares of Common Stock reserved for issuance under the
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 has 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 and each executive officer, director and employee of the Company has
agreed with the Underwriters that they will not sell or otherwise dispose of any
shares of Common Stock until 180 days from the date of this Prospectus (the
'Lock-Up Expiry Dates'), without the prior written consent of the Dain Rauscher
Wessels.
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UNDERWRITING
The underwriters named below (each an 'Underwriter' and collectively the
'Underwriters'), acting through their representatives, Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated ('Dain Rauscher Wessels') and Tucker
Anthony Incorporated (collectively, with Dain Rauscher Wessels, the
'Representatives'), have severally agreed, subject to the terms and conditions
of the underwriting agreement, to purchase from the Company and Osicom the
number of shares of Common Stock set forth opposite their respective names
below. The Underwriters are committed to purchase and pay for all such shares
if any are purchased, subject to the conditions stated in the underwriting
agreement.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OF UNDERWRITER OF COMMON STOCK
- - - ----------------------------------------------------------------------------------------------- ----------------
<S> <C>
Dain Rauscher Wessels..........................................................................
Tucker Anthony Incorporated....................................................................
----------------
Total..................................................................................... 3,000,000
----------------
----------------
</TABLE>
The Representatives have advised the Company and Osicom that the
Underwriters propose to offer the shares of Common Stock to the public at the
initial public offering price set forth on the cover page of this prospectus and
to certain dealers at such price less a concession of not in excess of
$ per share, of which $ may be reallowed to other dealers.
After the public offering, the public offering price, concession and reallowance
to dealers may be reduced by the Representatives. No such reduction shall change
the amount of proceeds to be received by the Company as set forth on the cover
page of the prospectus.
The underwriting agreement contains covenants of indemnity among the
Underwriters, the Company and Osicom against civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Osicom has granted to the Underwriters an option to purchase up to 450,000
additional shares of Common Stock. This option may be exercised at any time up
to 30 days after the date of this prospectus. The option entitles the
Underwriters to purchase the additional shares of Common Stock at the same price
per share as the 3,000,000 shares of Common Stock being sold in this offering.
If the Underwriters exercise the option, each of the Underwriters must purchase
approximately the same percentage of additional shares from Osicom that they
purchased from the Company and Osicom. If purchased, the additional shares will
be sold by the Underwriters on the same terms as those on which the 3,000,000
shares are being sold.
The price of the shares of Common Stock purchased by the Underwriters will
be the public offering price set forth on the cover page of the prospectus less
the following underwriting discounts and commissions, to be provided by the
Company and Osicom:
<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
By NETsilicon, Inc. .................................................
By Osicom Technologies, Inc. ........................................
</TABLE>
The Company will also pay offering expenses estimated to total $1.0
million.
Without the prior written consent of Dain Rauscher Wessels, the Company,
and Osicom have agreed, for a period of 365 days after the date of this
Prospectus, not to sell, transfer, grant any third party the right to purchase,
or otherwise dispose of any shares of Common Stock or other securities that they
own or acquire. The 365 day period is known as the '365 Day Lock-up Period.'
Similarly, without the prior written consent of the Underwriters, the directors,
officers and employees of the Company have agreed, for a period of 180 days
after the date of this Prospectus, not to sell, transfer, grant any
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third party the right to purchase or otherwise dispose of any shares of Common
Stock or other securities that they own or acquire. The 180 day period is known
as the '180 Day Lock-up Period.' Dain Rauscher Wessels may, without notice and
in its sole discretion, allow Osicom to dispose of Common Stock or other
securities prior to the expiration of the 365 Day Lock-up Period. Similarly,
Dain Rauscher Wessels may, without notice and in its sole discretion, allow any
director, officer or employee to dispose of Common Stock or other securities
prior to the expiration of the 180 Day Lock-up Period. There are, however, no
agreements between the Underwriters, Osicom or any director, officer or employee
that would allow them to do so.
In addition, the Company has agreed that it will not issue, sell, offer to
sell, or otherwise dispose of any shares of its Common Stock or other securities
during the 356 Day Lock-up Period without the prior consent of Dain Rauscher
Wessels. This agreement does not include shares of Common Stock or other
securities issued pursuant to employee stock option plans, employee stock
purchase plans, or Common Stock or other securities issued pursuant to option or
other securities outstanding on the date of this Prospectus. However, the
Company has agreed that employee stock options issued during the 180 Day Lock-up
Period may not be exercised prior to the expiration of the 180 Day Lock-up
Period. Any shares of Common Stock issued during the 180 Day Lock-up Period
pursuant to the exercise of stock options or other securities outstanding on the
date of this Prospectus shall bear a restrictive legend restricting the transfer
of such shares during the 180 Day Lock-up Period.
The Underwriters have advised the Company that in connection with this
offering, certain persons participating in this offering may engage in
transactions that may have the effect of stabilizing or maintaining the market
price of the Common Stock at a level above that which might otherwise prevail in
the open market. These transactions may include stabilizing bids, syndicate
covering transactions and the imposition of penalty bids. A 'stabilizing bid' is
a bid for or the purchase of Common Stock on behalf of the Underwriters for the
purpose of preventing or retarding a decline in the market price of the Common
Stock. A 'syndicate covering transaction' is the bid for or the purchase of the
Common Stock on behalf of the Underwriters to reduce a short position incurred
by the Underwriters in connection with this offering. A 'penalty bid' is an
arrangement permitting the Representatives to reclaim the selling concession
otherwise accruing to an Underwriter or syndicate member in connection with the
offering if the Common Stock originally sold by such Underwriter or syndicate
member is purchased by the Representatives in a syndicate covering transaction
and has therefore not been effectively placed by such Underwriter or syndicate
member. The Representatives have advised the Company that such transactions may
be effected on the Nasdaq National Market or otherwise and, if commence, may be
discontinued at any time.
Prior to this offering, there was no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation between the Company, Osicom and the Underwriters. Among factors to
be considered in determining the initial public offering price are prevailing
market and economic conditions, revenues and earnings of the Company, the state
of its business operations, an assessment of its management and consideration of
the above factors in relation to market valuation of companies in related
businesses and other factors deemed relevant. There can be no assurance,
however, that the prices at which the Common Stock will sell in the public
market after this offering will be equal to or greater than the initial public
offering price.
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
51
<PAGE>
<PAGE>
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.
AVAILABLE INFORMATION
This Prospectus, which constitutes a part of a Registration Statement on
Form S-1 (including all amendments thereto, the 'Registration Statement') filed
by the Company with the SEC under the Act, omits certain of the information set
forth in the Registration Statement. Reference is hereby made to the
Registration Statement and to the exhibits thereto for further information with
respect to the Company and the securities offered hereby. Copies of the
Registration Statement and the exhibits thereto are on file at the offices of
the SEC and may be obtained upon payment of the prescribed fee or may be
examined without charge at the public reference facilities of the SEC described
below.
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents, and each statement is qualified in its
entirety by reference to the copy of the applicable document filed with the SEC.
The Company is subject to certain of the informational reporting
requirements of the Securities Exchange Act of 1934, as amended and, in
accordance therewith, files reports and other information with the SEC. Such
reports and other information can be inspected and copied at the public
reference facility maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004 and at the regional offices of the SEC located at
Seven World Trade Center, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials may also be
obtained in person from the Public Reference Section of the SEC at its principal
office located at 450 Fifth Street, N.W., Washington, D.C. 20549-1004 at
prescribed rates. Additionally, such material may be obtained at the web site
the SEC maintains at http://www.sec.gov which contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC.
52
<PAGE>
<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, 1999 and 1998............................................................. F-3
Statements of Operations for the Years Ended January 31, 1999, 1998 and 1997............................... F-4
Statements of Stockholder's Equity (Deficit) for the Years Ended January 31, 1999, 1998 and 1997........... F-5
Statements of Cash Flows for the Years Ended January 31, 1999, 1998 and 1997............................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
'Upon completion of the stock split as described in Note I(ii) to the
accompanying financial statements, which is to take place upon the effectiveness
of this Registration Statement, BDO Seidman, LLP will be in a position to render
the following opinion.'
The Board of Directors of
NETsilicon, Inc.
We have audited the accompanying balance sheets of NETsilicon, Inc. (the
'Company') as of January 31, 1999 and 1998 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, 1999 and 1998, 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
.....................................
