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Rule 424(c)
June 13, 1996
33-89266
PROSPECTUS
NETVANTAGE, INC.
7,106,250 SHARES OF CLASS A COMMON STOCK
2,375,000 REDEEMABLE CLASS B WARRANTS
263,025 REDEEMABLE CLASS A WARRANTS
150,000 UNITS
On May 3, 1995 NetVantage, Inc., a Delaware corporation (the "Company")
completed an initial public offering of 1,725,000 units (including the
underwriter's overallotment of 225,000 units) at a price of $5.00 per unit. Each
unit ("Unit") consisted of one share of Class A Common Stock, $.001 par value
per share (the "Class A Common Stock"), one redeemable Class A Warrant (the
"Class A Warrants") and one redeemable Class B Warrant (the "Class B Warrants").
The Company also sold to the underwriter, and its designees, in the initial
public offering an option (the "Unit Purchase Option") to purchase up to 150,000
Units at an exercise price of $6.75 per Unit. The components of the Units were
separately transferable immediately upon issuance. Each Class A Warrant
entitles the holder to purchase, at an exercise price of $6.21, subject to
adjustment, 1.05 shares of Class A Common Stock and one Class B Warrant. Each
Class B Warrant entitles the holder to purchase, at an exercise price of $7.41
per share, subject to adjustment, 1.05 shares of Class A Common Stock. (The
exercise price and number of shares of Class A Common Stock and Class B Warrants
issuable upon exercise of the Class A and Class B Warrants have been adjusted as
a result of issuances of Class A Common Stock since the initial public offering.
No fractional shares will be issued upon exercise of the Warrants. With respect
to any fraction of a share called for upon the exercise of any Warrant, the
Company shall pay to the holder an amount in cash equal to such fraction
multiplied by the current market value of such fractional share.) The Warrants
are exercisable at any time after issuance through May 3, 2000. The Warrants are
subject to redemption by the Company for $.05 per Warrant, upon 30 days' written
notice, if the average closing bid price of the Class A Common Stock equals or
exceeds $9.10 per share with respect to the Class A Warrants and $10.85 per
share with respect to the Class B Warrants (subject to adjustment in each case)
for 30 consecutive business days ending within 15 days of the date the Warrants
are called for redemption.
The Company is hereby offering up to 150,000 Units issuable upon
exercise of the Unit Purchase Option and up to 6,056,250 shares of Class A
Common Stock and 1,875,000 Class B Warrants issuable upon exercise of the Class
A and Class B Warrants issued in the Company's initial public offering.
Concurrently with the Company's initial public offering, the Company
also registered on behalf of certain security holders (the "Selling
Securityholders") for resale an additional 500,000 Class A Warrants (the
"Selling Securityholders' Warrants") and the underlying 525,000 shares of Class
A Common Stock, 500,000 Class B Warrants and 525,000 shares of Class A Common
Stock issuable upon exercise of the Class B Warrants. As of the date of this
Prospectus, the Selling Securityholders continue to hold 263,025 Class A
Warrants. This Prospectus also relates to the offer and sale of such Selling
Securityholders' Warrants that may be sold from time to time and to the 500,000
Class B Warrants issuable upon exercise of the Selling Securityholders' Warrants
and the 1,050,000 shares of Class A Common Stock issuable upon exercise of the
Selling Securityholders' Warrants and the underlying Class B Warrants. Sales of
Selling Securityholders' Warrants or the underlying Class B Warrants or shares
of Class A Common Stock, or even the potential of such sales at any time, may
have an adverse effect on the market prices of the securities offered hereby.
The Company will not receive any of the proceeds from the sale of the 263,025
Selling Securityholders Warrants offered by the Selling Securityholders.
The Class A Common Stock and the Company's Class B Common Stock, $.001
par value per share (the "Class B Common Stock"), and Class E Common Stock,
$.001 par value (the "Class E Common Stock" or "Escrow Shares"), are
essentially identical, except that the Class B and Class E Common Stock have
five votes per share and the Class A Common Stock has one vote per share on all
matters upon which shareholders may vote. The Class B Common Stock is
convertible into Class A Common Stock at any time at the option of the holder
and automatically upon sale or transfer thereof.
The Class A Common Stock is authorized for trading on The Nasdaq
SmallCap Market under the symbol "NETVA," the Class A Warrants under the symbol
"NETVW," the Class B Warrants under the symbol "NETVZ" and the Units under the
symbol "NETVU."
___________________________
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH
DEGREE OF RISK. SEE "RISK FACTORS."
_________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is June 28, 1996.
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No dealer, salesman or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus in
connection with the offer made by this Prospectus. If given or made, such
information or representation must not be relied upon as having been
authorized by the Company or any Selling Securityholder. This Prospectus does
not constitute an offer of any securities other than the registered securities
to which it relates or an offer to any person in any jurisdiction in which
such an offer would be unlawful. Neither delivery of this Prospectus nor any
sale made hereunder shall under any circumstances create an implication that
information contained herein is correct as of any time subsequent to the date
of this Prospectus.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed by the Company with the Commission
can be inspected and copied at the public reference facilities maintained by
the Commission at 450 5th Street, N.W., Judiciary Plaza, Washington, D.C.
