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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
Exchange Act of 1934 for the quarterly period ended July 29, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
Exchange Act of 1934 for the transition period from ____ to ____.
Commission file number 0-26761
NETsilicon, Inc.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2826579
(State of incorporation) (I.R.S. Employer Identification No.)
411 WAVERLEY OAKS RD., BLDG. 227, WALTHAM, MASSACHUSETTS 02452
(Address of principal executive office)
(781) 647-1234
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
6,232,375 shares of Voting Common Stock, $0.01 par value, as of
September 8, 2000
7,500,000 shares of Non-Voting Common Stock, $0.01 par value, as of
September 8, 2000
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NETsilicon, Inc.
TABLE OF CONTENTS
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Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets July 29, 2000 and January 31, 2000.............. 3
Condensed Consolidated Statements of Income
Three Months and Six Months Ended July 29, 2000 and July 31, 1999..................... 4
Condensed Consolidated Statements of Cash Flows
Three Months and Six Months Ended July 29, 2000 and July 31, 1999..................... 5
Notes to Condensed Consolidated Financial Statements.................................. 6-7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 8-23
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk................................ 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................................................ 23
ITEM 2. Changes in Securities and Use of Proceeds................................................ 24
ITEM 3. Defaults Upon Senior Securities.......................................................... 24
ITEM 4. Submission of Matters to a Vote of Security Holders...................................... 24
ITEM 5. Other Information........................................................................ 24
ITEM 6. Exhibits and Reports on Form 8-K......................................................... 24
Signatures......................................................................................... 25
Exhibit 3.2
Exhibit 27.1
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
NETsilicon, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
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JULY 29, 2000 JANUARY 31, 2000
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 5,716,100 $ 11,096,500
Short-term investments 10,224,300 8,203,700
Accounts receivable, net 4,862,800 2,266,000
Inventory, net 5,537,800 4,322,400
Prepaid expenses and other current assets 1,130,600 798,900
------------ ------------
TOTAL CURRENT ASSETS 27,471,600 26,687,500
PROPERTY AND EQUIPMENT, NET 2,394,100 1,466,400
OTHER ASSETS 2,021,500 1,626,600
------------ ------------
TOTAL ASSETS $ 31,887,200 $ 29,780,500
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ -- $ 779,700
Accounts payable 3,941,000 3,013,200
Due to affiliate 1,100 56,900
Other current liabilities, including short term portion of
capital lease obligation 3,177,600 3,322,700
------------ ------------
TOTAL CURRENT LIABILITIES 7,119,700 7,172,500
CAPITAL LEASE OBLIGATION - Less current portion -- 125,100
------------ ------------
TOTAL LIABILITIES 7,119,700 7,297,600
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 5,000,000 authorized;
none issued -- --
Common stock, $0.01 par value; 35,000,000 authorized;
issued and outstanding:
Voting (6,142,375 and 6,037,500 shares) 61,400 60,400
Non- Voting (7,500,000 shares) 75,000 75,000
Additional paid-in capital 25,489,300 24,755,400
Accumulated other comprehensive loss (3,100) (26,400)
Accumulated deficit (855,100) (2,381,500)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 24,767,500 22,482,900
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,887,200 $ 29,780,500
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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NETsilicon, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 29, 2000 JULY 31, 1999 JULY 29, 2000 JULY 31, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 9,857,200 $ 7,515,100 $ 18,866,900 $ 13,329,600
COST OF SALES 4,128,900 3,864,700 7,640,400 7,073,100
------------ ------------ ------------ ------------
GROSS MARGIN 5,728,300 3,650,400 11,226,500 6,256,500
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling and marketing 2,764,300 1,728,600 5,332,100 3,054,200
Engineering, research and development 1,399,400 651,600 2,793,400 1,065,400
General and administrative 1,059,500 787,700 2,039,500 1,400,500
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 5,223,200 3,167,900 10,165,000 5,520,100
------------ ------------ ------------ ------------
OPERATING INCOME 505,100 482,500 1,061,500 736,400
Interest income (expense) 240,700 (174,600) 464,900 (413,000)
------------ ------------ ------------ ------------
INCOME BEFORE TAXES
ON INCOME 745,800 307,900 1,526,400 323,400
Taxes on income -- -- -- --
------------ ------------ ------------ ------------
NET INCOME $ 745,800 $ 307,900 $ 1,526,400 $ 323,400
============ ============ ============ ============
NET INCOME PER COMMON SHARE
Basic $ 0.05 $ 0.03 $ 0.11 $ 0.03
Diluted $ 0.05 $ 0.03 $ 0.10 $ 0.03
SHARES USED IN PER SHARE CALCULATION
Basic 13,620,780 10,000,000 13,594,968 10,000,000
Diluted 15,927,588 10,000,000 15,910,216 10,000,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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NETsilicon, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
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SIX MONTHS ENDED
JULY 29, 2000 JULY 31, 1999
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CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 1,526,400 $ 323,400
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Depreciation and amortization 662,100 495,600
Changes in operating assets and liabilities:
Accounts receivable (2,596,800) 1,804,700
Inventories (1,215,400) (479,500)
Other current assets (331,700) 68,800
Accounts payable 927,800 40,800
Other current liabilities (86,100) 770,500
------------ ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,113,700) 3,024,300
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of short-term investments (1,997,300) --
Purchases of property and equipment (1,371,900) (186,000)
Software development costs (304,100) (508,800)
Other assets (308,700) (184,700)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (3,982,000) (879,500)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayments of affiliates advances (55,800) (1,460,500)
Repayments of short-term debt, net (779,700) (744,900)
Payments of capital lease obligation (184,100) (7,900)
Proceeds from exercise of stock options 734,900 --
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (284,700) (2,213,300)
------------ ------------
DECREASE IN CASH AND EQUIVALENTS (5,380,400) (68,500)
CASH AND EQUIVALENTS - BEGINNING OF PERIOD 11,096,500 582,600
------------ ------------
CASH AND EQUIVALENTS - END OF PERIOD $ 5,716,100 $ 514,100
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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NETsilicon, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of presentation:
In the opinion of management, the accompanying condensed financial
statements include all adjustments necessary for a fair presentation
of NETsilicon, Inc.'s (the "Company") financial position, results of
operations and cash flows for these interim periods. This quarterly
information should be read in conjunction with the audited financial
statements and accompanying notes included in the Company's 2000 Form
10-K as filed with the Securities and Exchange Commission ("SEC") on
May 1, 2000.
The financial statements are prepared in conformity with generally
accepted accounting principles which require management to make
estimates that affect the reported amounts of assets, liabilities,
revenues and expenses, and the disclosure of contingent assets and
liabilities. Actual results could differ from these estimates.