BDO SEIDMAN, LLP
Boston, Massachusetts
February 26, 1999, except for notes
I (ii) and (iii) which are
as of , 1999
F-2
<PAGE>
<PAGE>
NETSILICON, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------
1999 1998
----------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash............................................................................ $ 582,600 $ 185,100
Accounts receivable, net (Notes D and S)........................................ 4,204,500 3,595,300
Due from affiliate (Note F)..................................................... 1,218,300 --
Inventory, net (Notes B, D and S)............................................... 3,769,300 2,607,400
Prepaid expenses and other current assets....................................... 238,600 172,600
----------- ----------
TOTAL CURRENT ASSETS....................................................... 10,013,300 6,560,400
----------- ----------
PROPERTY AND EQUIPMENT, NET (Notes C, D and E)....................................... 685,200 773,900
----------- ----------
OTHER ASSETS
Capitalized software, net (Note B).............................................. 470,400 221,400
Capitalized software of discontinued operations, net (Note A)................... -- 330,100
Other assets.................................................................... 479,500 47,600
----------- ----------
TOTAL OTHER ASSETS......................................................... 949,900 599,100
----------- ----------
TOTAL ASSETS......................................................................... $11,648,400 $7,933,400
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Short-term debt (Note D)........................................................ $ 3,191,500 $2,987,100
Current maturities of long term debt (Note E)................................... -- 17,900
Accounts payable................................................................ 2,789,800 1,777,300
Due to affiliates (Note F)...................................................... 6,423,100 2,171,000
Other current liabilities....................................................... 1,080,100 394,000
----------- ----------
TOTAL CURRENT LIABILITIES.................................................. 13,484,500 7,347,300
----------- ----------
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;
10,000,000 shares issued and outstanding...................................... 100,000 100,000
Additional paid-in capital...................................................... 2,463,000 2,463,000
Accumulated deficit............................................................. (4,399,100) (1,976,900)
----------- ----------
TOTAL STOCKHOLDER'S EQUITY (DEFICIT)....................................... (1,836,100) 586,100
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)................................. $11,648,400 $7,933,400
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
<PAGE>
NETSILICON, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES............................................................ $13,373,000 $ 7,920,300 $ 7,444,500
COST OF SALES (Note F)............................................... 7,270,400 4,060,200 4,293,600
----------- ----------- -----------
GROSS PROFIT.................................................... 6,102,600 3,860,100 3,150,900
----------- ----------- -----------
OPERATING EXPENSES
Selling and marketing........................................... 3,336,400 1,809,600 1,562,700
Engineering, research and development........................... 2,152,500 1,482,600 1,027,700
General and administrative...................................... 2,194,400 1,795,400 1,502,300
----------- ----------- -----------
TOTAL OPERATING EXPENSES................................... 7,683,300 5,087,600 4,092,700
----------- ----------- -----------
OPERATING LOSS FROM CONTINUING OPERATIONS............................ (1,580,700) (1,227,500) (941,800)
Interest expense................................................ (551,700) (118,500) (136,200)
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT............ (2,132,400) (1,346,000) (1,078,000)
Income tax benefit (Note L)..................................... -- 493,000 968,600
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS...................................... (2,132,400) (853,000) (109,400)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET OF INCOME TAX OF $0,
$493,000 and $968,600 in 1999, 1998 and 1997, respectively (Notes A
and L)............................................................. (289,800) 676,600 1,329,500
----------- ----------- -----------
NET INCOME (LOSS).................................................... $(2,422,200) $ (176,400) $ 1,220,100
----------- ----------- -----------
----------- ----------- -----------
NET INCOME (LOSS) PER SHARE (Notes K and M)
BASIC
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................. 10,000,000 10,000,000 7,158,300
NET INCOME (LOSS) PER COMMON SHARE
From continuing operations............................ $(0.21) $(0.09) $(0.02)
From discontinued operations.......................... (0.03) 0.07 0.19
----------- ----------- -----------
Net income (loss) per common share.................... $(0.24) $(0.02) $0.17
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
<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)
---------- -------- -------- -------- ---------- ----------- -------------
---------- -------- -------- -------- ---------- ----------- -------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
<PAGE>
NETSILICON, INC.
STATEMENTS OF CASH FLOWS
(NOTE O)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................... $(2,422,200) $ (176,400) $ 1,220,100
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities
Depreciation and amortization.............................. 644,100 580,500 674,200
Intangible assets valuation allowance...................... -- 237,900 --
Changes in current assets and liabilities:
Increase in accounts receivable............................ (609,200) (169,300) (1,037,100)
(Increase) decrease in inventories......................... (1,161,900) 55,400 560,300
(Increase) decrease in other current assets................ (66,000) (87,000) 105,600
Increase (decrease) in accounts payable.................... 1,012,500 (168,000) (1,562,600)
Increase (decrease) in other current liabilities........... 686,100 (227,800) (497,900)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES... (1,916,600) 45,300 (537,400)
----------- ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment............................. (328,100) (604,800) (138,600)
Software development costs (Note B)............................. (723,600) (556,000) (369,500)
Capitalized software transferred to Osicom (Note A)............. 577,400 -- --
Other assets.................................................... (431,900) 16,100 (2,700)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES................. (906,200) (1,144,700) (510,800)
----------- ----------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from affiliates advances............................... 3,033,800 854,400 947,500
Proceeds from issuance of short-term debt, net (Note D)......... 204,400 291,000 917,000
Repayments of long-term debt (Note E)........................... (17,900) (254,700) (441,900)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES............. 3,220,300 890,700 1,422,600
----------- ----------- -----------
INCREASE (DECREASE) IN CASH.......................................... 397,500 (208,700) 374,400
CASH -- BEGINNING OF YEAR............................................ 185,100 393,800 19,400
----------- ----------- -----------
CASH -- END OF YEAR.................................................. $ 582,600 $ 185,100 $ 393,800
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS
NETsilicon, Inc. (the 'Company') develops and markets embedded networking
solutions. The Company's products are incorporated into the design of embedded
systems to provide the ability to communicate over standards-based Local Area
Networks ('LANs'), Wide Area Networks ('WANs') and the Internet, enabling the
development of completely new embedded systems applications. The Company
believes that it provides the first standards-based embedded networking system
to offer a single chip solution that, in conjunction with the physical interface
and memory, encompasses all of the required hardware and software necessary to
network-enable virtually any electronic device. 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 20 original
equipment manufacturers ('OEMs').
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that affect
the reported amounts of assets, liabilities, revenues and expenses. Actual
results could differ from these estimates.
The accompanying financial statements are the responsibility of the
management of the Company.
A. THE COMPANY AND BASIS OF PRESENTATION
The Company, incorporated in Massachusetts on April 17, 1984 under the name
of Digital Products, Inc. is a wholly-owned subsidiary of Osicom Technologies,
Inc. ('Osicom') and operates as a product line unit. In September 1996, Osicom
acquired the Company through a merger with a newly-formed corporation for Osicom
common stock in a transaction accounted for as a pooling of interests. The
accompanying financial statements represent only the assets, liabilities,
operations and financial position of the Company.
The Company was comprised of two product lines: OEM and Commercial. The
Company developed both board and system level products to satisfy the specific
design needs of OEM's and the full system (hardware and software) solutions for
end-user customers. The end-user customers were reached through value-added
resellers and distributors; this sales activity is referred to as 'commercial
sales.' The Company has decided to focus its resources on the future development
of its NET+ family of products within the OEM line.
As a result, in May 1998, the Company sold its Commercial Line to Osicom,
which consisted principally of specific sales employees and capitalized software
related to Commercial products. Based on this transaction, the Company has
accounted for the Commercial Line as a discontinued operation. Capitalized
software related to the Commercial Line of business has been separately stated
on the balance sheets presented. The Company did not experience a gain or loss
on disposal as Osicom purchased the capitalized software and other miscellaneous
assets at their book value as of the date of purchase. Due to the similar nature
of the raw materials utilized in the manufacturing of products within each
business line, Osicom also has been granted the option to purchase existing
Company inventory at cost for a period of nine months. Sales, cost of sales,
selling, marketing, engineering, 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 Commercial Line. See Note Q.
General and administrative expenses include an amount that management
considers to be a reasonable allocation of general corporate expenses.
Management and administrative salaries are allocated based upon estimated time
devoted to 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.
F-7
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates -- The financial statements are prepared in conformity
with generally accepted accounting principles which 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 at January 31, 1999 and 1998 consist of:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Raw material............................................ $1,603,400 $1,350,400
Work in process......................................... 2,150,100 1,273,400
Finished goods.......................................... 140,400 175,600
---------- ----------
3,893,900 2,799,400
Less: Valuation reserve................................. 124,600 192,000
---------- ----------
$3,769,300 $2,607,400
---------- ----------
---------- ----------
</TABLE>
Fair Value of Financial Instruments -- The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques as appropriate. Except for financial instruments issued in
conjunction with related party transactions management believes that there are
no material differences between the recorded book values of its financial
instruments and their estimated fair value. It is not practicable to estimate
the fair value of related party notes payable or notes receivable of the Company
due to their related party nature.