20549, and at the following Regional Offices of the Commission: Midwest
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60861-2511 and Northeast Regional Office, 7 World Trade Center, suite
1300, New York, New York 10048. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549.
The Company has filed with the Commission a registration statement on
Form SB-2 (which together with all amendments, including a post-effective
amendment on Form S-3, and exhibits is referred to herein as the "Registration
Statement"). This Prospectus does not contain all information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information,
reference is hereby made to the Registration Statement which may be inspected
and copied in the manner and at the sources described above. Any statements
contained herein concerning the provisions of any document filed as an exhibit
to the Registration Statement or otherwise filed with the Commission are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission
pursuant to the Exchange Act are hereby incorporated by reference herein:
1. The Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995.
2. The Company's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1996.
3. The Company's Current Reports on Form 8-K dated January 11,
1996, April 2, 1996 and May 7, 1996.
4. The Company's Proxy Statement dated April 26, 1996.
5. The Company's Registration Statement on Form SB-2,
registration no. 33-89266, which was declared effective by the
Commission on May 3, 1995.
6. The description of the Class A Common Stock, Class A Warrants
and Class B Warrants contained in the Company's Registration
Statement on Form 8-A dated May 1, 1995, relating to the
registration of the Class A Common Stock, Class A Warrants and
Class B Warrants pursuant to Section 12(g) of the Exchange
Act.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act prior to the termination of the offering made
hereby shall be deemed to be incorporated by reference herein and to be part
hereof from the date of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is incorporated or deemed to be incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company hereby undertakes to provide without charge to each person
to whom this Prospectus is delivered, on the written or oral request of such
person, a copy of any and all of the documents incorporated by reference in
this Prospectus (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference into the documents that this Prospectus
incorporates). Written or oral requests for such copies should be directed to
Thomas V. Baker, Secretary, NetVantage, Inc., 201 Continental Boulevard, Suite
201, El Segundo, California 90245-4427, telephone (310) 726-4130.
RISK FACTORS
INVESTMENT IN THE CLASS A COMMON STOCK AND CLASS A AND CLASS B WARRANTS OFFERED
HEREBY ARE HIGHLY SPECULATIVE IN NATURE AND INVOLVE A HIGH DEGREE OF RISK.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, ALONG WITH THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING CONSIDERATIONS AND
RISKS IN EVALUATING AN INVESTMENT IN THE COMPANY.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; NO ASSURANCE OF FUTURE
PROFITABILITY. The Company was engaged primarily in research and development
from its inception in March 1991 through March 31, 1996 and has limited
marketing experience to date. The Company has incurred significant losses
during this period and had, as of March 31, 1996, an accumulated deficit of
$(12,892,156) and losses are continuing. The significant costs associated with
manufacturing, marketing, and distribution efforts, as well as the continued
development activities necessary to develop the Company's products, will
significantly adversely impact the Company's results of operations for the
foreseeable future and may result in additional losses.
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To achieve profitability, the Company must sell its current products,
successfully develop and commercialize new products for existing markets,
control its operating expenses, and develop and manage its distribution
capability. Accordingly, there can be no assurance that the Company will
attain profitability in the future.
EXPLANATORY PARAGRAPH ABOUT GOING CONCERN IN INDEPENDENT ACCOUNTANT'S
REPORT. The Company has received a report from its independent accountants
that contains an explanatory paragraph that describes the uncertainty as to the
ability of the Company to continue as a going concern as described in Note 4 to
the financial statements for the fiscal year ended December 31, 1995. The
Company may incur losses for the foreseeable future due to the significant
costs associated with the manufacturing, marketing and distributing of Ethernet
switch products and the continual development activities necessary to develop
the Company's products. There can be no assurance that the Company will
achieve profitable operations.
UNCERTAINTY OF PRODUCT ACCEPTANCE; LIMITED MARKETING CAPABILITY.
Switching technology in the target market for networking products is an
emerging technology. There can be no assurance that the Company's planned
introduction of products will realize market acceptance or will meet technical
demands of potential customers. There can be no assurance that these efforts
have been successful. Furthermore, there can be no assurance that the
Company's technologies, in their current form, will be suitable for specific
applications or that further design modifications, beyond anticipated changes
to accommodate different markets, will not be necessary. The Company intends
to market its products primarily through original equipment manufacturers
("OEM"), and must, therefore, compete for the attention of such OEMs with other
companies utilizing the same OEMs.
RAPIDLY EVOLVING MARKET AND POSSIBLE TECHNOLOGICAL OBSOLESCENCE. The
market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
The introduction of products embodying new technologies or the emergence of new
industry standards can render existing products obsolete or unmarketable. The
Company's success will depend upon its ability to develop and introduce, on a
timely and cost-effective basis, new products that keep pace with technological
developments and emerging industry standards and address increasingly
sophisticated customer requirements. There can be no assurance that the
Company will be successful in identifying, developing, manufacturing and
marketing product enhancements or new products that respond to technological
change or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products, or that its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance. The Company's business, operating results and
financial condition would be materially and adversely affected if the Company
were to incur delays in developing new products or product enhancements or such
products or enhancements did not gain market acceptance.
