<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-25992
NETVANTAGE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4324525
(State or Other Jurisdiction of Incorporation or (IRS Employer
Organization) Identification No.
201 Continental Blvd. Suite 201, El Segundo, CA 90245
(Address of Principal Executive Offices)
(310) 726-4130
(Registrant's Telephone Number, Including Area Code)
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 [_]
The number of shares outstanding of each of the Registrant's classes of
Common Stock as of May 13, 1998: 10,160,603 shares of Class A Common Stock,
241,310 shares of Class B Common Stock and 540,995 shares of Class E Common
Stock.
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NetVantage, Inc.
Quarterly Report on Form 10-Q
Index
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION:........................................................................................ 3
Item 1. Financial Statements:......................................................................................... 3
Condensed Balance Sheets - March 31, 1998 and December 31, 1997................................................ 3
Condensed Statements of Operations - Three Months Ended March 31, 1998 and 1997................................ 4
Condensed Statements of Cash Flows - Three Months Ended March 31, 1998 and 1997................................ 5
Notes to Condensed Financial Statements ....................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................................... 11
PART II. OTHER INFORMATION:............................................................................................ 12
Item 1. Legal Proceedings............................................................................................. 12
Item 2. Changes in Securities and Use of Proceeds..................................................................... 12
Item 3. Defaults upon Senior Securities............................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders........................................................... 12
Item 5. Other Information............................................................................................. 12
Item 6. Exhibits and Reports on Form 8-K.............................................................................. 13
Signatures.................................................................................................................... 13
Exhibit Index................................................................................................................. 14
</TABLE>
2
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
NETVANTAGE, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 11,052,588 $ 13,739,948
Accounts receivable, net of allowance of $384,059 and $359,173 at
March 31, 1998 and December 31, 1997, respectively.............................. 4,318,109 5,559,019
Other receivables................................................................ 204,661 274,727
Inventories, net................................................................. 4,388,592 7,379,511
Prepaid expenses and other current assets........................................ 272,334 172,406
------------ ------------
Total current assets............................................................ 20,236,284 27,125,611
Property and equipment, net...................................................... 2,104,954 1,869,227
Note receivable from related party, net.......................................... 328,333 328,333
Other assets..................................................................... 25,523 25,523
------------ ------------
$ 22,695,094 $ 29,348,694
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 1,533,584 $ 2,146,669
Accrued expenses................................................................. 1,135,578 1,009,768
Accrued compensation and related liabilities..................................... 1,026,465 763,148
------------ ------------
Total current liabilities....................................................... 3,695,627 3,919,585
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.01 per share, 5,000,000 shares authorized,
none issued.....................................................................
Class A common stock, par value $0.001 per share, 17,000,000 shares
authorized, 10,145,940 and 10,082,133 shares issued and outstanding at
March 31, 1998 and December 31, 1997, respectively.............................. 10,145 10,082
Class B common stock, convertible into Class A common stock, par value $0.001
per share, 1,800,000 shares authorized, 245,535 and 300,030 shares issued and
outstanding at March 31, 1998 and December 31, 1997, respectively............... 246 300
Class E common stock, convertible into Class B common stock, par value
$0.001 per share, 1,200,000 shares authorized, 540,995 issued; all shares
are held in escrow.............................................................. 541 541
Additional paid-in-capital....................................................... 64,884,781 64,830,665
Accumulated deficit.............................................................. (45,896,246) (39,412,479)
------------ ------------
Total stockholders' equity...................................................... 18,999,467 25,429,109
------------ ------------
$ 22,695,094 $ 29,348,694
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
3
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NETVANTAGE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------------
1998 1997
---------------------------------------
<S> <C> <C>
Net revenues.................................................................. $ 575,886 $ 3,302,586
-------------- --------------
Costs and expenses:
Cost of revenues........................................................... 4,126,647 2,357,895
Research and development................................................... 1,844,928 1,457,573
Selling and marketing...................................................... 462,454 703,895
General and administrative................................................. 787,494 1,190,672
-------------- --------------
7,221,523 5,710,035
-------------- --------------
Loss from operations.......................................................... (6,645,637) (2,407,449)
Interest income............................................................... 166,957 153,702
Interest expense.............................................................. (5,087) (33,313)
-------------- --------------
Net loss...................................................................... $ (6,483,767) $ (2,287,060)
============== ==============
Net loss per share:
Basic and diluted net loss per share....................................... $ (0.62) $ (0.23)
============== ==============
Weighted average number of shares outstanding................................. 10,384,903 9,994,072
============== ==============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
4
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NETVANTAGE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1998 1997
----------- -------------
<S> <C> <C>
Net loss............................................................................. $ (6,483,767) $ (2,287,060)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of goodwill and intangibles.......................... 261,280 197,557
Allowance for doubtful accounts.................................................... 24,886 25,000
Compensation recorded upon issuance of warrants.................................... 112,725
Allowance for inventory valuation.................................................. 2,835,650 400,000
Changes in assets and liabilities:
Accounts receivable................................................................ 1,216,023 1,422,207
Other receivables.................................................................. 70,066 618,975
Due from related parties........................................................... (254,710)
Inventories........................................................................ 155,269 (4,258,674)
Prepaid expenses and other assets.................................................. (99,928) 46,099
Note receivable from related party.................................................