Certain prior period amounts have been reclassified to conform to the
current period presentation. Included among these reclasses is the
reclassification of amortization of capitalized software costs from
engineering, research and development costs to cost of sales. These
reclassifications had no effect on net income or stockholders' equity.
Operating results for the interim period are not necessarily
indicative of results that may be expected for the entire fiscal year.
2. Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or
market. Cost is computed using standard costs, which approximate
actual cost on a first-in, first-out basis. Inventories consist of:
<TABLE>
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July 29, 2000 January 31, 2000
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Raw material $4,083,900 $2,518,600
Work in process 1,311,200 1,693,400
Finished goods 142,700 110,400
-------------- ----------------
Total inventory $5,537,800 $4,322,400
============== ================
</TABLE>
3. Earnings per share calculation:
Basic earnings per share is computed based on the weighted average
number of shares outstanding during the period. Diluted earnings per
share is computed based on the weighted average number of shares
outstanding during the period increased by the effect of dilutive
potential common shares which consist of shares issuable under stock
benefit plans.
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The following is a reconciliation of the numerators and denominators
of the basic and diluted per share computations:
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------------ -----------------------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income available to common
shareholders, basic and diluted $ 745,800 $ 307,900 $ 1,526,400 $ 323,400
=========== =========== =========== ===========
Weighted-average number of
common shares used in basic
earnings per share 13,620,780 10,000,000 13,594,968 10,000,000
Effect of dilutive securities -
stock options 2,306,808 -- 2,315,248 --
----------- ----------- ----------- -----------
Weighted-average number of
common shares and dilutive
potential common stock used in
dilutive earnings per share 15,927,588 10,000,000 15,910,216 10,000,000
=========== =========== =========== ===========
</TABLE>
The shares issuable upon exercise of options and warrants represent
the quarterly average of the shares issuable at exercise net of the
shares assumed to have been purchased, at the average market price for
the period, with the assumed exercise proceeds. Accordingly, options
with exercise prices in excess of the average market price for the
period are excluded because their effect would be anti-dilutive.
4. Subsequent Events
On August 31, 2000, the Company completed the acquisition of the
strategic network technology assets of Pacific Softworks Technology
("Pacific"), a subsidiary of PASW, Inc. (formerly Pacific Softworks,
Inc.). Pacific is a provider of embedded network protocols - software
that enables electronic devices to communicate over local and wide
area networks. The acquisition will be accounted for as a purchase.
NETsilicon issued 90,000 shares of common stock in consideration of
the purchased assets of Pacific.
On August 31, 2000, Websprocket, LLC filed a suit against the Company
in the United States District Court for the Northern District of
California (Websprocket, LLC v. NETsilicon, Inc., Civil Action No.
C-00-20915), claiming breach of contract. The complaint alleges that
the Company breached a technology development contract that was
executed between the Company and Websprocket, LLC in December, 1999.
Websprocket, LLC seeks relief including alleged damages of $2,000,000
plus attorney's fees, a declaration of its rights under the technology
development contract and an injunction requiring the Company to cease
using and return all property of Websprocket, LLC. We believe we have
meritorious defenses to the claims and intend to contest the lawsuit
vigorously. An unfavorable resolution of the action could have a
material adverse effect on the business, results of operations or
financial condition of the Company.
5. Recently issued accounting standards:
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, as amended by SFAS No. 137 and SFAS No. 138, is
effective for years beginning after June 15, 2000. Adoption of SFAS
No. 133 and its amendments is not expected to have a material impact
on our results of operations, financial position or cash flows.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Some of the information in this discussion and analysis contains
forward-looking statements within the meaning of the federal
securities laws. These statements include statements regarding our
financial performance, product development plans, projected capital
expenditures, liquidity and business strategy. Forward-looking
statements typically are identified by use of terms such as may, will,
expect, anticipate, estimate and similar words, although some
forward-looking statements are expressed differently. You should be
aware that our actual results could differ materially from those
contained in the forward-looking statements due to a number of
factors, including delays in product introductions, interruptions in
supply and competitive product introductions. You should also consider
carefully the "Business" and "Risk Factors" sections contained in the
Company's 2000 Form 10-K as filed with the SEC and the "Risk Factors"
section contained herein, which address additional factors that could
cause our actual results to differ from those set forth in the
forward-looking statements.
You should read this discussion together with the unaudited financial
statements and other information included in this document.
OVERVIEW
We develop and market semiconductor devices and software products
designed to meet the networking requirements of embedded systems. We
commenced our operations in 1984 as Digital Products, Inc. From our
inception, we have developed and marketed networking products for
embedded systems that enable the connection of electronic devices to
networks.
In September 1996, Osicom Technologies, Inc. ("Osicom") acquired all
of our outstanding capital stock from our stockholders. We were a
wholly-owned subsidiary of Osicom from the date of the acquisition
through our initial public offering in September 1999.
RESULTS OF OPERATIONS
The following table sets forth information derived from our Statement
of Operations expressed as a percentage of net sales for the three and
six month periods ended July 29, 2000 and July 31, 1999.
<TABLE>
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Three months ended Six months ended
------------------------ ------------------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 41.9 51.4 40.5 53.1
----- ----- ----- -----
Gross margin 58.1 48.6 59.5 46.9
----- ----- ----- -----
Operating expenses:
Selling and marketing 28.0 23.0 28.3 22.9
Engineering, research and 14.2 8.7 14.8
development 8.0
General and administrative 10.7 10.5 10.8 10.5
----- ----- ----- -----
Total operating expenses 52.9 42.2 53.9 41.4
----- ----- ----- -----
Operating income 5.2 6.4 5.6 5.5
Interest income (expense) 2.4 (2.3) 2.5 (3.1)
----- ----- ----- -----
Income before taxes on income 7.6 4.1 8.1 2.4
Taxes on income -- -- -- --
Net income 7.6% 4.1% 8.1% 2.4%
===== ===== ===== =====
</TABLE>
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Three and Six Months Ended July 29, 2000 Compared to Three and Six
Months Ended July 31, 1999:
Net sales. Net sales increased to $9.9 million for the three months
ended July 29, 2000 from $7.5 million for the three months ended July
31, 1999, representing an increase of 31.2%. Net sales increased to
$18.9 million for the six months ended July 29, 2000 from $13.3
million for the six months ended July 31, 1999, an increase of 41.5%.
The increase in net sales was due primarily to an increase in OEM
customers to which we shipped product from 30 for the period ended
July 31, 1999 to 63 for the period ended July 29, 2000. Furthermore,
the increase is attributable to increased sales to existing OEM
imaging customers due to greater demand for their products and an
increase in the number of projects we have with these customers.