SIGNIFICANT FLUCTUATION IN QUARTERLY PERFORMANCE; POSSIBLE VOLATILITY
OF MARKET PRICE. The Company's revenue is derived primarily from sales to OEMs
whose purchase orders may not provide significant lead times for delivery of
products. Consequently, the majority of the Company's revenue in each quarter
results from orders booked in that quarter. The Company establishes expenditure
levels based in part on its expectations of future revenue. As a result of
these short lead times, the Company's ability to establish expense, production
and inventory levels could be impaired. Furthermore, if anticipated sales and
shipments in any quarter do not occur when expected, expenditure levels could be
disproportionately high and the Company's operating results for that quarter,
and potentially future quarters, could be adversely affected. In addition, the
Company's operating results may fluctuate as a result of a number of other
factors, including demand for the Company's products, competition and pricing
pressures, the introduction of new products by the Company's competitors,
production or quality problems, the ability of the Company to develop and manage
the introduction of new products, changes in material or labor costs and general
economic conditions. Moreover, the market prices for securities of merging and
development stage companies have historically been highly volatile.
SIGNIFICANT COMPETITION. The LAN and WAN internetworking and hub
markets are intensely competitive, and the Company expects competition to
increase substantially. The Company's competitors include vendors specifically
dedicated to the intelligent switching hub market, bridge router vendors, hub
vendors and major computer system vendors. Several of these competitors have
recently introduced or announced their intentions to introduce new competitive
products. In addition, companies in related data communications markets could
offer products with functionality similar or superior to that offered by the
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Company's products. Increased competition could result in price reductions,
reduced margins and loss of any market share the Company may acquire, all of
which would materially and adversely affect the Company's business, operating
results and financial condition. Many of the Company's current and potential
competitors have substantially greater financial, technical, marketing and
other resources and larger installed customer bases than the Company.
Moreover, the internetworking market has become increasingly concentrated in
recent years as a result of acquisitions, which are likely to permit the
Company's competitors to devote significantly greater resources to the
development and marketing of new competitive products. The Company expects
that competition will increase substantially as a result of these and other
industry consolidations and alliances, as well as the emergence of new
competitors. There can be no assurance that the Company will be able to
compete successfully with existing or new competitors or that competitive
pressures faced by the Company will not materially and adversely affect its
business, operating results and financial condition.
SIGNIFICANT PRODUCT CONCENTRATION; LIMITED PRODUCTION CAPABILITIES.
The Company has only recently commercially introduced its principal product in
its Ethernet Switch line of products - the NV7516 Ethernet Switch. Since the
NV7516 is the Company's principal product available for commercial sale, the
operating results of the Company in the short term, and the future development
of additional products in the longer-term, will depend substantially upon the
successful sale of the NV7516 Ethernet Switch, as to which there can be no
assurance.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant extent upon certain key management and technical employees,
including its Chairman, President and Chief Executive Officer, Stephen R.
Rizzone. The loss of services of any of the Company's key employees would have
a material adverse effect on the Company. The Company's success will also
depend in large part upon its ability to attract and retain highly-skilled
technical personnel to provide technological depth and support, to enhance its
existing products and to develop new products, as well as managerial, sales and
marketing personnel. If the Company is unable to hire the necessary personnel,
the development of new products and enhancements would likely be delayed or
prevented. See "-- Rapidly Evolving Market and Possible Technological
Obsolescence." Competition for highly-skilled technical, managerial, sales and
marketing personnel is intense. There can be no assurance that the Company
will be successful in retaining its key technical and management personnel and
in attracting and retaining the personnel it requires for expansion.
DEPENDENCE ON SUPPLIERS. Certain key components used in the Company's
products, such as microprocessors, communications controller chips, Fiber
Distributed Data Interface ("FDDI"), certain Field Programmable Gate Array
("FPGAs") chips and Ethernet media interface components, are currently
available only from single or limited sources. The Company does not have
long-term supply contracts with these or any other sole or limited source
vendors and purchases these components on a purchase order basis. No assurance
can be given that component shortages will not occur in the future. In
addition, the Company subcontracts the manufacture of its board-level
assemblies to third parties, and there can be no assurance that these
subcontractors will be able to support the manufacturing requirements of the
Company. The inability to obtain sufficient quantities of source components or
subassemblies as required, or to develop alternative sources as required in the
future, could result in delays or reductions in product shipments or product
redesigns which would materially and adversely affect the Company's business,
operating results and financial condition. In addition, reliance on outside
sources reduces the Company's control over manufacturing costs.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success is heavily
dependent upon its proprietary technology. The Company has no patents. The
Company generally enters into confidentiality or license agreements with its
employees, distributors, customers and potential customers and limits access to
and distribution of its software, documentation, and other proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to prevent misappropriation of its technology or
that the Company's competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. The
Company is subject to the risk of adverse claims and litigation alleging
infringement of intellectual property rights. There can be no assurance that
third parties will not assert infringement claims with respect to the Company's
current or future products or that any such claims will not require the Company
to enter into royalty arrangements or result in costly litigation. No assurance
can be given that any necessary licenses can be obtained or that, if obtainable,
such licenses can be obtained on
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commercially reasonable terms.