Accounts payable................................................................... (613,085) (1,396,737)
Accrued expenses................................................................... 125,810 (130,076)
Accrued compensation and related liabilities....................................... 263,317 (330,767)
------------ ------------
Net cash used in operating activities................................................ (2,244,479) (5,835,461)
------------ ------------
Investing activities:
Purchase of property and equipment................................................. (497,007) (221,828)
------------ ------------
Financing activities:
Common stock issuance under stock option plans..................................... 54,126
Proceeds from exercise of B warrant call........................................... 26,233,126
Issuance costs on warrant call..................................................... (596,176)
------------ ------------
Net cash provided by financing activities............................................ 54,126 25,636,950
------------ ------------
Increase in cash and cash equivalents................................................ (2,687,360) 19,579,661
Cash and cash equivalents at beginning of period..................................... 13,739,948) 2,787,593
------------ ------------
Cash and cash equivalents at end of period........................................... $ 11,052,588 $ 22,367,254
============ ============
Supplemental disclosures of cash flow information - Interest paid.................... $ 5,087
Non cash transaction - Issuance of warrants for compensation of officer.............. $ 112,725
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
5
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NetVantage, Inc.
Notes to Condensed Financial Statements
(Unaudited)
1. Description of Business and Basis of Presentation
NetVantage, Inc. (the "Company") is a provider of Ethernet Workgroup
switching products to the Original Equipment Manufacturer ("OEM") marketplace.
Ethernet Workgroup switches increase the information handling capacity of Local
Area Networks ("LANs"). Other applications for the Company's switching products
include connecting LANs to each other to extend the network's scope and power
and to provide installed networks with the ability to connect to networking
devices incorporating new technologies such as Asynchronous Transfer Mode or
"ATM," Gigabit Ethernet and Layer 3 Switching. The Company's switching products
require no special skills to install, and require no changes to existing user
network equipment, wiring, hub equipment, software protocols or applications.
The Company's products offer end-users cost effective solutions for their
connectivity needs.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The unaudited condensed financial statements reflect, in
the opinion of management, adjustments, all of which are of a normal recurring
nature, necessary to present fairly the financial position of the Company as of
March 31, 1998, the results of operations for the three months ended March 31,
1998 and 1997, and its cash flows for the three months ended March 31, 1998 and
1997. The unaudited condensed financial statements should be read in conjunction
with the Company's audited annual financial statements and notes included in the
Company's Annual Report on Form 10-K and Form 10-K/A for the year ended December
31, 1997.
Certain previously disclosed amounts have been reclassified in order to
conform to the current year's presentation. The reclassification of these
amounts had no effect on the result of operations or accumulated deficit.
2. Inventory
The Company's inventory was comprised of the following at March 31, 1998
and December 31, 1997:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -------------
<S> <C> <C>
Finished goods $ 1,882,000 $ 3,417,317
Parts and materials 2,506,592 3,962,194
----------- -----------
$ 4,388,592 $ 7,379,511
=========== ===========
</TABLE>
The finished goods inventory as of March 31, 1998, consists of NV7500
series and NV8500 series products. Parts and materials inventory as of March 31,
1998 includes $1,305,607 of items related to the Company's NV7500 series and
NV8500 series products. The NV7500 series and NV8500 series related inventory
included above is valued at estimated fair value which is below the Company's
initial cost.