Backlog for our products and services was approximately $8.1 million
and $11.1 million at July 29, 2000 and July 31, 1999, respectively,
all of which was scheduled to be shipped within 12 months.
Our embedded networking semiconductor and controller products
accounted for 88.6% and 95.6% of total net sales for the six months
ended July 29, 2000 and July 31, 1999, respectively. Software
development tools and development boards accounted for 5.3% of total
net sales for the six months ended July 29, 2000 and 1.2% of total net
sales for the prior year six month period. Royalty, maintenance and
service revenue was 6.0% and 3.2% of total net sales for the six
months ended July 29, 2000 and July 31, 1999, respectively. Deferred
revenue of $306,000 is included in other current liabilities at July
29, 2000.
During the six months ended July 29, 2000, international sales
accounted for 52.9% of net sales compared to 34.5% of net sales for
the six month period ended July 31, 1999.
Cost of sales; gross margin. Costs of goods sold consist principally
of the cost of raw material components and subcontractor labor
assembly from outside manufacturers and suppliers. Gross margin
increased to $5.7 million, or 58.1% of net sales, for the three months
ended July 29, 2000 from $3.7 million, or 48.6% of net sales, for the
three months ended July 31, 1999, representing an increase of 56.9%.
Gross margin increased 79.4% to $11.2 million, or 59.5% of net sales,
for the six months ended July 29, 2000 from $6.3 million, or 46.9% of
net sales, for the six months ended July 31, 1999.
The increases in gross margin percent for the periods ended July 29,
2000 from the prior year periods were due primarily to (i) material
and subcontractor labor cost reductions which were partially
attributable to the increased sales volume, (ii) increases in
non-recurring engineering fees related to new OEM imaging projects and
royalties and (iii) a gradual shift in product mix to higher margin
intelligent device market products, including our new NET+OS product
which was released in April, 2000.
Selling and marketing expenses. Selling and marketing expenses consist
mainly of employee-related expenses, commissions to sales
representatives, trade shows and travel expense. Selling and marketing
expenses increased from $1.7 million, or 23.0% of net sales, for the
three months ended July 31, 1999 to $2.8 million, or 28.0% of net
sales, for the three months ended July 29, 2000, representing an
increase of 59.9%. Similarly, selling and marketing expenses increased
74.6% to $5.3 million, or 28.3% of net sales,
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for the six months ended July 29, 2000 from $3.1 million, or 22.9% of
net sales, for the six months ended July 31, 1999.
The increase was the result of (i) additional sales commissions due to
increased sales volume and the expansion of our network of
manufacturing representatives, distributors and authorized developers,
(ii) additional payroll costs related to the expansion of our direct
sales and marketing teams in the United States, Europe and Asia from
30 employees in July, 1999 to 45 employees in July, 2000 and (iii)
greater marketing costs associated with the introduction of new
products, greater participation in trade shows and costs associated
with internet and web marketing activities.
Engineering, research and development. Engineering, research and
development expenses consist primarily of salaries and the related
costs of employees engaged in research, design and development
activities. Engineering, research and development expenses increased
to $1.4 million, or 14.2% of net sales, for the three months ended
July 29, 2000 from $652,000, or 8.7% of net sales, for the three
months ended July 31, 1999, representing an increase of 114.8%.
Engineering, research and development expenses increased 162.2% to
$2.8 million, or 14.8% of net sales, for the six months ended July 29,
2000 from $1.1 million, or 8.0% of net sales, for the six months ended
July 31, 1999.
This increase is due primarily to increased payroll costs associated
with an increase in headcount from 30 employees engaged in research
and development activities at July 31, 1999 to 43 employees at July
29, 2000. In addition, the increase in engineering, research and
development expenses is attributable to increases in contract labor
and consulting costs related to our investment in product development,
including investments in the development of products supporting the
Linux operating system and Java programming language. Furthermore, the
increase is due to higher recruiting costs and increased depreciation
and amortization of purchased software tools.
General and administrative expenses. General and administrative
expenses consist mainly of salaries, employee-related expenses, legal
expenses, audit fees and reserves for accounts receivable allowances.
General and administrative expenses increased to $1.1 million, or
10.7% of net sales, for the three months ended July 29, 2000 from
$788,000, or 10.5% of net sales, for the three months ended July 31,
1999, an increase of 34.5%. General and administrative expenses
increased 45.6% to $2.0 million, or 10.8% of net sales, for the six
months ended July 29, 2000 from $1.4 million, or 10.5% of net sales,
for the six months ended July 31, 1999. The increase in general and
administrative expenses is attributable to higher payroll costs
related to an increase in headcount in addition to increased legal,
accounting and insurance costs associated with becoming a public
entity and costs associated with the continued development of our MIS
group.
Interest income/expense. Interest income includes interest earned on
cash and short-term investment balances. Interest expense is the
result of our borrowings against our line of credit with our former
lender, Coast Business Credit, and the interest charged by our former
sole shareholder, Osicom, for our borrowings from Osicom. Net interest
income was $241,000, or 2.4% of net sales, and $465,000, or 2.5% of
net sales, for the three and six months ended July 29, 2000,
respectively, and consisted of interest earned on cash and short-term
investment balances. Net interest expense was $175,000, or 2.3% of net
sales, and $413,000, or 3.1% of net sales, for the three and six
months ended July 31, 1999, respectively and consisted of interest on
borrowings from both our line of credit and Osicom. The increases in
interest income and the decreases in interest expense from the periods
ended July, 1999 to the periods ended July, 2000 are the result of the
proceeds raised by the sale of our stock in conjunction with our
initial public
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offering on September 15, 1999 and our subsequent repayment of amounts
due Coast Business Credit and Osicom.
Provision for income taxes. There was no net provision for income
taxes for the three and six month periods ended July 29, 2000 and July
31, 1999 as the provisions were offset by available net operating loss
carryforwards.
Liquidity and Capital Resources
Prior to our public offering in September, 1999 we financed our
operations through advances from Osicom and borrowings under our
short-term bank line of credit. The Company received proceeds, net of
offering costs, of approximately $22.2 million as a result of the
initial public offering and sale of our stock. At July 29, 2000 we had
working capital of $20.4 million and cash and cash equivalents of $5.7
million.