EFFECT OF ISSUANCE OF WARRANTS AND OPTIONS; UNDERWRITER'S UNIT
PURCHASE OPTION. The Company has granted to D.H. Blair Investment Banking
Corp., the underwriter of the Company's initial public offering (the
"Underwriter"), a unit purchase option (the "Underwriter's Unit Purchase
Option") for nominal consideration to purchase up to 150,000 Units at an
exercise price of $6.75 per Option Unit. The existence of the Unit Purchase
Option, the Warrants offered hereby, the Selling Securityholders' Warrants and
outstanding options and warrants to acquire shares of Class A Common Stock
could adversely affect the Company's ability to obtain future financing, and
their exercise could further dilute the interest of investors acquiring Units
in this Offering. The price which the Company may receive for the Class A
Common Stock issued upon exercise of such options and warrants will probably be
less than the market price of the Class A Common Stock at the time such options
and warrants are exercised. The holders of the options and warrants might be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain needed capital by a new offering of its securities on terms
more favorable than those provided for by the options and warrants.
POSSIBLE DEPRESSIVE EFFECT ON PRICE OF SECURITIES OF FUTURE SALES OF
COMMON STOCK AND EXERCISE OF REGISTRATION RIGHTS. The sale or other
disposition of all of the currently outstanding shares of Class B and Class E
Common Stock (and the Class A Common Stock underlying such shares) is
restricted by the Securities Act. In the future, these shares may only be sold
in compliance with Rule 144 promulgated under the Securities Act or other
exemption from registration thereunder unless such sale is registered. Actual
sales or the prospect of sales of such shares of Class B and Class E Common
Stock under Rule 144 or otherwise in the future may depress the prices of the
Company's securities or any market that may develop, and also make it difficult
to sell the Company's securities purchased by investors herein. All
outstanding shares of Class B and Class E Common Stock are eligible for sale
under Rule 144 (subject to the restrictions on transfer applicable to the Class
E Common Stock), provided all conditions of that rule are satisfied. The
holders of the Underwriter's Unit Purchase Option have been granted
registration rights with respect to all shares purchased upon exercise of the
Underwriter's Unit Purchase Option or the Warrants underlying the Underwriter's
Unit Purchase Option. In addition, the Company has registered on behalf of the
Selling Securityholders an aggregate of 500,000 Selling Securityholders'
Warrants and the securities underlying such Warrants. The sale, or
availability for sale, of substantial amounts of Class A Common Stock or
Selling Securityholders' Warrants (including shares of Class A Common Stock
underlying such Selling Securityholders' Warrants and underlying Class B
Warrants issuable upon exercise of the Selling Securityholders' Warrants) in
the public market could adversely affect the prevailing market prices of the
Company's securities and the Company's ability to raise additional capital
through the sale of its equity securities.
NON-REGISTRATION IN CERTAIN JURISDICTIONS OF SHARES UNDERLYING THE
WARRANTS; REQUIREMENTS TO MAINTAIN CURRENT PROSPECTUS. Purchasers of the
Warrants will have the right to exercise them only if a current prospectus
relating to such shares is then in effect and the shares are qualified for sale
under the securities laws of the state or states in which the purchaser
resides. The Company has undertaken and intends to maintain a current
prospectus which will permit the purchase and sale of the securities underlying
the Warrants, but there can be no assurance that the Company will be able to do
so. The Warrants may be deprived of any value if a current prospectus covering
the securities issuable upon the exercise thereof is not filed and kept
effective or if such underlying securities are not, or cannot be, registered in
the applicable states.
CHARGE TO INCOME IN THE EVENT OF RELEASE AND CONVERSION OF ESCROW
SHARES. The Escrow Shares will be released from escrow and converted into
shares of Class B Common Stock if, and only if, the Company attains certain
earnings levels over the two to four year period following the Company's initial
public offering or if the Class A Common Stock achieves specified market price
targets over the next three years. With respect to such escrow arrangements,
the Securities and Exchange Commission (the "Commission") has taken a position
that in the event any shares held by an employee, officer, director, consultant
or any relative are released from escrow, compensation expense will be recorded
for financial reporting purposes. Therefore, in the event the Company attains
any of the earnings or
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stock price thresholds required for the release and conversion of the Escrow
Shares, the release of shares to employees, officers, directors or their
relatives will be treated, for financial reporting purposes, as compensation
expense of the Company. Accordingly, the Company will, in the event of the
release and conversion of the Escrow Shares, recognize during the period that
the earnings or stock price thresholds are met a substantial noncash charge to
earnings that would increase the Company's loss or reduce or eliminate
earnings, if any, at such time. The amount of this charge will be equal to the
aggregate market price of such shares at the time of release from escrow.