3. Net Loss Per Share
During the fourth quarter of 1997, the Company adopted Statement 128,
"Earnings Per Share". Statement 128 specifies new standards for calculating the
earnings per share ("EPS") information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements and increasing the comparability of EPS data on an international
basis. Some of the changes made to simplify the EPS computations include (a)
eliminating the presentation of primary EPS and replacing it with Basic EPS,
with the principal difference being that common stock equivalents are not
considered in computing Basic EPS, (b) eliminating the modified treasury stock
method and the three percent materiality provision, and (c) revising the
contingent share provisions and the supplemental EPS data requirements. The
adoption of Statement 128 did not have a material impact on the Company's
financial statements.
Net loss per share was computed based on the weighted average number of the
Company's Class A and B Common Shares outstanding during the year and excludes
the shares of Class E Common Stock held in escrow because the conditions for the
release of these shares from escrow have not been satisfied. Common Stock
equivalents were not considered in the diluted net loss per share calculation in
1998 and 1997 because the effect on the diluted net loss per share would be
antidilutive.
6
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NetVantage, Inc.
Notes to Condensed Financial Statements
(Unaudited)
4. Stockholders' Equity
Class E Escrow Arrangement
In connection with the Company's initial public offering, all outstanding
shares of Class E Common Stock were placed in escrow by the existing
stockholders. All shares of Class E Common Stock placed into escrow, including
those shares which may be issued upon exercise of options ("Escrowed Contingent
Shares") are not transferable (but those issued and outstanding may be voted).
On October 17, 1996, the criteria for the release of certain Escrowed Contingent
Shares were met and on that date 600,000 shares, including 541,062 shares held
by employees, officers, directors, consultants and their relatives, were
released from escrow. The release of 541,062 shares was deemed compensatory
and, accordingly, resulted in a charge to operations in 1996 equal to the fair
market value of the Escrowed Contingent Shares on release. The release of
Escrowed Contingent Shares held by individuals that have not had any
relationship with the Company, other than that of a common stockholder, had been
deemed not to be compensatory.
The remaining shares of Class E Common Stock are to be released from escrow in
the event that net income before provision for income taxes, and exclusive of
any extraordinary earnings or charges and the compensation charges discussed in
the previous paragraph, reaches $8.9 million for the 1998 fiscal year; or the
bid price of the Company's common stock averages in excess of $23.50 for 30
consecutive business days during the period commencing November 3, 1996 and
ending May 3, 1998. Any options to purchase common stock shall be deemed
converted into similar options to acquire Class B and Class E Common Stock in
the same proportion that outstanding Class E Common Stock is converted upon
attaining the specified earning or market price level.
All Escrowed Contingent Shares that have not been released from escrow by
March 31, 1999 are subject to redemption by the Company at a redemption price of
$0.01 per share.
Warrant Redemption
The Company redeemed its Class B Warrants on January 10, 1997, pursuant to its
November 27, 1996 notice of redemption. Prior to the redemption date, Class B
Warrants representing 3,726,627 shares of Class A Common Stock were exercised,
resulting in gross proceeds to the Company during 1997 of approximately
$25,479,450.
Stockholder Rights Plan
On February 13, 1998, the Company adopted a Stockholder Rights Plan (the
"Rights Plan"). Under the Rights Plan, a dividend of one Share Purchase Right (a
"Right") was declared for each share of Class A Common Stock outstanding at the
close of business on March 6, 1998. In the event that a person or group acquires
securities representing 15% or more of the aggregate voting power of the
Company's stock without advance approval by the Board of Directors, each Right
will entitle the holder, other than the acquirer, to buy Class A Common Stock
with a market value of twice the exercise price (initially $35.00, subject to
adjustment) for the Right's then current exercise price. In addition, if the
Rights are triggered by such a non-approved acquisition and the Company is
thereafter acquired in a merger or other transaction in which the
stockholders of the Company are not treated equally, stockholders with
unexercised Rights will be entitled to purchase common stock of the acquirer
with a value of twice the exercise price of the Rights. The Company's Board of
Directors may redeem the Rights for a nominal amount at any time prior to an
event that causes the Rights to become exercisable. The Rights trade
automatically with the underlying Class A Common Stock (unless and until a
distribution event occurs under the Rights Plan) and expire on February 13, 2008
if not redeemed earlier.