Our operating activities used cash of $1.1 million and provided cash
of $3.0 million for the six month periods ended July 29, 2000 and July
31, 1999, respectively. Cash used by operating activities in the six
month period ended July 29, 2000 was attributable to increases in
accounts receivable and inventory, offset in part by net income, an
increase in accounts payable and the non-cash impact of depreciation
and amortization. The increase in accounts receivable and inventory
related to the growth in sales and the demand for our product. The
increase in inventory is also due to larger volume purchases of
certain electronic components that were made to decrease the risk to
our operations of the sharp fluctuations in the market supply of the
components. Cash provided in the six month period ended July 31, 1999
was attributable to a decrease in accounts receivable, an increase in
other current liabilities, and the non-cash impact of depreciation and
amortization, offset in part by an increase in inventory.
In order to support our anticipated growth, we expect that our sales
and marketing expenses, engineering, research and development expenses
and general and administrative expenses each will increase in the
fiscal year ending January 31, 2001 and thereafter compared to the
amounts of such expenses in the fiscal year ending January 31, 2000.
There can be no assurance that our available cash and cash flow from
operations will be sufficient to fund such additional expenses.
Our standard payment terms are net 30 days. While we actively pursue
collection within that time, receivables have frequently taken longer
to collect in part because we sell products to large companies in
Asia.
Our investing activities used cash of $4.0 million and $880,000 during
the six months ended July 29, 2000 and July 31, 1999, respectively.
Cash used in investing activities during the six months ended July 29,
2000 related primarily to purchases of $2.0 million of short-term
investments and $1.4 million of property and equipment. Cash used in
investing activities during the six months ended July 31, 1999 related
primarily to software development costs of $509,000.
Cash used in financing activities was $285,000 and $2.2 million during
the six months ended July 29, 2000 and July 31, 1999, respectively.
Cash used in financing activities during the period ended July 29,
2000 related to repayments of short-term debt and capital lease
obligations in the amount of $780,000 and $184,000, respectively,
which were offset in part by proceeds from the exercise of stock
options of $735,000. Cash used in financing activities during the
period ended July 31, 1999 was attributable to $1.5 million of
repayments of affiliate advances and $745,000 of repayments of
short-term debt.
During the three months ended April 30, 2000 we repaid the balance due
on our line of credit with Coast Business Credit and terminated the
credit facility. We are in the process of securing a replacement
credit facility.
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We anticipate that our available cash resources will be sufficient to
meet our presently anticipated capital requirements through the next
12 months. Nonetheless, we may elect to sell additional equity
securities, subject to the provisions of our 365-day lock-up agreement
with the underwriters of our initial public offering, or to obtain
additional credit. Our future capital requirements may vary materially
from those now planned and will depend on many factors, including, but
not limited to, the levels at which we maintain inventory and accounts
receivable; the market acceptance of our products; the levels of
promotion and advertising required to launch products or enter markets
and attain a competitive position in the marketplace; volume pricing
concessions; our business, product, capital expenditure and research
and development plans and technology roadmap; capital improvements to
new and existing facilities; technological advances; the response of
competitors to our products; and our relationships with suppliers and
customers. In addition, we may require an increase in the level of
working capital to accommodate planned growth, hiring and
infrastructure needs. Additional capital may be required for
consummation of any acquisitions of businesses, products or
technologies. We may need to raise additional funds through public or
private financings or borrowings if existing resources and cash
generated from operations are insufficient to fund our future
activities. No assurance can be given that additional financing will
be available or that, if available, such financing can be obtained on
terms favorable to our shareholders and us. If additional funds are
raised through the issuance of equity securities, the percentage
ownership of then current stockholders of us will be reduced and such
equity securities may have rights, preferences or privileges senior to
those of holders of our common stock. If adequate funds are not
available to satisfy short- or long-term capital requirements, we may
be required to limit our operations significantly.
Risk Factors
You should carefully consider the following risks before investing in
our common stock. These are not the only risks facing our company.
Additional risks may also impair our business operations. If any of
the following risks come to fruition, our business, results of
operations or financial condition could be materially adversely
affected. In that case, the trading price of our common stock could
decline, and you may lose all or part of your investment. You should
also refer to the other information set forth in this report, and
incorporated by reference, including our financial statements and the
accompanying notes.
This report contains certain "forward-looking statements" (statements
that are not historical fact) based on our current expectations,
assumptions, estimates and projections about our company and our
industry. These forward-looking statements involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in those forward-looking statements as a result of many
factors, as more fully described in this section and elsewhere in this
report.
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT THAT MAKE
FUTURE OPERATING RESULTS AND PROFITABILITY DIFFICULT TO PREDICT.
We incurred net losses from continuing operations for the fiscal years
ended January 31, 1997, 1998 and 1999. At January 31, 2000, we had an
accumulated deficit of $2.4 million. Although we were profitable in
fiscal year 2000 and for the first six months of fiscal year 2001,
there can be no assurance that we will be able to maintain
profitability on a quarterly or annual basis in the future. In
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addition, revenue growth is not necessarily indicative of future
operating results and there can be no assurance that we will be able
to sustain revenue growth. We continue 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 us. Due to the limited history
and undetermined market acceptance of our new products, the rapidly
evolving nature of our business and markets, potential changes in
product standards that significantly influence many of the markets for
our products, the high level of competition in the industries in which
we operate and the other factors described elsewhere in Risk Factors,
there can be no assurance that our investment in these areas will
result in increases in revenue or that any revenue growth that is
achieved can be sustained. Our history of losses, coupled with the
factors described below, make future operating results difficult to
predict. We and our future 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 we will be
profitable in any future period.
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE
TRADING PRICE OF OUR COMMON STOCK.
Our 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. These results have varied significantly due to a number of
factors, including:
- market acceptance of and demand for our products and those
of our customers;
- unanticipated delays or problems in the introduction of our
products;
- the timing of large customer orders;
- the timing and success of our customers' development cycles;
- our ability to introduce new products in accordance with
customer design requirements and design cycles;
- new product announcements or product introductions by us and
our competitors;
- availability and cost of manufacturing sources for our
products;
- the volume of orders that are received and can be filled in
a quarter;
- the rescheduling or cancellation of orders by customers;
- changes in product mix;
- timing of "design wins" with our customers and related
revenue; and
- changes in currency exchange rates.
Our operating results could also be harmed by:
- the growth rate of markets into which we sell our products;
- changes in the mix of sales to customers and sales
representatives;
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- costs associated with protecting our intellectual property;
and
- changes in product costs and pricing by us and our
competitors.
We budget expenses based in part on future revenue projections. We may
be unable to adjust spending in a timely manner in response to any
unanticipated declines in revenues.
As a result of these and other factors, investors should not rely
solely upon period-to-period comparisons of our operating results as
an indication of future performance. It is likely that in some future
period our operating results or business outlook will be below the
expectations of securities analysts or investors, which would likely
result in a significant reduction in the market price of the shares of
common stock.