Although the amount of compensation expense recognized by the Company will not
affect the Company's total stockholders' equity, it may have a depressive
effect on the market price of the Company's securities.
POSSIBLE ADVERSE EFFECT OF INVESTIGATION BY SECURITIES AND EXCHANGE
COMMISSION OF UNDERWRITER AND D. H. BLAIR & CO., INC. CONCERNING BUSINESS
ACTIVITIES INCLUDING COMPLIANCE WITH THE FEDERAL SECURITIES LAWS BY THE
UNDERWRITER, D.H. BLAIR & CO., INC. AND ISSUERS WHOSE SECURITIES WERE
UNDERWRITTEN BY EITHER THE UNDERWRITER OR D.H. BLAIR & CO., INC. The
Commission is conducting an investigation concerning various business
activities of the Underwriter and D.H. Blair & Co., Inc. ("Blair & Co."). The
investigation appears to be broad in scope, involving numerous aspects of the
Underwriter's and Blair & Co.'s compliance with the Federal securities laws and
compliance with the Federal securities laws by issuers whose securities were
underwritten by the Underwriter or Blair & Co., or in which the Underwriter or
Blair & Co. made over-the-counter markets, persons associated with the
Underwriter or Blair & Co., such issuers and other persons. The Company has
been advised by the Underwriter that the investigation has been ongoing since
at least 1989 and that it is cooperating with the investigation. The
Underwriter cannot predict whether this investigation will ever result in any
type of formal enforcement action against the Underwriter or Blair & Co. or, if
so, whether any such action might have an adverse effect on the Underwriter or
Blair & Co. or the securities offered hereby. Blair & Co. currently makes a
market in the Company's securities. An unfavorable resolution of the
Commission's investigation could have the effect of limiting such firm's
ability to make a market in the Company's securities, which could affect the
liquidity or price of such securities.
POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN THE COMPANY'S
SECURITIES. The Underwriter has advised the Company that Blair & Co. intends
to make a market in the Company's securities following consummation of this
Offering. Rule 10b-6 promulgated under the Securities Exchange Act of 1934
(the "1934 Act"), may prohibit Blair & Co. from engaging in any market making
activities with regard to the Company's securities for the period from two or
nine business days (or such other applicable period as Rule 10b-6 may provide)
prior to any solicitation by the Underwriter of the exercise of Warrants until
the later of the termination of such solicitation activity or the termination
(by waiver or otherwise) of any right that the Underwriter may have to receive
a fee for the exercise of Warrants following such solicitation. As a result,
Blair & Co. may be unable to provide a market for the Company's securities
during the period while the Warrants are exercisable. Any temporary cessation
of such market making activities could have an adverse effect on the market
price of the Company's securities.
POSSIBLE ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants are
subject to redemption at any time by the Company at $.05 per Warrant on at
least 30 days' prior written notice if the closing bid price of the Class A
Common Stock shall have averaged in excess of $9.10 per share in the case of
the Class A Warrants and $10.85 per share in the case of the Class B Warrants
(subject to adjustment), for the 30 consecutive trading days ending within 15
days of the date on which notice of redemption is given. If the Warrants are
redeemed, Warrant holders will lose their right to exercise the Warrants except
during such 30 day redemption period. Redemption of the Warrants could force
the holders to exercise the Warrants at a time when it may be disadvantageous
for the holders to do so, to sell the Warrants at the then market value of the
Warrants at the time of redemption when they might otherwise wish to hold the
Warrants, or to accept the redemption price, which is likely to be
substantially less than the market value of the Warrants at the time of
redemption.
POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ STOCK MARKET AND
POSSIBLE MARKET ILLIQUIDITY. The Company's failure to meet the maintenance
criteria of The Nasdaq Stock Market, Inc. ("Nasdaq") in the future for any
reason may result in the discontinuance of the inclusion of the Company's
securities on Nasdaq. In order to remain quoted on Nasdaq, a company must
maintain $2,000,000 in assets, a $200,000 market value of the public float and
$1,000,000 in total capital and surplus. In addition, continued inclusion
requires two market-makers and a minimum bid price of $1.00 per share;
provided, however, that if a company falls below such minimum bid price, it
will remain eligible for inclusion on Nasdaq if the market value of the public
float is at least $1,000,000 and the company has $2,000,000 in capital and
surplus. In such event, trading, if any, in the Company's securities may then
continue to be conducted on the OTC Electronic Bulletin Board or in the over-
the-counter market in the so-called "pink sheets." As a result, an investor
may find it more difficult to dispose of, or to obtain accurate quotations as
to the market value of the
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Company's securities, and the prices for the Company's securities may be lower
than might otherwise be obtained.