Property and Equipment -- Property and equipment are recorded at historical
cost. Depreciation and amortization are provided over the estimated useful lives
of the individual assets or the terms of the leases if shorter using accelerated
and straight-line methods. Useful lives for property and equipment range from
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
F-8
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
become an integral part of the Company's products are deferred in accordance
with Statement of Financial Accounting Standards Nos. 2 and 86. The deferred
costs are amortized using the straight-line method over the remaining estimated
3 year economic life of the product or the ratio that current revenues for the
product bear to the total of current and anticipated future revenues for that
product. Amortization expense for the fiscal years ended January 31, 1999,
1998 and 1997 was $227,300, $277,300, and $321,900. Accumulated amortization
was $206,200 and $132,200 as of January 31, 1999 and 1998, 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.
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).
F-9
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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 ending beginning after December 15, 1997;
earlier application is permitted. The new standard revises employers'
disclosures about pension and other postretirement benefit plans but does not
change the measurement or recognition of those plans. SFAS No. 132 standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures previously required when
no longer useful. The 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, 1999. Adoption of SFAS 133 is not expected to
have a material impact on the Company's results of operations, financial
position or cash flows.
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.
F-10
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
C. PROPERTY AND EQUIPMENT
Property and equipment of the Company consisted of the following components
as of January 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Manufacturing, engineering and plant equipment and
software............................................. $ 3,240,700 $2,931,800
Office furniture and fixtures.......................... 313,800 313,800
Leasehold and building improvements.................... 158,100 138,900
----------- ----------
Total property and equipment...................... 3,712,600 3,384,500
Less: Accumulated depreciation......................... (3,027,400) (2,610,600)
----------- ----------
Net book value.................................... $ 685,200 $ 773,900
----------- ----------
----------- ----------
</TABLE>
Depreciation expense was $416,800, $303,200 and $352,300 for the fiscal
years ended January 31, 1999, 1998 and 1997, respectively.
D. SHORT TERM DEBT
Short term debt at January 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Floating interest rate loan (2.5% over lender's prime
rate) secured by all the tangible assets of the
Company; weighted average interest rate for the years
ended January 31, 1999 and 1998 was 10.5% and 11.8%,
respectively.......................................... $3,191,500 $2,987,100
---------- ----------
---------- ----------
</TABLE>
On October 11, 1996, the Company obtained a $3,000,000 line of credit from
Coast Business Credit which was increased to $5,000,000 subsequent to January
31, 1998. The line of credit is collateralized by substantially all the assets
of the Company and a guarantee by Osicom. Advances are limited to 80% of
eligible receivables and 30% of eligible inventory. The loan bears interest at
2.5% over the bank's prime rate but not less than 8%. The 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 outstanding were $3,478,000 and
$2,614,900 during the year ended January 31, 1999, respectively. The highest and
average amounts outstanding were $2,987,100 and $2,298,000 during the year ended
January 31, 1998, respectively.
The Company is in compliance with its loan covenants at January 31, 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-11
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
F. DUE FROM/TO AFFILIATES
Due from affiliates at January 31, 1999 represents a receivable from an
Osicom subsidiary. Charges to this subsidiary for manufactured goods and other
expenses for the year ended January 31, 1999 were approximately $1,410,500.
Due to affiliates at January 31, 1999 and 1998 consist of:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Due to Osicom........................................... $5,884,800 $1,812,200
Due to Uni.............................................. 538,300 358,800
---------- ----------
$6,423,100 $2,171,000
---------- ----------
---------- ----------
</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 3.0% per year.
In the ordinary course of business a wholly-owned subsidiary of Osicom, Uni
Precision Industrial, Ltd. ('Uni'), manufactured and assembled products for the
Company on a competitive bid basis. During the years ended January 31, 1999 and
1998 purchases from Uni were $1,557,200 and $775,600 of which $538,300 and
$358,800 were unpaid at January 31, 1999 and 1998.
G. LEASES AND OTHER COMMITMENTS
(i) LEASES
Rental expense under operating leases was $460,500, $330,800 and $291,600
for the years ended January 31, 1999, 1998 and 1997, 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
2003.................................................................. --
----------
$1,093,600
----------
----------
</TABLE>
(ii) EMPLOYMENT CONTRACT
The company has an employment contract with its Vice President, Worldwide
Industrial Automation, EMEA New Markets European sales 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 commission up to
$125,000 per year.
F-12
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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) Concurrent with the offering, the Company affected a 100,000-for-one
stock split resulting in 10,000,000 shares being issued and outstanding
post-split.
All shareholder's equity accounts have been retroactively restated to
reflect these changes.
(iii) On the effective date of the offering, the Company will grant options
to officers and employees for the purchase of approximately 2,900,000 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-13
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
----------------
----------------
</TABLE>
Additional information about outstanding options to purchase Osicom common
stock held by employees of the Company at January 31, 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 9.7 $ 6.82 -- --
$10.88 to $19.31.................. 64,374 7.2 15.53 13,728 $15.94
$20.81 to $32.25.................. 85,413 3.5 29.83 70,277 30.69
$45.00............................ 5,000 9.5 45.00 -- --
------- ------
$4.78 to $45.00................... 272,832 7.2 16.78 84,005 28.28
------- ------
------- ------
</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 net loss and loss per share for
the years ended January 31, 1999, 1998 and 1997, would have been revised to the
pro forma amounts presented below:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported................................. $(2,422,200) $ (176,400) $ 1,220,100
Pro forma................................... $(2,702,200) $ (528,300) $ 627,900
Basic income (loss) per share:
As reported................................. $ (0.24) $ (0.02) $ 0.17
Pro forma................................... $ (0.27) $ (0.05) $ 0.09
</TABLE>
The fair value of option grants is estimated on the date of grant utilizing
the Black-Scholes option-pricing model with the following weighted average
assumptions for grants during the years ended January 31, 1999: expected life of
option 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. The
assumptions for the year ended January 31,
F-14
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 fiscal January 31, 1997 were:
expected life of option of 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.
In connection with their acceptance of employment with the Company,
employees have agreed that all unvested options to purchase common stock of
Osicom will be forfeited and employees will have 90 days after the effective
date of the initial public offering to exercise all vested options. Certain
options granted during the quarter ended January 31, 1999 to executive officers
will continue to vest over the one year period after the effective date of the
initial public offering and will be exercisable for 90 days after the one year
period. The Company will grant options to purchase the Common Stock of the
Company in the first quarter of fiscal 2000 and in the future. Accordingly, the
historical proforma impact of applying the fair value method prescribed by SFAS
123 is not representative of the impact that may be expected in the future.
L. INCOME TAXES
The Company's provision for taxes on income consists of for the fiscal
years ended January 31:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Income taxes:
Current.......................................... $ -- $ -- $ --
Deferred......................................... -- -- --
--------- --------- ---------
Total....................................... -- -- --
Allocation of tax expense to discontinued
operations..................................... -- 493,000 968,600
--------- --------- ---------
Income tax benefit............................... $ -- $ 493,000 $ 968,600
--------- --------- ---------
--------- --------- ---------
</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.