OUR FAILURE TO INCREASE SALES TO EMBEDDED SYSTEMS MANUFACTURERS WILL
ADVERSELY AFFECT OUR FINANCIAL RESULTS.
Our financial performance and future growth is dependent upon our
ability to sell our products to embedded systems developers in various
markets, including markets in which networking solutions for embedded
systems have not historically been sold, such as the industrial
automation equipment, data acquisition and test equipment, Internet
devices and security equipment markets. A substantial portion of our
recent development efforts have been directed toward the development
of new products for markets that are new and rapidly evolving. There
can be no assurance that
- the additional embedded systems markets targeted by us for
our products and services will develop;
- developers within each market targeted by us will choose our
products and services to meet their needs;
- we will successfully develop products to meet the
industry-specific requirements of developers in our targeted
markets or that design wins will result in significant
sales; or
- developers in our targeted markets will gain market
acceptance for their devices which incorporate our products.
We have limited experience in designing our products to meet the
requirements of developers in these industries. Moreover, our products
and services have, to date, achieved limited acceptance in these
industries.
WE ARE DEPENDENT ON THE IMAGING MARKET FOR A LARGE PORTION OF OUR
REVENUES.
The imaging market has historically accounted for substantially all of
our revenues. In the fiscal years ended January 31, 2000, 1999 and
1998, 95%, 95% and 100%, respectively, of our revenues were generated
from customers in the imaging market. Our success has been and
continues to be dependent on the continued growth and success of the
imaging market. Many of our customers face competition from larger,
more established companies which may exert competitive or other
pressures on them. Any decline in sales to the imaging market would
have a material adverse effect on our business, results of operations
and financial condition.
The imaging market is characterized by declining prices of existing
products. Therefore, continual improvements in manufacturing
efficiencies and the introduction of new products and enhancements to
existing products are required for us to maintain our gross
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margins. In response to customer demands or competitive pressures, or
to pursue new product or market opportunities, we may take certain
pricing or marketing actions, such as price reductions or volume
discounts. These actions could have a material adverse effect on us.
A significant amount of our customers in the imaging market are
headquartered in Japan. Our customers are subject to declines in their
local economies, which have affected them from time to time in the
past and may affect them in the future. The success of our customers
affects their purchases from us.
OUR HIGHLY CONCENTRATED CUSTOMER BASE INCREASES THE POTENTIAL ADVERSE
EFFECT ON US FROM THE LOSS OF ONE OR MORE CUSTOMERS.
Our products have historically been sold into the imaging markets for
use in products such as printers, scanners, fax machines, copiers and
multi-function peripherals. This market is highly concentrated.
Accordingly, our sales are derived from a limited number of customers,
with the top five OEM customers accounting for 72% and 52% of total
revenues for the fiscal years ended 2000 and 1999, respectively. In
particular, sales to Ricoh, Dimatech and Minolta each accounted for
26%, 24% and 13% of total revenues, respectively, for the fiscal year
ended January 31, 2000. Sales to Minolta, Kyocera and Konica accounted
for 12%, 12% and 11% of total revenues, respectively, for the fiscal
year ended January 31, 1999. We expect that a small number of
customers will continue to account for a substantial portion of our
total revenues for the foreseeable future. All of our sales are made
on the basis of purchase orders rather than under long-term
agreements, and therefore, any customer could cease purchasing our
products at any time without penalty. The decision of any key customer
to cease using our products or a material decline in the number of
units purchased by a significant customer would have a material
adverse effect on us.
THE LONG AND VARIABLE SALES CYCLE FOR OUR PRODUCTS MAKE IT MORE
DIFFICULT FOR US TO PREDICT OUR OPERATING RESULTS AND MANAGE OUR
BUSINESS.
The sale of our products typically involves a significant technical
evaluation and commitment of capital and other resources by potential
customers, as well as delays frequently associated with customers'
internal procedures to deploy new technologies within their products
and to test and accept new technologies. For these and other reasons,
the sales cycle associated with our products is typically lengthy,
lasting nine months or longer, and is subject to a number of
significant risks, including customers' internal acceptance reviews,
that are beyond our control. Because of the lengthy sales cycle and
the large size of customer orders, if orders forecasted for a specific
customer for a particular quarter are not realized in that quarter,
our operating results for that quarter could be materially adversely
affected.
OUR RELATIVELY LOW LEVEL OF BACKLOG INCREASES THE POTENTIAL
VARIABILITY OF OUR QUARTERLY OPERATING RESULTS.
Our backlog at the beginning of each quarter typically is not
sufficient to achieve expected sales for the quarter. To achieve our
sales objectives, we are dependent upon obtaining orders during each
quarter for shipment during that quarter. Furthermore, our agreements
with our customers typically permit them to change delivery schedules.
Non-imaging customers may cancel orders within specified time frames
(typically 30 days or more prior to the scheduled shipment date under
our policies) without significant penalty. Our 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
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<PAGE> 16
lead to reductions in their purchases from us. These reductions, in
turn, have caused and could cause adverse fluctuations in our
operating results.
OUR DEPENDENCE ON NEW PRODUCT DEVELOPMENT AND THE RAPID TECHNOLOGICAL
CHANGE THAT CHARACTERIZES OUR INDUSTRY MAKE US SUSCEPTIBLE TO LOSS OF
MARKET SHARE RESULTING FROM COMPETITORS' PRODUCT INTRODUCTIONS AND
SIMILAR RISKS.
The semiconductor and networking industries are characterized by
rapidly changing technologies, evolving industry standards, frequent
new product introductions, short product life cycles and rapidly
changing customer requirements. The introduction of products embodying
new technologies and the emergence of new industry standards can
render existing products obsolete and unmarketable. Our future success
will depend on our ability to enhance our existing products, to
introduce new products to meet changing customer requirements and
emerging technologies, and to demonstrate the performance advantages
and cost-effectiveness of our products over competing products. Any
failure by us to modify our products to support new local-area
network, or LAN, wide-area network, or 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 us. In particular, we have dedicated significant
resources to developing products based on the Linux operating system
and on the Java programming language, and the failure of these
products to achieve widespread acceptance could have a material
adverse effect on us.
We have 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 we will
not experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products or product
enhancements, or that our new products and product enhancements will
adequately meet the requirements of the marketplace and achieve any
significant or sustainable degree of market acceptance in existing or
additional markets. Failure by us, 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 us. In addition, the future introductions or announcements of
products by us or one of our competitors embodying new technologies or
changes in industry standards or customer requirements could render
our then-existing products obsolete or unmarketable. There can be no
assurance that the introduction or announcement of new product
offerings by us or one or more of our competitors will not cause
customers to defer the purchase of existing Company products. Such
deferment of purchases could have a material adverse effect on us.