DISCLOSURES RELATING TO LOW PRICED STOCKS; POSSIBLE RESTRICTIONS ON
RESALES OF LOW PRICED STOCKS AND ON BROKER-DEALER SALES; POSSIBLE ADVERSE
EFFECT OF "PENNY STOCK" RULES ON LIQUIDITY FOR THE COMPANY'S SECURITIES. If
the Company's securities were to be delisted from Nasdaq (see "Possible
Delisting of Securities from the Nasdaq Stock Market and Possible Market
Illiquidity," above), they may become subject to Rule 15g-9 (the "Rule")
promulgated under the 1934 Act, which imposes additional sales practice
requirements on broker-dealers that sell securities governed by the Rule, to
persons other than established customers and "accredited investors" (generally,
individuals with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouses). For transactions covered by
the Rule, the broker- dealer must make a special suitability determination for
the purchaser and have received the purchaser's written consent to the
transaction prior to sale. Consequently, the Rule may have an adverse effect
on the ability of broker-dealers to sell the Company's securities and may
affect the ability of purchasers in this Offering to sell the Company's
securities in the secondary market and otherwise affect the trading market in
the Company's securities.
The Commission has adopted regulations which generally define a "penny
stock" to be any non-Nasdaq equity security that has a market price (as therein
defined) less than $5.00 per share or with an exercise price of less than $5.00
per share, subject to certain exceptions. For any transactions by
broker-dealers involving a penny stock (unless exempt), the rules require
delivery, prior to a transaction in a penny stock, of a risk disclosure
document relating to the penny stock market. Disclosure is also required to be
made about compensation payable to both the broker-dealer and the registered
representative and current quotations for the securities. Finally, monthly
statements are required to be sent disclosing recent price information for the
penny stocks.
The foregoing penny stock restrictions will not apply to the Company's
securities if such securities are listed on Nasdaq and have certain price and
volume information provided on a current and continuing basis or if the Company
meets certain minimum net tangible asset or average revenue criteria. There
can be no assurance that the Company's securities will qualify for exemption
from these restrictions. In any event, even if the Company's securities were
exempt from such restrictions, they would remain subject to Section 15(b)(6) of
the Exchange Act, which gives the Commission the authority to prohibit any
person that is engaged in unlawful conduct while participating in a
distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the Commission finds that
such a restriction would be in the public interest. If the Company's
securities were subject to the rules on penny stocks, the market liquidity for
the Company's securities could be severely adversely affected.
POTENTIAL ADVERSE EFFECTS OF PREFERRED STOCK. The Company's
Certificate of Incorporation authorizes the issuance of shares of "blank check"
preferred stock, which will have such designations, rights and preferences as
may be determined from time to time by the Board of Directors. Accordingly,
the Board of Directors is empowered, without shareholder approval (but subject
to applicable government regulatory restrictions), to issue preferred stock
with dividend, liquidation, conversion, voting or other rights which could
adversely affect the voting power or other rights of the holders of the
Company's Common Stock. In the event of such issuance, the preferred stock
could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company. Although the
Company has no present intention to issue any additional shares of its
preferred stock, there can be no assurance that the Company will not do so in
the future.
NO DIVIDENDS. 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. See "Dividend Policy."
USE OF PROCEEDS
The Company may use the net proceeds from the sale of the Class A
Common Stock issuable upon exercise of Class A and Class B Warrants offered by
the Company hereby for general corporate purposes, including working capital.
The Company will receive no proceeds from the sale of the Selling
Securityholders' Warrants by the Selling Securityholders.
7
<PAGE> 9
THE COMPANY
The Company was incorporated in California on March 12, 1991. On
November 11, 1994, the Company changed its state of incorporation from
California to Delaware. In connection with the reincorporation, the Company,
(i) effected a one-for-five reverse stock split; (ii) increased the authorized
capital of the Company to 20,000,000 shares of $0.001 par value common stock,
of which 17,000,000 are designated Class A Common Stock, 1,800,000 are
designated Class B Common Stock, and 1,200,000 are designated Class E Common
Stock; and (iii) authorized 5,000,000 shares of $0.01 par value preferred
stock. All shares of common stock outstanding at the time of the
reincorporation, adjusted for the reverse stock split, were exchanged for Class
B and E Common Stock on the basis of three shares of old stock for one share of
Class B Common Stock and two shares of Class E Common Stock.
The Company is engaged in the development, manufacture and sale of
switching devices designed to increase the information handling capacity of
existing and installed Local Area Networks or "LANs." The Company's switching
devices may also be used to connect LANs to each other to extend the network's
scope and power. They are also designed to provide installed networks with the
ability to connect to emerging technologies, such as Asynchronous Transfer Mode
or "ATM," a technology which will enable data to be moved both within and
between LANs and Wide Area Networks or "WANs." The Company's switching devices
require no special skills to install, and require no changes to existing user
network equipment, wiring, hub equipment, software protocols or applications.