F-15
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities recognized for financial reporting purposes
and such amounts recognized for tax purposes. Deferred tax assets and
liabilities are comprised of the following at January 31:
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Deferred tax assets:
Valuation allowances............................... $ 178,900 $ 88,200
Research and development credits................... 210,000 210,000
Tax loss carryforward.............................. 1,582,200 656,900
Other.............................................. 40,000 34,400
----------- ---------
Gross deferred tax assets..................... 2,011,100 989,500
Less: valuation allowance.......................... (1,812,800) (757,300)
----------- ---------
Deferred tax asset............................ 198,300 232,200
----------- ---------
Deferred tax liabilities:
Software development costs......................... (198,300) (232,200)
----------- ---------
Deferred tax liabilities...................... (198,300) (232,200)
----------- ---------
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>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Loss before income taxes from continuing
operations..................................... $(2,132,400) $(1,346,000) $(1,078,000)
----------- ----------- -----------
----------- ----------- -----------
Theoretical tax expense (benefit) at 35%......... $ (746,300) $ (471,100) $ (377,300)
Impact of non-qualified stock options............ (24,300) (60,000) --
Impact of state taxes and other.................. (284,900) (83,600) (164,300)
Change in valuation allowance.................... 1,055,500 121,700 (427,000)
----------- ----------- -----------
Tax benefit...................................... $ -- $ (493,000) $ (968,600)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-16
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
M. EARNINGS PER SHARE CALCULATION
The following data show the amounts used in computing basic earnings per
share.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss)................................ $(2,422,200) $ (176,400) $ 1,220,100
Less: preferred dividends........................ -- -- --
----------- ----------- -----------
Net loss available to common shareholders used in
basic EPS...................................... $(2,422,200) $ (176,400) $ 1,220,100
----------- ----------- -----------
----------- ----------- -----------
Average number of common shares used in basic
EPS............................................ 10,000,000 10,000,000 7,158,300
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Company had a net loss for the fiscal years ending January 31, 1999 and
1998. Accordingly, the effect of dilutive securities including warrants to
acquire common stock and stock options, vested and nonvested, are not included
in the calculation of EPS because their effect would be antidilutive. The
following data shows the effect on income and the weighted average number of
shares of dilutive potential common stock.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) available to common shareholders
used in basic EPS................................ $(2,422,200) $ (176,400) $1,220,100
Adjustments........................................ -- -- --
----------- ---------- ----------
Net income (loss) available to common shareholders
after assumed conversions of dilutive
securities....................................... $(2,422,200) $ (176,400) $1,220,100
----------- ---------- ----------
----------- ---------- ----------
Average number of common shares used in basic
EPS.............................................. 10,000,000 10,000,000 7,158,300
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....... 10,000,000 10,000,000 8,873,100
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The shares issuable upon exercise of options and warrants represents the
quarterly average of the shares issuable at exercise net of the shares assumed
to have been purchased, at the average market price for the period, with the
assumed exercise proceeds. Accordingly, options with exercise prices in excess
of the average market price for the period are excluded because their effect
would be antidilutive. The average market price for the periods presented has
been assumed to be equal to the exercise price of the rights to be distributed
to Osicom's shareholders in connection with the Company's planned initial public
offering. All options outstanding during the periods presented are exercisable
at prices equal to or greater than this price and are therefore excluded from
diluted income per share as they would be antidilutive.
Income (loss) per share for the fiscal years ended January 31, 1997 has
been restated to give effect to the application of SFAS 128 which was adopted by
the Company for periods ending after December 15, 1997. There was no effect of
the restatement on income (loss) per share for the year ended January 31, 1997.
F-17
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998 and 1997 the interest expense incurred on
these notes was $27,100 and $22,300, 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 for the fiscal year ended January 31, 1999 was approximately
$262,800. Interest expense paid approximated the related expenses for the fiscal
years ended January 31, 1998, and 1997.
No income taxes were paid for the years ended January 31, 1999, 1998 and
1997.
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.
The following data shows the customers accounting for more than 10% of net
receivables at fiscal years ended January 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Konica.............................................................................. 19.7% --
Dimatech............................................................................ 18.5 2.0%
Ricoh Electronics................................................................... 13.7 --
Ingram Micro........................................................................ -- 26.6
Tech Data Corporation............................................................... -- 17.0
Kyocera Communications Systems Co., Ltd. ........................................... 4.0 18.4
</TABLE>
F-18
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following data shows that sales to major customers during fiscal years
ended January 31, 1999, 1998, and 1997 as a percentage of net sales:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Xerox Corporation..................................................... 15.6% 33.7% 21.0%
Kyocera Communications Systems Co., Ltd............................... 11.6 8.7 6.7
Konica Business Systems............................................... 11.4 8.8 --
NEC................................................................... 3.5 10.8 0.4
Digital Equipment, Inc................................................ -- 5.3 33.3
Paradyne Corporation.................................................. -- 2.3 10.4
</TABLE>
Q. DISCONTINUED OPERATION
Effective May 1, 1998 the Company sold its Commercial product line to
Osicom as described in Note A. The agreement provides for the terms and
conditions of the transfer by the Company to Osicom of the right to manufacture
and sell Commercial products. The agreement provides that Osicom shall have the
right to manufacture and sell the Company's stand alone print servers to
distributors who will then market such products directly to the consumer. The
Company has assigned accounts receivables accruing after July 31, 1998, computer
software and furniture, fixtures, equipment, software licenses and trademarks to
Osicom. Any future licensing fees will be paid by Osicom. Osicom has the option
to acquire inventory of stand alone print servers at the Company's cost during
the period of the agreement. The agreement requires the Company to provide
certain engineering support to Osicom, for which Osicom shall pay 100% of the
actual cost of such support to the Company. It also requires Osicom to assign
all its rights in the trademark NET+ARM'TM' to the Company and requires Osicom
to use its best efforts to obtain a consent in writing from ARM, Limited to the
assignment of the rights to NET+ARM'TM'. 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.
The Company entered into a supply agreement with Osicom pursuant to which
the Company sells to Osicom several products, including the NET+ARM'TM' chips
for fixed prices. The prices are subject to change consistent with any changes
in the Company's costs for such products. The agreement also provides that
Osicom manufacturers products for the Company at Osicom's best price, as
determined by mutual agreement. The agreement has a term of five years and does
not obligate Osicom to purchase any products from the Company or the Company to
utilize Osicom for manufacturing.
The Company and Osicom entered into a one year sublease agreement for
approximately 6,000 square feet of office space at the Company's facilities for
an annual rental of $88,000 per year payable quarterly. The sublease may be
extended for one year terms for the term of the Company's facility lease.
F-19
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
R. SEGMENT INFORMATION
Information for the fiscal years ended January 31, 1999, 1998 and 1997 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>
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Net sales:
United States................................ $ 6,683,800 $5,653,500 $ 7,444,500
Asia......................................... 5,355,800 1,150,700 --
Europe....................................... 960,500 1,089,500 --
Other........................................ 372,900 26,600 --
----------- ---------- -----------
Total net sales......................... $13,373,000 $7,920,300 $ 7,444,500
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
There were no long-lived assets at any foreign locations during the years
presented.
F-20
<PAGE>
<PAGE>
NETSILICON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
S. VALUATION AND QUALIFYING ACCOUNTS
Changes in the inventory valuation reserve were as follows:
<TABLE>
<S> <C>
Balance at 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
---------
---------
Changes in the accounts receivable valuation reserve were as follows:
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
---------
---------
</TABLE>
Note: See Managements' Discussion and Analysis of Financial Condition and
Results of Operations.
F-21
<PAGE>
<PAGE>
- - - --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT
RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER TO SELL NOR
IS IT SEEKING AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION WHERE IT IS
UNLAWFUL TO DO SUCH. THE INFORMATION IN THIS PROSPECTUS IS CURRENT AND CORRECT
ONLY AS OF , 1999, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR ANY SALE OF SECURITIES.
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTCIPATING 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.
- - - --------------------------------------------------------------------------------
3,000,000 SHARES OF COMMON STOCK
$12.00 TO $14.00 PER SHARE
[LOGO]
DAIN RAUSCHER WESSELS TUCKER ANTHONY
a division of Dain Rauscher Incorporated Incorporated
, 1999
- - - --------------------------------------------------------------------------------
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses (other than underwriting discounts and commissions)
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.................................... $ 13,427.40
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.......................................................................... 293,587.60
-------------
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 Exchange
Commission such indemnification is against public policy as expressed in
II-1
<PAGE>
<PAGE>
that Act and is therefore unenforceable. The Registrant expects to obtain a
directors and officers liability insurance policy prior to the effective date of
this Registration Statement.
The 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>
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..............................................
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 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.......
10.9 -- Amendment No. 1 to NETsilicon, Inc. 1998 Director Stock Option Plan......................
**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..........................................................................
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.
** To be filed by amendment.
II-2
<PAGE>
<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 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,
II-3
<PAGE>
<PAGE>
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>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
duly caused this Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Waltham,
Massachusetts on March 11, 1999.
NETSILICON, INC.
By: /S/ CORNELIUS PETERSON
...
CORNELIUS PETERSON VIII
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 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 President and Chief Executive Officer March 11, 1999
......................................... and Director
CORNELIUS PETERSON VIII
/S/ RENN ZAPHIROPOULOS Chairman of the Board March 11, 1999
.........................................
RENN ZAPHIROPOULOS
/S/ DANIEL J. SULLIVAN Vice President -- Finance, Chief March 11, 1999
......................................... Financial Officer
DANIEL J. SULLIVAN
/S/ YECHIAM YEMINI Director March 11, 1999
.........................................