OUR FAILURE TO EFFECTIVELY MANAGE PRODUCT TRANSITIONS COULD HAVE A
MATERIAL ADVERSE EFFECT ON US.
From time to time, we or our competitors may announce new products,
capabilities or technologies that may replace or shorten the life
cycles of our existing products. Announcements of currently planned or
other new products may cause customers to defer or stop purchasing our
products until new products become available. Furthermore, the
introduction of new or enhanced products requires us to manage the
transition from older product inventories and ensure that adequate
supplies of new products can be delivered to meet customer demand. Our
failure to effectively manage transitions from older products could
have a material adverse effect on our business, results of operations
and financial condition.
OUR FAILURE TO COMPETE SUCCESSFULLY IN OUR HIGHLY COMPETITIVE MARKET
COULD RESULT IN REDUCED PRICES AND LOSS OF MARKET SHARE.
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The markets in which we operate are intensely competitive and
characterized by rapidly changing technology, evolving industry
standards, declining average selling prices and frequent new product
introductions. A number of companies offer products that compete with
one or more elements of our products. We believe that the competitive
factors affecting the market for our 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 we will be able to compete successfully against current
and future competitors, or that competitive factors faced by us will
not have a material adverse effect on us.
We primarily compete with the internal development departments of
large manufacturing companies that have developed their own networking
solutions, as well as established developers of embedded systems
software and chips such as Axis Communications, Echelon, Emulex,
Hitachi, Integrated Systems, Intel, Milan Technology, a division of
Digi International, Motorola, Peerless Systems, Samsung and Wind
River. In addition, we are aware of certain companies which have
recently introduced products that address the markets targeted by us.
We have experienced and expect to continue to experience increased
competition from current and potential competitors, many of which have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and larger customer
bases than ours. In particular, established companies in the
networking or semiconductor industries may seek to expand their
product offerings by designing and selling products using competitive
technology that could render our products obsolete or have a material
adverse effect on our sales. Increased competition may result in
further price reductions, reduced gross margins and loss of market
share.
WE DEPEND ON THIRD-PARTY SOFTWARE THAT WE USE UNDER LICENSES THAT MAY
EXPIRE.
We rely on certain software that we license from third parties,
including software that is integrated with internally developed
software and used in our products to perform key functions. Our
material software license agreements are with Integrated Systems,
which terminates only if we default under the agreement; with Novell,
which is renewable annually at the option of both parties, and with
Peerless Systems, which expires in 2004 and is 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 us 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.
WE DEPEND ON MANUFACTURING, ASSEMBLING AND PRODUCT TESTING
RELATIONSHIPS AND ON LIMITED SOURCE SUPPLIERS, AND ANY DISRUPTIONS IN
THESE RELATIONSHIPS MAY CAUSE DAMAGE TO OUR CUSTOMER RELATIONSHIPS.
We do not have our own semiconductor fabrication assembly or testing
operations or contract manufacturing capabilities. Instead, we rely
upon independent contractors to manufacture our components,
subassemblies, systems and products. Currently, all of our
semiconductor devices are being manufactured, assembled and tested by
Atmel Corporation in the United States, and we expect that we will
continue to rely upon Atmel to manufacture, assemble and test a
significant portion of our semiconductor devices in
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the future. We recently experienced a delay in the introduction of one
of our products due to a problem with Atmel's design tools. While we
are in the process of qualifying other suppliers, any qualification
and pre-production periods could be lengthy and may cause delays in
providing products to customers in the event that the sole source
supplier of the semiconductor devices fails to meet our requirements.
For example, Atmel uses its manufacturing facilities for its own
products as well as those it manufactures on a contract basis. There
is no assurance that Atmel will have adequate capacity to meet the
needs of its contract manufacturing customers. In addition,
semiconductor manufacturers generally experience periodic constraints
on their manufacturing capacity.
We also rely upon limited-source suppliers for a number of other
components used in our products. There can be no assurance that these
independent contractors and suppliers will be able to meet our future
requirements for manufactured products, components and subassemblies
in a timely fashion. We generally purchase limited-source components
under purchase orders and have no guaranteed supply arrangements with
these suppliers. In addition, the availability of many of these
components to us is dependent in part on our ability to provide our
suppliers with accurate forecasts of our future requirements. Any
extended interruption in the supply of any of the key components
currently obtained from limited sources would disrupt our operations
and have a material adverse effect on our business, results of
operations and financial condition.
Delays or lost sales have been and could be caused by other factors
beyond our control, including late deliveries by vendors of
components, changes in implementation priorities or slower than
anticipated growth in the market for networking solutions for embedded
systems. Operating results in the past have also been adversely
affected by delays in receipt of significant purchase orders from
customers. In addition, we have experienced delays as a result of the
need to modify our products to comply with unique customer
specifications. In general, the timing and magnitude of our revenues
are highly dependent upon our achievement of design wins, the timing
and success of our customers' development cycles, and our customers'
product sales. Any of these factors could have a material adverse
effect on our business, results of operations and financial condition.
THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY MAY RESULT IN
SUBSTANTIAL PERIOD-TO-PERIOD FLUCTUATIONS.
Our semiconductor devices provide networking capabilities for embedded
systems. The semiconductor industry is highly cyclical and subject to
rapid technological change and has been subject to significant
economic downturns at various times, characterized by diminished
product demand, accelerated erosion of average selling prices and
production overcapacity. The semiconductor industry also periodically
experiences increased demand and production capacity constraints. As a
result, we may experience substantial period-to-period fluctuations in
future operating results due to general semiconductor industry
conditions, overall economic conditions or other factors.
OUR ABILITY TO COMPETE COULD BE JEOPARDIZED IF WE ARE UNABLE TO
PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.
Our ability to compete depends in part on our proprietary rights and
technology. We have no patents and rely primarily on a combination of
copyright and trademark laws, trade secrets, confidentiality
procedures and contract provisions to protect our proprietary rights.
We generally enter into confidentiality agreements with our employees,
and sometimes with our customers and potential customers and limit
access to the distribution of our software, hardware designs,
documentation and other proprietary information. There can be no
assurance that the steps taken by us in this regard will be adequate
to prevent the misappropriation of our technology. While we have filed
one patent application and plan to file various additional
applications, such applications may be
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denied. Any patents, once issued, may be circumvented by our
competitors. Furthermore, there can be no assurance that others will
not develop technologies that are superior to ours. Despite our
efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. In addition, the laws of
some foreign countries do not protect our proprietary rights as fully
as do the laws of the United States. There can be no assurance that
our means of protecting our proprietary rights in the United States or
abroad will be adequate or that competing companies will not
independently develop similar technology. Our failure to adequately
protect our proprietary rights could have a material adverse effect on
our business, results of operations and financial condition.