In mid 1994, the Company introduced its NV7500 Ethernet Switch and
began commercial shipments of this product in late 1994. In 1995, the Company
attempted to market this product through both distribution channels and
Original Equipment Manufacturers ("OEMs"). In the third quarter of 1995, the
Company changed its strategic marketing emphasis to OEM customers and
discontinued its efforts to market through distribution channels. Also in 1995
the Company began development of the NV7516 Ethernet Switch to largely replace
the NV7500. With the strategic marketing shift, sales declined in the third and
fourth quarters of 1995 as the OEMs awaited the introduction of the NV7516. In
December 1995, the Company introduced prototype NV7516 products to certain
potential OEM customers.
In 1994, the Company began development of a Token Ring Switch. In
early 1996, the Company decided to halt further development of the Token Ring
switch and focus the Company's resources on the Ethernet Switching market.
The Company purchased a license to certain ATM technology under
development by CircuitPath Network Systems Corporation ('CircuitPath") for
$580,000. CircuitPath continues to develop this technology, however no products
have yet been developed.
On May 3, 1995, the Company completed an initial public offering of
1,725,000 Units (including the Underwriter's overallotment of 225,000 Units).
Each Unit consists of one share of Class A Common Stock, one Class A Warrant
and one Class B Warrant. Upon exercise, the Class A Warrants entitle the holder
to purchase 1.05 shares of Class A Common Stock for $6.21 and to receive one
Class B Warrant. Class B Warrants entitle the holder to purchase one share of
Class A Common Stock for $7.41. The offering price for the Units was $5.00 per
unit for total gross proceeds of $8,625,000, or $7,503,750 after Underwriter's
commission. In addition, the Underwriter purchased for nominal consideration a
Unit Purchase Option to purchase up to 150,000 Units at an exercise price of
$6.75 per Option Unit.
As a condition of the initial public offering, all shares of the
Company's then outstanding Class B and E Common Stock, including all shares of
Class B and E Common Stock issuable upon exercise of outstanding options, are
subject to an escrow agreement. With respect to the Class B Common Stock and
related options, the shares are released from escrow thirteen months following
the date of the offering. With respect to the Class E Common Stock and related
options, the shares are released from escrow upon the attainment of certain
earnings levels or market price targets (See Note 10 of Notes to Financial
Statements included in the Company's 1995 Annual Report on Form 10-KSB).
On July 25, 1995, the Company completed a private sale of 165,000
previously unissued shares of its Class A Common Stock to UB Networks for $5.25
per share, the fair market price based on the average closing bid and ask
prices preceding the transaction date, for net proceeds of $866,250.
8
<PAGE> 10
On January 10, 1996, the Company completed a private sale of 854,993
previously unissued shares of its Class A Common Stock to two individuals for
$5.848 per share, the fair market price based on the average closing bid and
ask prices preceding the transaction date, for net proceeds of $5,000,000.
Research and Development
Since inception, the Company has devoted substantial resources to
research and development, focusing on developing high-performance switching
technology. During the years ended December 31, 1995, 1994 and 1993, the
Company incurred, respectively, $2,192,536, $847,872 and $728,099 of research
and development expenses. The Company believes that its future depends on its
ability to continue to enhance its existing products, and to develop new
products. Accordingly, the Company expects to expend substantial amounts of
funds in the future for research and development.
Marketing
The Company currently markets its products to domestic and foreign
OEMs through a sales staff located at the Company's principal office. The
Company currently has no plans to establish sales and marketing offices other
than those at its principal office.
Sales to one customer amounted to $76,145 (63%) in 1994 and sales to
three major customers amounted to $256,173 (20%), $254,705 (20%) and $206,454
(16%) in 1995, respectively. In the future these customers may not be as
significant because of the Company's strategic marketing shift to OEM business.
Competition
The Company faces competition from a number of established and
emerging computer, communications and internetworking device companies,
including Alantec Corporation, Cisco Systems, Inc., 3Com Corporation, Cabletron
Corporation, Hewlett-Packard, Lannet, Plaintree Systems, Standard Microsystems
Corporation, Xylan, Inc. and Kalpana, Inc. Many of the Company's current and
potential competitors have significantly greater financial, technical,
marketing and other resources and larger installed customer bases than the
Company.
Manufacturing and Materials
The Company's products are currently manufactured by subcontractors.
The Company's subcontractors use "burn-in" procedures (testing at higher
than normal operating temperatures) and comprehensive inspection, statistical
process control and other testing procedures to assure the quality and
reliability of its products.
Although the Company generally uses standard parts and components for
its products, certain components are currently available only from single or
limited sources. The Company is limited to a sole supplier for Ethernet
controller chips (Advanced Micro Devices), as well as certain other chip
products, all of which are key components in the Company's products. The
Company believes that it will be able to obtain adequate supplies in a timely
manner from existing sources, or that any shortages it experiences will be no
worse than those experienced by its competitors. No assurance can be given,
however, that shortages will not occur or that the Company will not experience
a reduction or interruption in supply or a significant increase in the price of
one or more components that would adversely affect the Company's operating
results and business.
Proprietary Rights
The Company does not have any patents; however, the Company has filed
a patent application relating to the Company's core switching technology. The
Company relies on a combination of patent, trade secret, copyright and
trademark law, nondisclosure agreements and technical measures to establish and
protect its proprietary right in its products.