YECHIAM YEMINI
/S/ LEONARD HECHT Director March 11, 1999
.........................................
LEONARD HECHT
/S/ BRUCE B. ROESNER Director March 11, 1999
.........................................
BRUCE B. ROESNER
</TABLE>
II-5
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- - - ----------- -------------------------------------------------------------------------------------------- --------
<S> <C> <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..............................................
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 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.......
10.9 -- Amendment No. 1 to NETsilicon, Inc. 1998 Director Stock Option Plan......................
**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..........................................................................
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.
** To be filed by amendment.
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................. 'TM'
The registered trademark symbol shall be expressed as.................. 'r'
<PAGE>
<PAGE>
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, Clerk
of Digital Products, 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 August 21, 1998 by a vote of the directors
and 100 shares of common stock of 100 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.
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
- - - -------------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- - - -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Common 35,000,000 $.01
- - - -------------------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------------------
Preferred: Preferred: 5,000,000 $.01
- - - -------------------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>
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.
None.
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.
2
<PAGE>
<PAGE>
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
(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
3. any other entity in which any such person or organization or this
Corporation is in any way interested.
4. 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.
5. 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
3
<PAGE>
<PAGE>
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.
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 Waverly Oaks Road, Waltham, MA 02154
b. The name, residential address and post office address of each director and
officer of the corporation is as follows:
<TABLE>
<CAPTION>
NAME RESIDENCE POST
OFFICE 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: 301 W. 57th Street Same
Yechiam Yemini New York, NY 10019
Leonard Hecht 18241 Lake Encino Drive Same
Encino, CA 91316
Renn Zaphiropoulous 12500 West Highway 56 P.O. Box 1022
Cedar City, VT 84720 Cedar City, VT 84720
Bruce Boyd Roesner 13034 Polvera Avenue Same
San Diego, CA 92128
</TABLE>
4
<PAGE>
<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 I: The name of the corporation is changed
to: "NETsilicon, Inc."
Article III: The stock authorization is to be
changed. Please see attached Page 3A.
SIGNED UNDER THE PENALTIES OF PERJURY, this 24 day of August, 1998,
/s/ Cornelius Peterson VIII
___________________________________
Cornelius Peterson VIII, President
/s/ Daniel J. Sullivan
___________________________________
Daniel J. Sullivan, Clerk
5
<PAGE>
<PAGE>
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<CAPTION>
- - - -------------------------------------------------------------------------------------------
WITHOUT PAR VALUE WITH PAR VALUE
- - - -------------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- - - -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Common 100 $.01
- - - -------------------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------------------
Preferred: Preferred:
- - - -------------------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------------------
</TABLE>
Change the total authorized to:
<TABLE>
<CAPTION>
- - - -------------------------------------------------------------------------------------------
WITHOUT PAR VALUE WITH PAR VALUE
- - - -------------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- - - -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Common 35,000,000 $.01
- - - -------------------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------------------
Preferred: Preferred: 5,000,000 $.01
- - - -------------------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>
EXHIBIT 5.1
Woodbridge
___________________, 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 3,000,000 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
Dain Rauscher Wessels, of which 2,000,000 shares of the Common Stock are
being issued and sold by the Company and 1,000,000 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 450,000 shares of the Common Stock (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>
<PAGE>
NETsilicon, Inc.
_________, 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.
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>
<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
<PAGE>
<PAGE>
individual must be an employee of the Corporation, parent or subsidiary. A
Director shall abstain from voting on the grant of any options to himself, his
spouse, his children, grandchildren and parents. The grant of each option shall
be 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 four million five hundred thousand (4,500,000)
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
<PAGE>
<PAGE>
only if, at all times during the period beginning on the date of the granting of
such option and ending with the date of exercise of such option, the optionee is
an employee or consultant of the Corporation, its parent or a subsidiary.
1. 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.
2. 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.
3. 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.
4. 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.
5. 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>
<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
<PAGE>
<PAGE>
Subsidiary thereof (the "Successor Corporation"). If an Option is assumed or
substituted for, the Option or equivalent option shall continue to be
exercisable as provided in Section 7 hereof for so long as the Optionee serves
as an employee of the Successor Corporation. Following such assumption or
substitution, if the Optionee's status as an employee is terminated other than
upon a voluntary resignation by the Optionee, the Option shall become fully
vested and exercisable in accordance with Section 7 above.
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 BY 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>
<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 appropriate. 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>
<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
<PAGE>
<PAGE>
equitably requires an adjustment in the number or kind of Shares theretofore
reserved for the grant of options pursuant to the Plan but not yet subject to
option and of the Shares then subject to an option or options. such adjustments
shall be made by the Board of Directors and shall be effective and binding for
all purposes of the Plan and of each option outstanding thereunder. In the case
of any such substitution or adjustment as provided for in this paragraph, the
aggregate option exercise price set forth for all outstanding options for all
Shares covered thereby prior to such substitution or adjustment will be the
option exercise price for all shares or other securities which shall have been
adjusted pursuant to this paragraph. No adjustment or substitution provided for
in this paragraph shall require the Corporation to sell a fractional Share, and
the total substitution or adjustment with 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>
<PAGE>
EXHIBIT 10.7
- - - --------------------------------------------------------------------------------
COAST
Amendment #2 to
Loan and Security Agreement
Borrower: NETsilicon, Inc., a Massachusetts corporation, fka Digital
Products, Inc.
Address: 2800 28th Street, Suite 100
Santa Monica, California 90405
Date: October 28, 1998
This Amendment #2 to Loan and Security Agreement (the "Amendment") is entered
into by and between Coast Business Credit'r', a division of Southern Pacific
Bank (fka Southern Pacific Thrift & Loan Association ( "Coast"), and the
above-referenced borrower. This Amendment principally amends the Schedule (the
"Schedule") to the Loan and Security Agreement dated October 11, 1996, as
amended by Amendment #1 to Loan and Security Agreement dated February 12, 1998.
The Schedule, as modified by this Amendment, shall for all purposes be deemed to
be, and the same shall constitute an integral part of the Loan and Security
Agreement. (Definitions and certain terms used in this Amendment shall have the
meanings set forth in the Loan and Security Agreement, the Schedule and all
other documents and agreements executed in connection therewith or in
furtherance thereof).
For good and valuable consideration, receipt of which is hereby
acknowledged, the Schedule is hereby amended in the following respects by this
Amendment and by reason thereof the Loan and Security Agreement, to the extent
governed or impacted by the Schedule, is also amended to the extent that
modifications of the Schedule result in modifications to the Loan and Security
Agreement.
- - - --------------------------------------------------------------------------------
NAME OF BORROWER:
Borrower has changed its name from Digital Products, Inc. to
NETsilicon, Inc., a Massachusetts corporation. Wherever
reference is made to Borrower, the same shall refer to
NETsilicon, Inc. Borrower agrees to execute such documents and
agreements as Coast may request from time to time reflecting
such name change.
- - - --------------------------------------------------------------------------------
<PAGE>
<PAGE>
Amendment #2 to Loan and Security Agreement Coast Business Credit
- - - --------------------------------------------------------------------------------
SECTION 1 OF THE SCHEDULE (dealing with the Credit Limit) is amended and
restated in its entirety to read as follows:
1. CREDIT LIMIT
<TABLE>
<S> <C>
(Section 1.1): Loans in a total amount at any time outstanding not to exceed the lesser of a
total of $5,000,000 (the "Maximum Dollar Amount"), or the sum of (a) and
(b) below:
(a) Loans (the "Receivable Loans") in an amount not to exceed 80% of the
amount of Borrower's Eligible Receivables (as defined in Section 8 above), plus
(b) Loans (the "Inventory Loans") in an amount not to exceed the lesser of:
(1) 45% of the value of Borrower's Eligible
Inventory (as defined in Section 8 above*),
calculated at the lower of cost or market
value and determined on a first-in-,
first-out basis, or
(2) $1,500,000.00.
</TABLE>
*Coast, in its sole and absolute discretion, may, but is under no obligation to
do so, elect to include certain encoded OEM inventory labeled WIP Final as
Eligible if Coast determines that the same meets its underwriting criteria.
Section 1 of the Schedule is superseded in its entirety by the
foregoing.
- - - --------------------------------------------------------------------------------
SECTION 3 OF THE SCHEDULE (dealing with fees) is amended to read as follows:
- - - --------------------------------------------------------------------------------
3. FEES (Section 1.3):
Amendment Fee: $5,000 payable concurrently herewith.