We exclusively license the right to use the NET+ARM trademark from ARM
Limited according to a royalty-free agreement expiring in 2008. We
depend on ARM to enforce its rights to the trademark against
third-party infringement. There can be no assurance that ARM will
promptly and adequately enforce these rights which could have a
material adverse effect on our business, results of operations and
financial condition.
WE COULD BECOME SUBJECT TO CLAIMS AND LITIGATION REGARDING
INTELLECTUAL PROPERTY RIGHTS, WHICH COULD SERIOUSLY HARM US AND
REQUIRE US TO INCUR SIGNIFICANT COSTS.
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. Although we
have not been notified that our products infringe any third-party
intellectual property rights, there can be no assurance that we will
not receive such notification in the future. Any litigation to
determine the validity of third-party infringement claims, whether or
not determined in our favor or settled by us, would at a minimum be
costly and divert the efforts and attention of our management and
technical personnel from productive tasks, which could have a material
adverse effect on our business, results of operations and financial
condition. There can be no assurance that any infringement claims by
third parties or any claims for indemnification by customers or end
users of our products resulting from infringement claims will not be
asserted in the future or that such assertions, if proven to have
merit, will not materially adversely affect our business, results of
operations or financial condition. In the event of an adverse ruling
in any such matter, we would be required to pay substantial damages,
cease the manufacture, use and sale of infringing products,
discontinue the use of certain processes or be required to obtain a
license under the intellectual property rights of the third party
claiming infringement. There can be no assurance that a license would
be available on reasonable terms or at all. Any limitations on our
ability to market our products, or delays and costs associated with
redesigning our products or payments of license fees to third parties,
or any failure by us to develop or license a substitute technology on
commercially reasonable terms could have a material adverse effect on
our business, results of operations and financial condition.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS AND
EXPANSION THAT COULD IMPAIR OUR ABILITY TO GROW OUR REVENUES ABROAD.
In the fiscal years ended January 31, 2000, 1999 and 1998,
international sales constituted approximately 50%, 51% and 30% of our
net sales, respectively, and approximately 77%, 46% and 31% of our
domestic sales, respectively, were to customers headquartered in Asia.
We believe that our future growth is dependent in part upon our
ability to increase sales in international markets, and particularly
to manufacturers located in Japan, which sell their products
worldwide. These sales are subject to a variety of risks, including
fluctuations in currency exchange rates, tariffs, import restrictions
and other trade barriers, unexpected changes in regulatory
requirements, longer accounts receivable payment cycles and
potentially adverse tax consequences and export license
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requirements. In addition, we are subject to the risks inherent in
conducting business internationally, including political and economic
instability and unexpected changes in diplomatic and trade
relationships. In particular, the economies of certain countries in
the Asia-Pacific region are experiencing considerable economic
instability and downturns. Because our sales to date have been
denominated in United States dollars, increases in the value of the
United States dollar could increase the price in local currencies of
our products in non-US markets and make our products more expensive
than competitors' products denominated in local currencies. In
addition, an integral part of our business strategy is to form
strategic alliances for the manufacture and distribution of our
products with third parties, including foreign corporations. There can
be no assurance that one or more of the factors described above will
not have a material adverse effect on our business, results of
operations and financial condition.
We intend to expand our presence in Europe to address new markets. One
change resulting from the formation of a European Economic and
Monetary Union ("EMU") required EMU member states to irrevocably fix
their respective currencies to a new currency, the euro, as of January
1, 1999. 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. There can be no assurance that the
conversion to the euro will not have a material adverse effect on our
business, results of operations and financial condition.
IF WE LOSE KEY PERSONNEL IT COULD PREVENT US FROM EXECUTING OUR
BUSINESS STRATEGY.
Our business and prospects depend to a significant degree upon the
continuing contributions of our executive officers and our key
technical personnel. We do not have employment contracts with any of
our key personnel, with the exception of our Vice President,
Industrial Automation, Embedded Markets Europe; Vice President,
Finance, and Chief Financial Officer; and the Chairman, Chief
Executive Officer and President, and we do not maintain any key-man
life insurance policies. Competition for such personnel is intense,
and there can be no assurance that we will be successful in attracting
and retaining qualified personnel. Failure to attract and retain key
personnel could result in our failure to execute our business strategy
and have a material adverse effect on us.
ANY FAILURE TO COMPLY WITH SIGNIFICANT REGULATIONS AND EVOLVING
INDUSTRY STANDARDS COULD DELAY INTRODUCTION OF OUR PRODUCTS, WHICH
COULD HURT OUR BUSINESS.
The market for our 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, our
products must comply with various regulations defined by the Federal
Communications Commission and standards established by Underwriters'
Laboratories. Some of our 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, we may be required to modify our products or
develop and support new versions of our products. The failure of our
products to comply or delays in compliance, with the various existing
and evolving industry standards could delay introduction of our
products, which could have a material adverse effect on our business,
results of operations and financial condition.
ANY MATERIAL PRODUCT DEFECTS COULD RESULT IN LOSS OF MARKET SHARE,
DELAY OF MARKET ACCEPTANCE OR PRODUCT LIABILITY CLAIMS OR LOSSES.
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Complex products such as those offered by us 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 failure or inability to correct such errors would, result in the
loss of market share, the delay or loss of market acceptance of our
products, material warranty expense, diversion of engineering and
other resources from our product development efforts, the loss of
credibility with our customers or product recall. The use of our
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 us to significant
product liability claims. Although we have not experienced any product
liability or economic loss claims to date, the sale and support of our
products may entail the risk of such claims. Any of such occurrences
could have a material adverse effect upon our business, results of
operations and financial condition.
IF WE DO NOT SUCCESSFULLY MANAGE OUR GROWTH, IT COULD HAVE A MATERIAL
ADVERSE EFFECT ON US.
We have limited internal infrastructure and any significant growth
would place a substantial strain on our financial and management
personnel and information systems and controls. Such growth would
require us to implement new and enhance existing financial and
management information systems and controls and add and train
personnel to operate such systems effectively. Our intention to
continue to pursue our growth strategy through efforts to increase
sales of existing products and new products can be expected to place
even greater pressure on our 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 we will be able to successfully manage expanding
operations. Our inability to manage our expanded operations
effectively could have a material adverse effect on our business,
results of operations and financial condition.
A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK COULD BE SOLD INTO
THE PUBLIC MARKET, WHICH COULD DEPRESS OUR STOCK PRICE.