9
<PAGE> 11
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
This Prospectus relates to the offering of up to 5,625,000 shares of
Class A Common Stock and 1,875,000 Class B Warrants issuable upon exercise of
the Class A and Class B Warrants issued in the Company's initial public
offering.
Concurrently with the Company's initial public offering, the Company
also registered on behalf of certain security holders (the "Selling
Securityholders") for resale an additional 500,000 Class A Warrants (the
"Selling Securityholders' Warrants") and the underlying 500,000 shares of Class
A Common Stock, 500,000 Class B Warrants and 500,000 shares of Class A Common
Stock issuable upon exercise of the Class B Warrants. As of the date of this
Prospectus, the Selling Securityholders continue to hold 263,025 Class A
Warrants. This Prospectus also relates to the offer and sale of such Selling
Securityholders' Warrants that may be sold from time to time and to the 263,025
Class B Warrants issuable upon exercise of the Selling Securityholders' Class A
Warrants and the 526,050 shares of Class A Common Stock issuable upon exercise
of the Selling Securityholders' Class A Warrants and the underlying Class B
Warrants. The Company will not receive any of the proceeds from the sale of
the 263,025 Selling Securityholders Warrants offered by the Selling
Securityholders.
The following table sets forth certain information with respect to
each Selling Securityholder for whom the Company is registering securities for
resale to the public. The Company will not receive any of the proceeds from
the sale of these securities. Except as described below, there are no material
relationships between any of the Selling Securityholders and the Company, nor
have any such material relationships existed within the past three years.
<TABLE>
<CAPTION>
NUMBER OF
CLASS A WARRANTS
BENEFICIALLY OWNED
AND MAXIMUM
NUMBER TO BE
SELLING SECURITYHOLDER SOLD
---------------------- ------------------
<S> <C>
Marcos Anszelowicz . . . . . . . . . . . . . . . . . 25,000
George T. Barton . . . . . . . . . . . . . . . . . . 50,000
Jacob and Channah B. Borenstein . . . . . . . . . . 25,000
Kenneth and Sherry Cohen . . . . . . . . . . . . . . 12,500
Stuart Gruber . . . . . . . . . . . . . . . . . . . 6,000
Jay Harris . . . . . . . . . . . . . . . . . . . . . 12,500
Andrew Holder . . . . . . . . . . . . . . . . . . . 18,750
James and Joyce Johnson . . . . . . . . . . . . . . 12,000
Robert Katz . . . . . . . . . . . . . . . . . . . . 6,500
Poseidon Capital Pension & Profit Sharing Plan . . . 19,600
Marc Roberts & Ron Cantor, Esq. . . . . . . . . . . 5,000
Jesse D. Roggen . . . . . . . . . . . . . . . . . . 6,300
Anand J. Sathe . . . . . . . . . . . . . . . . . . . 6,250
E. Donald Shapiro . . . . . . . . . . . . . . . . . 12,000
Eugene Silverman . . . . . . . . . . . . . . . . . . 3,125
Leonard Toboroff . . . . . . . . . . . . . . . . . . 12,500
J. Michael Wolfe . . . . . . . . . . . . . . . . . 30,000
-------
Total . . . . . . . . . . . . . . . . . . . 263,025
=======
</TABLE>
INDEMNIFICATION
The Company's Certificate of Incorporation eliminates in certain
circumstances the liability of directors of the Company for monetary damages
for breach of their fiduciary duty as directors. This provision does not
eliminate the liability of a director (i) for breach of the director's duty of
loyalty to the Company or its shareholders, (ii) for acts or omissions by the
director not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for willful or negligent declaration of an unlawful
dividend, stock purchase or redemption, or (iv) for transactions from which the
director derived an improper personal benefit. Such limitation of liability
does not affect the availability of equitable remedies such as injunctive
relief or rescission.
10
<PAGE> 12
The Company's Bylaws provide that the Company shall indemnify its
directors, officers, employees or agents to the full extent permitted by the
Delaware General Corporation Law, and the Company shall have the right to
purchase and maintain insurance on behalf of any such person whether or not the
Company would have the power to indemnify such person against the liability
insured against.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company 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 Company will, unless in the opinion of 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 Securities Act and will be governed by the final
adjudication of such issue.
EXPERTS
The financial statements incorporated in this Prospectus by reference
to the Annual Report on Form 10-KSB for the year ended December 31, 1995, have
been so incorporated in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Petillon & Hansen, Torrance, California. Richard K. Hansen is
the beneficial owner of 10,666 shares of Class B Common Stock and 21,334 shares
of Class E Common Stock, which were purchased by him at the Company's
inception.
11
<PAGE> 13
NETVANTAGE, INC.
PROSPECTUS
7,106,250 SHARES OF CLASS A COMMON STOCK
2,375,000 REDEEMABLE CLASS B WARRANTS
263,025 REDEEMABLE CLASS A WARRANTS
150,000 UNITS
[BACK COVER]
12