Except as expressly modified herein, all other terms and
conditions for the Schedule, dealing with fees remain unchanged.
- - - --------------------------------------------------------------------------------
SECTION 4 OF THE SCHEDULE (dealing with Term) is amended and restated in its
entirety to read as follows:
4. MATURITY DATE
(Section 6.1): February 1, 2001 subject to automatic
renewal as provided in Section 6.1 above,
and early termination as provided in Section
6.2 above.
-2-
<PAGE>
<PAGE>
Amendment #2 to Loan and Security Agreement Coast Business Credit
- - - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Early Termination Fee
(Section 6.2) An amount equal to 1.5% of the Maximum Dollar Amount (as defined
in the Schedule), if termination occurs on or before February 1, 2000
and 1% of the Maximum Dollar Amount if termination occurs after
February 1, 2000 and before February 1, 2001.
</TABLE>
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Borrower: Coast:
<S> <C>
NETsilicon, a Massachusetts corporation COAST BUSINESS CREDIT,
fka DIGITAL PRODUCTS, INC. a division of Southern Pacific Bank,
f/k/a Southern Pacific Thrift & Loan
Association
By /s/ By
---------------------------- -------------------------------
Title Secretary Title
------------------------- ----------------------------
</TABLE>
The undersigned, having executed and delivered to Coast, a
Subordination Agreement dated as of October 11, 1996, and a Continuing Guaranty
also dated as of October 11, 1996, hereby (a) consents to the foregoing
Amendment #2 to Loan and Security Agreement, (b) reaffirms that the
Subordination Agreement and the Continuing Guaranty are in full force and effect
and (c) acknowledge that the Subordination Agreement and Continuing Guaranty
shall, to the extent applicable, be deemed to include the modifications provided
in Amendment #2 to Loan and Security Agreement.
Osicom Technologies, Inc.
By /s/
------------------------
Title VP of Finance
----------------------
-3-
<PAGE>
<PAGE>
EXHIBIT 10.8
EMPLOYMENT CONTRACT
between
Net+Silicon Inc., USA
411 Waverley Oaks Road
Building 227
Waltham
Mass. 02452
U.S.A.
- hereinafter referred to as "Company" -
and
Mr. Michael Evenson
Lerchenstrasse 14
71144 Steinenbronn
Germany
- hereinafter referred to as " Senior Manager " -
RECITAL
The Company and Senior Manager desire to enter into an Employment
Agreement setting forth the terms and conditions of Senior Manager's employment
with the Company.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, the Company and Senior Manager agree as
follows:
1. Employment.
(a) Term. The Senior Manager shall be employed by the Company as
Vice President and General manager responsible for the Company's business
activities in Europe and the
1
<PAGE>
<PAGE>
Industrial Automation Market worldwide (EIA). Specific responsibilities and to
serve in such additional or different position or positions as the Company may
determine in its sole discretion. This employment contract shall become
effective on the date hereof, and is entered into for an indefinite period of
time. The contract shall end without notice no later than at the end of the
month in which the Senior Manager fulfills the conditions to receive state old
age pension benefits unless earlier terminated as set forth herein.
(b) Duties and Responsibilities. Senior Manager will be reporting
to Cornelius Peterson, President and shall be responsible for:
Establishing European Operation with Sales, Support and Marketing.
Develop the European Operation in line with Company objectives.
Develop and operate the Company's Worldwide Industrial Automation
Business via local Sales, Support and Marketing functions in
Europe, ASIA and the Americas.
Develop and accomplish a mutually agreeable business plan
including products, marketing, sales budgets and profit and
capital plan. This plan must be accepted by the company before it
can be implemented and will be subject to regular review and
updating to reflect the needs for profitability and growth with
respect to prevailing business conditions.
(c) Controls. In performing these responsibilities Senior Manager
must conform to the Company standard practices and controls for financial and
contractual commitments, expenditures and obligations.
(d) Location. The initial principal location at which Senior
Manager shall perform services for the Company shall be Germany. The Company
reserves the right to transfer the Senior Manager to another place of work if
this is necessary for business reasons and if such transfer can reasonably be
imposed on the Senior Manager.
2. Compensation
(a) Base Salary. Executive shall be paid a base salary ("Base
Salary") at the annual rate of US$4807.69, payable in bi-weekly installments
consistent with Company's payroll practices which is equivalent to an annual
base salary of US$125,000.00. The annual Base Salary shall be reviewed on or
before January 1 of each year, unless Senior Manager's employment hereunder
shall have been terminated earlier pursuant to this Agreement, starting on
January 1st 2000 by the Executive Management group of the Company to determine
if such Base Salary should be changed for the following year.
(b) Commission. In addition to the Base Salary Senior Manager is
entitled to an incentive package targeted at $125,000 per year at 100% of
attainment of mutually accepted business and performance goals and targets. The
yearly goals will be described in a separate
2
<PAGE>
<PAGE>
agreement to be agreed on or before January 1st of each year. Attachment 1
contains the First year's goals. Commissions are paid monthly in the following
month and will be guaranteed for the first three months at the following rate
mo. 1 - 80%, mo. 2 and 3 - 70% mo. A recoverable draw against commissions will
be made available for the second three months, if requested by Senior Manager,
at a rate of 50% of standard monthly commission ($125,000 : 12). The Company
reserves the right to modify the Commission Plan at any time.
(c) Payment. Payment of all compensation to Senior Manager
hereunder shall be made in accordance with the relevant Company policies in
effect from time to time, including normal payroll practices, and shall be
subject to all applicable employment and withholding taxes in Germany. By
payment of the above remuneration all activities which the Senior Manager has to
perform according to this contract shall be deemed compensated. In particular,
the Senior Manager shall not be entitled to any additional compensation for
overtime work.
3. Other Employment Benefits.
(a) Business Expenses. Upon submission of itemized expense
statements in the manner specified by the Company, Senior Manager shall be
entitled to reimbursement for reasonable travel and other reasonable business
expenses duly incurred by Executive in the performance of his duties under this
Agreement.
(b) Benefit Plans. Senior Manager shall be entitled to participate
in the Company's medical and dental plans, life and disability insurance plans
pursuant to their terms and conditions. Senior Manager shall be entitled to
participate in any other benefit plan offered by the Company to its employees
during the term of this Agreement (other than stock option or stock incentive
plans, which are governed by Section 3(d) below). Nothing in this Agreement
shall preclude the Company or any affiliate of the Company from terminating or
amending any employee benefit plan or program from time to time.
(c) Vacation. Senior Manager shall be entitled to 2 weeks of
vacation for the first year and 3 weeks of paid vacation each subsequent year of
full employment, exclusive of legal holidays, as long as the scheduling of
Senior Manager's vacation does not interfere with the Company's normal business
operations.
(d) Stock Options. Senior Manager shall be awarded 40,000 stock
options in NETsilicon. These options will be awarded on the date of the new
Company is established and vesting starts on the first day of employment. The
strike price of the options will be the same as that for the other senior
employees and that of the Initial Public Offering. The vesting will be over a 2-
year period on a basis or 50% vested at the end of the first year and 100% at
the end of the second year. Senior manager is eligible to participate in the
Companies additional options programs such as annual performance options,
Employee stock purchase and 401k stock contributions by the Company. For all
design wins over the quota during the first 6 months of employment Senior
Manager will be given 500 additional stock options at the prevailing price as
set by the Board of Directors.
3
<PAGE>
<PAGE>
(e) No Other Benefits. Senior Manager understands and acknowledges
that the compensation specified in Sections 2 and 3 of this Agreement shall be
in lieu of any and all other compensation, benefits and plans.
4. Senior Manager's Business Activities. The Senior Manager shall
devote his full working time and ability to the Company's business. All other
activity for remuneration or activity which normally entitles to remuneration,
including any part time work, is prohibited unless the Company has given its
prior written consent. The Company shall grant such consent if the additional
activity does not adversely affect the Company's interests.