Sales of a substantial number of shares of common stock in the public
market could adversely affect the market price for our common stock
and reported earnings per share and could make it more difficult for
us to raise funds through equity offerings in the future.
Subject to applicable federal and securities laws and the restrictions
set forth below, 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 distributions 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 is not subject to any obligation to retain its
shares in NETsilicon, except that in connection with our initial
public offering, Osicom agreed not to sell or otherwise dispose of any
shares of common stock for a period of 365 days after September 15,
1999, without the prior written consent of CIBC World Markets Corp. As
a result, there can be no assurance concerning the period of time
during which Osicom will maintain its beneficial ownership of our
common stock. Moreover, there can be no assurance that, in any
transfer by Osicom of a controlling interest in us, 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.
ANY ACQUISITIONS WE HAVE MADE OR WILL MAKE COULD DISRUPT OUR BUSINESS
AND SERIOUSLY HARM OUR FINANCIAL CONDITION.
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We continue to intend to consider investments in complementary
companies, products or technologies. We may buy businesses, products
or technologies in the future. In the event of any future purchases,
we could:
- issue stock that would dilute our current stockholders'
percentage ownership;
- incur debt;
- assume liabilities;
- incur amortization expenses related to goodwill and other
intangible assets; or
- incur large and immediate write-offs.
OUR OPERATION OF ANY ACQUIRED BUSINESS WILL ALSO INVOLVE NUMEROUS
RISKS, INCLUDING:
- problems combining the purchased operations, technologies or
products;
- unanticipated costs;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with
suppliers and customers;
- risks associated with entering markets in which we have no
or limited prior experience; and
- potential loss of key employees, particularly those of the
purchased organizations.
We cannot assure you that we will be able to successfully integrate
any businesses, products, technologies or personnel that we have
acquired or that we might acquire in the future and any failure to do
so could disrupt our business and seriously harm our financial
condition.
BECAUSE THE NASDAQ NATIONAL MARKET IS LIKELY TO EXPERIENCE EXTREME
PRICE AND VOLUME FLUCTUATIONS, THE PRICE OF OUR COMMON STOCK MAY
DECLINE.
The market price of our shares is likely to be highly volatile and
could be subject to wide fluctuations in response to numerous factors,
including the following:
- actual or anticipated variations in our quarterly operating
results or those of our competitors;
- announcements by us or our competitors of new products or
technological innovations;
- introduction and adoption of new industry standards;
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- changes in financial estimates or recommendations by
securities analysts;
- changes in the market valuations of our competitors;
- announcements by us or our competitors of significant
acquisitions or partnerships; and
- sales of our common stock.
Many of these factors are beyond our control and may negatively impact
the market price of our common stock, regardless of our performance.
In addition, the stock market in general, and the market for
technology companies in particular, has been highly volatile. Our
common stock may not trade at the same levels of shares as that of
other technology companies and shares of technology companies, in
general, may not sustain their current market prices. In the past,
securities class action litigation has often been brought against a
company following periods of volatility in the market price of its
securities. We may be the target of similar litigation in the future.
Securities litigation could result in substantial costs and divert
management's attention and resources, which could seriously harm our
business and operating results.
PROVISIONS OF OUR CHARTER DOCUMENTS MAY HAVE ANTI-TAKEOVER EFFECTS
THAT COULD PREVENT A CHANGE OF CONTROL.
Provisions of our amended and restated certificate of incorporation
and bylaws could make it more difficult for a third party to acquire
us, even if doing so would be beneficial to our stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We own financial instruments that are sensitive to market risks as
part of our investment portfolio. The investment portfolio is used to
preserve our capital until it is required to fund operations,
including our research and development activities. None of these
market-risk sensitive instruments are held for trading purposes. We do
not own derivative financial instruments in our investment portfolio.
The investment portfolio contains instruments that are subject to the
risk of a decline in interest rates.
Investment Rate Risk. Our investment portfolio includes debt
instruments that primarily have durations of less than one year. These
bonds are subject to interest rate risk, and could decline in value if
interest rates fluctuate. Our investment portfolio also at times
includes certain commercial paper which is also subject to interest
rate risk. Due to the short duration and conservative nature of these
instruments, we do not believe that we have a material exposure to
interest rate fluctuations.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On August 31, 2000, Websprocket, LLC filed a suit against the Company
in the United States District Court for the Northern District of
California (Websprocket, LLC v. NETsilicon, Inc., Civil Action No.
C-00-20915), claiming breach of contract. The complaint alleges that
the Company breached a technology development contract that was
executed between the Company and Websprocket, LLC in December, 1999.
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Websprocket, LLC seeks relief including alleged damages of $2,000,000
plus attorney's fees, a declaration of its rights under the technology
development contract and an injunction requiring the Company to cease
using and return all property of Websprocket, LLC. We believe we have
meritorious defenses to the claims and intend to contest the lawsuit
vigorously. An unfavorable resolution of the action could have a
material adverse effect on the business, results of operations or
financial condition of the Company.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
The following proposals were voted upon by the Company's stockholders
at the Annual Stockholders' Meeting held on June 28, 2000.
The following persons were elected as Class I Directors of the Company
to serve for a three year term or until their successors are elected.
Schedule of votes cast for each director: Votes For Votes Withheld
Michael K. Ballard 5,474,086 9,740
William Johnson 5,474,086 9,740
The term of office for the following directors continued after the
meeting: Francis E. Girard (Class II), F. Grant Saviers (Class II),
Edward B. Roberts (Class III) and Cornelius Peterson, VIII
(Class III).
A proposal to approve the Company's 2000 Employee Stock Purchase Plan
was adopted and approved with 3,009,106 shares voting in favor;
184,813 shares withholding or voting against; 7,446 shares abstaining
and 2,282,461 not voting.
The election of BDO Seidman, LLP as auditors for the fiscal year
ending January 31, 2001 was ratified with 5,476,924 shares voting in
favor; 5,012 shares withholding or voting against the proposal; and
1,890 shares abstaining.
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit Number Description
-------------- -----------
3.2 Restated By-laws of the Company, as Amended
27.1 Financial Data Schedule
b) Reports on 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETsilicon, Inc.
-------------------------------------------
(Registrant)
September 12, 2000 By /s/ Cornelius Peterson VIII
-------------------------------------------
Cornelius Peterson VIII, President,
Chief Executive Officer and Director
(Principal Executive Officer)
September 12, 2000 By /s/ Daniel J. Sullivan
-------------------------------------------
Daniel J. Sullivan, Vice President,
Finance, Chief Financial Officer
(Principal Financial and Accounting
Officer)
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