5. Termination of Employment. Any notice of termination must be
given in writing to be effective
(a) For Cause. Notwithstanding anything herein to the contrary,
the Company may terminate Senior Manager's employment hereunder for cause for
any one of the following reasons: (1) conviction of a felony, any act involving
moral turpitude, or a misdemeanor where imprisonment is imposed, (2) commission
of any act of theft, fraud, dishonesty, or falsification of any employment or
Company records, (3) improper disclosure of the Company's confidential or
proprietary information, (4) any action by the Senior Manager which has a
detrimental effect on the Company's reputation or business, (5) Senior Manager's
failure or inability to perform any reasonable assigned duties after written
notice from the Company of, and a reasonable opportunity to cure, such failure
or inability, (6) any breach of this Agreement, which breach is not cured within
ten (10) days following written notice of such breach, (7) a course of conduct
amounting to gross incompetence, (8) chronic and unexcused absenteeism, (9)
unlawful appropriation of a corporate opportunity, or (10) misconduct in
connection with the performance of any of Senior Manager's duties, including,
without limitation, misappropriation of funds or property of the Company,
securing or attempting to secure personally any profit in connection with any
transaction entered into on behalf of the Company, misrepresentation to the
Company, or any violation of law or regulations on Company premises or to which
the Company is subject. Upon termination of Senior Manager's employment with the
Company for cause, the Company shall be under no further obligation to Senior
Manager, except to pay all accrued but unpaid base salary and accrued vacation
to the date of termination thereof.
(b) Without Cause. The Company may terminate Senior Manager's
employment hereunder at any time without cause, provided, however, that Senior
Manager shall be entitled to 6 months notice period. During this period Senior
Manager will continue to discharge his responsibilities and be able to seek new
employment. In case of such termination of this employment contract, the Company
can, at any time, release the Senior Manager from his working duties until the
end of the notice period. In such case the Company shall continue to pay to the
Senior Manager his contractual remuneration in the amount of 6 Months of Base
Salary in addition to accrued but unpaid Base Salary and accrued vacation, less
deductions required by law,until the end of the notice period. Any outstanding
vacation claim shall be credited by the such [sic] period of release. Such
Payments to Senior Manager are due if, and only if, Senior Manager executes a
valid and comprehensive release of any and all claims that the Senior Manager
may have against the Company in a form provided by the Company and Senior
Manager executes such form within seven (7) days
4
<PAGE>
<PAGE>
of tender. If the Senior Manager terminates his employment hereunder he must
give a minimum of a three- (3) month notice period.
(c) Cooperation. After notice of termination, Senior Manager shall
cooperate with the Company, as reasonably requested by the Company, to effect a
transition of Senior Manager's responsibilities and to ensure that the Company
is aware of all matters being handled by Senior Manager.
6. Disability of Senior Manager. The Company may terminate this
Agreement without liability if Senior Manager shall be permanently prevented
from properly performing his essential duties hereunder with reasonable
accommodation by reason of illness or other physical or mental incapacity for a
period of more than [120] consecutive days.
7. Death of Senior Manager. In the event of the death of Senior
Manager during the Employment Period, the Company's obligations hereunder shall
automatically cease and terminate; provided, however, that within 15 days the
Company shall pay to Senior Manager's heirs or personal representatives Senior
Manager's Base Salary and accrued vacation accrued to the date of death.
8. Confidential Information and Invention Assignments. Senior
Manager has executed the Company Confidential Information and Invention
Assignment Agreement (See attachment 2-the "Confidential Information and
Invention Assignment Agreement"). The obligations under the Confidential
Information and Invention Assignment Agreement shall survive termination of this
Agreement for any reason.
9. Exclusive Employment. During employment with the Company,
Senior Manager will not do anything to compete with the Company's present or
contemplated business, nor will he or she plan or organize any competitive
business activity. Senior Manager will not enter into any agreement which
conflicts with his duties or obligations to the Company. Senior Manager will not
during his employment, without the Company's express written consent, directly
or indirectly, solicit or encourage any employee, agent, independent contractor,
supplier, customer, consultant or any other person or company to terminate or
alter a relationship with the Company.
10. Assignment and Transfer. Senior Manager's rights and
obligations under this Agreement shall not be transferable by assignment or
otherwise, and any purported assignment, transfer or delegation thereof shall be
void. This Agreement shall inure to the benefit of, and be binding upon and
enforceable by, any purchaser of substantially all of Company's assets, any
corporate successor to Company or any assignee thereof.
11. Existing Obligations. Your start date is targeted at Oct 15,
1998 and we understand that you have requirements to support your current
employer in the transition to their replacement staffing on a mutually agreeable
basis. You are authorized to fulfill whatever obligations are necessary to
former employer until December 31, 1998. Any such time spent on the behalf of
former employer will be taken without compensation to you by Company.
5
<PAGE>
<PAGE>
12. Miscellaneous.
(a) Attorneys' Fees. Should either party hereto, or any heir,
personal representative, successor or assign of either party hereto, resort to
legal proceedings in connection with this Agreement or Senior Manager's
employment with the Company, the party or parties prevailing in such legal
proceedings shall be entitled, in addition to such other relief as may be
granted, to recover its or their reasonable attorneys' fees and costs in such
legal proceedings from the non-prevailing party or parties; provided, however,
that nothing herein is intended to affect the provisions of Section 12(l).
(b) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of Germany.
(c) Entire Agreement. This Agreement contains the entire agreement
and understanding between the parties hereto and supersedes any prior or
contemporaneous written or oral agreements, representations and warranties
between them respecting the subject matter hereof.
(d) Amendment. This Agreement may be amended only by writing
signed by Senior Manager and by a duly authorized representative of the Company.
(e) Severability. If any term, provision, covenant or condition of
this Agreement, or the application thereof to any person, place or circumstance,
shall be held to be invalid, unenforceable or void, the remainder of this
Agreement and such term, provision, covenant or condition as applied to other
persons, places and circumstances shall remain in full force and effect.
(f) Construction. The headings and captions of this Agreement are
provided for convenience only and are intended to have no effect in construing
or interpreting this Agreement. The language in all parts of this Agreement
shall be in all cases construed according to its fair meaning and not strictly
for or against the Company or Senior Manager.
(g) Rights Cumulative. The rights and remedies provided by this
Agreement are cumulative, and the exercise of any right or remedy by either
party hereto (or by its successor), whether pursuant to this Agreement, to any
other agreement, or to law, shall not preclude or waive its right to exercise
any or all other rights and remedies.
(h) Nonwaiver. No failure or neglect of either party hereto in any
instance to exercise any right, power or privilege hereunder or under law shall
constitute a waiver of any other right, power or privilege or of the same right,
power or privilege in any other instance. All waivers by either party hereto
must be contained in a written instrument signed by the party to be charged and,
in the case of the Company, by an officer of the Company (other than Senior
Manager) or other person duly authorized by the Company.
(i) Remedy for Breach; Attorneys' Fees. The parties hereto agree
that, in the event of breach or threatened breach of any covenants of Senior
Manager, the damage or imminent damage to the value and the goodwill of the
Company's business shall be inestimable, and
6
<PAGE>
<PAGE>
that therefore any remedy at law or in damages shall be inadequate. Accordingly,
the parties hereto agree that the Company shall be entitled to injunctive relief
against Senior Manager in the event of any breach or threatened breach of any of
such provisions by Senior Manager, in addition to any other relief (including
damages) available to the Company under this Agreement or under law. The
prevailing party in any action instituted pursuant to this Agreement shall be
entitled to recover from the other party its reasonable attorneys' fees and
other expenses incurred in such action.
(j) Notices. Any notice, request, consent or approval required or
permitted to be given under this Agreement or pursuant to law shall be
sufficient if in writing, and if and when sent by certified or registered mail,
with postage prepaid, to Senior Manager's residence (as noted in the Company's
records), or to the Company's principal office, as the case may be.
(k) Assistance in Litigation. Senior Manager shall, during and
after termination of employment, upon reasonable notice, furnish such
information and proper assistance to the Company as may reasonably be required
by the Company in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become a party; provided, however, that
such assistance following termination shall be furnished at mutually agreeable
times and for mutually agreeable compensation.
(l) Disputes. Any controversy, claim or dispute arising out of or
relating to this Agreement or the employment relationship, either during the
existence of the employment relationship or afterwards, between the parties
hereto, their assignees, their affiliates, their attorneys, or agents, shall be
litigated solely in Germany. Each party (1) submits to the jurisdiction of such
court, (2) waives the defense of an inconvenient forum, (3) agrees that valid
consent to service may be made by mailing or delivery of such service to the
party's last known address, if personal service delivery can not be easily
effected, and (4) authorizes and directs the Agent to accept such service in the
event that personal service delivery can not easily be effected.
7
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date set forth below.
[COMPANY] Senior Manager,:
By: By:
---------------------------------- -------------------------------
Name: Cornelius Peterson Name: Michael Evensen
--------------------------------- -----------------------------
Title: President NET+SILICON Division
-------------------------------
Date: October 1st 1998
-------------------------------
8
<PAGE>
<PAGE>
Attachment 1
Commission Incentive Goals for 1999
Q1 and Q1 1999 based on design wins as stated below and paid in accordance with
the same practices as all other employees. If at the end of the first 3 months
these goals are deemed by either party to be significantly unfair either party
can request a change in the goals and the request will be negotiated. The
incentive for the Design Wins will be paid at a rate of determined by the # of
wins at quota divided into the standard incentive for the quota period. A design
win is a PO for a development kit and a cancelable PO for the first shipping
year of chips.
<TABLE>
<CAPTION>
Business area Q1 Q2
<S> <C> <C>
Europe New markets 3 7
IA Europe 3 5
IA Japan 1 3
IA USA 7 9
Total Design Win Goals 14 24
- - - -------------------------------------------------------------------------
</TABLE>
Q3 and on Based on attainment of EIA Revenue and operating profit mutually
agreeable goals.
Approved by
C Peterson
M Evensen
Date
9
<PAGE>
<PAGE>
Attachment 2
NETsilicon Confidential Information and Invention assignment agreement
<PAGE>
<PAGE>
NETSILICON, INC.
AMENDMENT NO. 1 TO 1998 DIRECTOR STOCK OPTION PLAN
THIS AMENDMENT TO 1998 DIRECTOR STOCK OPTION PLAN is entered into this
_____ day of ____________, 1999, by and between NETsilicon, Inc., a
Massachusetts corporation with principal offices at411 Waverley Oaks Road,
Building 227, Waltham, MA 02154 (hereinafter called the "Corporation"), and the
Directors of the Corporation as listed on Schedule A attached hereto
(individually, a "Grantee" and collectively, the "Grantees").
WHEREAS, the Corporation granted certain stock options to Grantees pursuant
to that certain 1998 Director Stock Option Plan (the "Stock Option Plan") and
the Corporation and the Grantees desire to amend the terms of the Stock Option
Plan as set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth and for other good and valuable consideration, the parties hereto agree as
follows:
1. The Stock Option Plan is hereby amended to delete paragraph 3(a)(ii)
thereof in its entirety and to insert the following in its place:
The Chairman of the Board of Directors shall be automatically granted
an Option to purchase 40,000 Shares and 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 a Chairman or an
Outside Director, respectively, whether through election by the
shareholders of the Company or appointment by the Board to fill a
vacancy; provided, however, that a Chairman or an Inside Director who
ceases to be a Chairman or an Inside Director, respectively, but who
remains a Director shall not receive a First Option.
2. All other terms and conditions of the Stock Option Plan not otherwise
affected by the amendments set forth herein shall remain in full force and
effect.
IN WITNESS WHEREOF, the Corporation has caused this Amendment to 1998
Director Stock Option Plan to be duly executed by its President and Chief
Executive Officer duly authorized, and the Grantees have set their hands and
seals all on the date and year first written above.
CORPORATION:
NETsilicon, Inc.
By:_______________________
Cornelius Peterson, VIII, Director
<PAGE>
<PAGE>
GRANTEES:
__________________________________
Cornelius Peterson, VIII, Director
__________________________________
Leonard Hecht, Director
__________________________________
Bruce B. Roesner, Director
__________________________________
Yechiam Yemini, Director
__________________________________
Renn Zaphiropoulos, Chairman
<PAGE>
<PAGE>
SCHEDULE A
NETsilicon, Inc. Board of Directors
Cornelius Peterson, VIII, Director
Leonard Hecht, Director
Bruce B. Roesner, Director
Yechiam Yemini, Director
Renn Zaphiropoulos, Chairman
<PAGE>
<PAGE>
OSICOM TECHNOLOGIES, INC.
2800 28TH Street
Suite 100
Santa Monica, California 90405
March 10, 1999
Mr. Cornelius Peterson VIII
President and CEO
NETsilicon, Inc.
411 Waverly Oaks Road
Suite 227
Waltham, Mass. 02154
Dear Pete:
This letter confirms our agreement to amend the Intercompany Agreement (the
"Agreement") dated as of May 1, 1998 between NETsilicon, Inc. ("NSI") and Osicom
Technologies, Inc. ("Osicom") as set forth below. Osicom and NETsilicon hereby
agree that these amendments shall be effective as of May 1, 1998.
1. The term of paragraph 5 of the Agreement, as to engineering support
only, shall expire on June 30, 1999, subject, however, to the right of
Osicom to terminate such extension at any time on five (5) business
days prior written notice to NSI. The term of paragraph 5 of the
Agreement, as to manufacturing services, shall expire on April 30,
1999.
2. Paragraph 8 of the Agreement is hereby deleted and replaced in its
entirety by the following: NSI and Osicom shall jointly own the
intellectual property set forth on the attached Schedule C (the
"Intellectual Property") subject to the following limitations: (a)
Osicom's rights to the Intellectual Property shall be limited to its
use solely for the purpose of developing, manufacturing and selling
the commercial products listed on Schedule A to the Agreement; (b)
Osicom shall not use the Intellectual Property in any products that
directly compete with any NETsilicon products; and (c) Osicom shall
have no right to sell, license, transfer or assign to any third party
all or any part of its rights in the Intellectual Property or any
derivative thereof. Furthermore, Osicom acknowledges that, except as
provided herein, NETsilicon's rights to the Intellectual Property are
owned by NETsilicon without limitation.
3. Schedule C of the Agreement is hereby deleted and replaced it its
entirety by Schedule C attached to this letter and made a part hereof.
<PAGE>
<PAGE>
4. Except as amended by this letter, the Agreement remains in full force
and effect according to its terms.
If the foregoing correctly sets our agreement, please sign and return this
letter to me.
Very truly yours,
OSICOM TECHNOLOGIES, INC.
By: /s/ Par Chadha
____________________________________
Par Chadha, Chief Executive Officer
Agreed to and accepted
this 10th day of March, 1999
NETsilicon, Inc.
/s/ Cornelius Peterson VIII
___________________________
Cornelius Peterson, VIII
President and CEO
<PAGE>
<PAGE>
EXHIBIT C
NSI INTELLECTUAL PROPERTY AVAILABLE FOR OSICOM USE
ALL DESIGNS OF NSI AS OF THE DAY OF COMMENCEMENT OF THE IPO AS FOLLOWS:
NET+ARM
Verilog for the NETARM chips 12, 15 and 40
Test bench for the NETARM chips 12, 15 and 40
Schematics, BOM and Artwork files for the NETARM Development Board
Source code that NETsilicon owns for the NET+ARM software and firmware:
Release D.2 for pSOS and Release D.2 for VxWorks
Source code for the HTML to C compiler
Source code for the flash download utility
COMMERCIAL PRINT SERVERS
Schematics, BOM and Artwork files for the commercial NET+ARM based boards:
Pocket, 500/1000 and EIO
Schematics, BOM and Artwork files for the 68340 Ethernet and Token Ring boards
500/1000, 2000, MIO
Electronic versions of manuals, latest revision
Source code that NETsilicon owns for the Commercial Print Servers
Source code for utility software:
NSDOCTOR
NSBROWSE
FTP Flash downloads
IP and IPX P2P
SOURCE CODE NOT OWNED BY NETSILICON INCLUDES THE FOLLOWING:
PSOS
VxWorks
TCP/IP
IPX/SPX
AppleTalk
HTTP
SNMP
Streams
MANUFACTURING DOCUMENTATION
Whatever documentation that is in existence to support manufacturing
<PAGE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
NETsilicon, Inc.
Waltham, Massachusetts
We hereby consent to the inclusion in the Prospectus constituting a part of
this Registration Statement on Form S-1 of our report dated February 26, 1999
(except for Note I (ii) and (iii) as to which the date is _________) on the
financial statements of NETsilicon, Inc. (the 'Company'), as of January 31, 1999
and 1998, 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
March 11, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 582,600
<SECURITIES> 0
<RECEIVABLES> 4,204,500
<ALLOWANCES> 300,000
<INVENTORY> 3,769,300
<CURRENT-ASSETS> 10,013,300
<PP&E> 3,712,600
<DEPRECIATION> 3,027,400
<TOTAL-ASSETS> 11,648,400
<CURRENT-LIABILITIES> 13,484,500
<BONDS> 0
<COMMON> 100,000
0
0
<OTHER-SE> (1,936,100)
<TOTAL-LIABILITY-AND-EQUITY> 11,648,400
<SALES> 13,373,000
<TOTAL-REVENUES> 13,373,000
<CGS> 7,270,400
<TOTAL-COSTS> 7,683,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 551,700
<INCOME-PRETAX> (2,132,400)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,132,400)
<DISCONTINUED> (289,800)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,422,200)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> 0
<PAGE>