7
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NetVantage, Inc.
Notes to Condensed Financial Statements
(Unaudited)
Stock Options Grants
On February 13, 1998 the Company's Board of Directors granted options to
purchase a total of 373,000 shares of Class A Common Stock to various employees,
consultants and outside directors at an exercise price of $6.65625 per share.
The Board also granted an option to purchase 17,331 shares of Class B and Class
E Common Stock (exercisable two-thirds Class B Common Stock and one-third Class
E Common Stock) under the 1992 Plan to an officer of the Company at an exercise
price of $5.325 per share. Due to certain restrictions on transferability of the
Class B and Class E Common Stock, the per share price for the option to purchase
such shares was set at 80% of $6.65625.
5. Revenue and Accounts Receivable Concentrations
Revenue and accounts receivable concentrations are expected due to the large
individual orders characteristic of the Company's OEM customer base. The
following table represents sales to customers accounting for greater than 10% of
the Company's net revenues for the three months ended March 31, 1998 and 1997,
and customer accounts receivable accounting for greater than 10% of Company
accounts receivable at March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
NET REVENUES
THREE MONTHS ENDED
MARCH 31, ACCOUNTS RECEIVABLE
------------------- -------------------------------
MARCH 31, DECEMBER 31,
1998 1997 1998 1997
-------- -------- ---------- --------------
<S> <C> <C> <C> <C>
Customer 1 (Allied Telesis, K.K.)............................... 57% 11% 85% 87%
Customer 2...................................................... 25% 16% 3% N/A
Customer 3...................................................... N/A 73% N/A N/A
</TABLE>
Due to certain consolidations in the Company's customer base during 1997,
reported net revenues and accounts receivable concentrations have been combined
above in order to reflect the current mix of the Company's customers.
With the exception of Customer 1, Allied Telesis, K.K., management of the
Company believes that the loss of any one current customer would not have a
material adverse effect on its business.
8
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements that involve certain
risks and uncertainties that could cause the actual results to differ materially
from the forward-looking statements. For example, statements in this Form 10-Q
that relate to future, plans, events or performance are forward-looking
statements that involve risks and uncertainties, including risks associated with
uncertainties pertaining to customer orders, demand for products and services,
development of markets for the Company's products and services and other risks.
Other potential risks and uncertainties include, without limitation, risks in
the near term associated with the development and introduction of new products,
including the need to complete testing satisfactorily, the availability of
appropriate quantities of defect-free parts which incorporate new technology and
customer acceptance of new products when introduced, as well as those mentioned
in the Company's Annual Report on Form 10-K and Form 10-K/A for the year ended
December 31, 1997 (including those listed under the heading "Risk Factors") and
other factors described from time to time in other filings made by the Company
with the Securities and Exchange Commission. Actual results, events and
performance may differ materially. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to release publicly the results of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
The following discussion should be read in conjunction with the unaudited
condensed financial statements and accompanying notes, included in Part I - Item
1 of this Quarterly Report, and the audited financial statements and
accompanying notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K and Form 10-K/A for the year ended December 31, 1997.
GENERAL
In mid-1995, the Company introduced its 8 port Ethernet switch and began
commercial shipments of this product in late 1995. In 1995, the Company
attempted to market this product both through distribution channels and to
Original Equipment Manufacturers ("OEMs"). Late 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. In the first
quarter of 1996, the Company completed its second product, a 16 port Ethernet
switch with uplink capability. In the first quarter of 1996, the production and
sale of the original 8 port product was discontinued. During the third quarter
of 1996, the Company began selling an 8 port Ethernet switch with a 100 Base T
uplink. Substantially all of the revenue in 1996 was from the 8 and 16 port
Ethernet switching products including 100 Base T, 100 Base FX and 100 VG
uplinks. The Company continued to sell the 8 port Ethernet switch during the
first and second quarter of 1997. Sales of the 8 port switch for all practical
purposes ended after the second quarter of 1997. Sales of the 16 port Ethernet
switch with a single uplink continued throughout 1997. The Company introduced a
new 16 port switch with dual uplinks in the first quarter of 1997. All of the
Company's products mentioned above are expected to become insignificant to the
Company's future revenue due to the introduction of the NV9200, the Company's
newest Ethernet switch, during the second quarter of 1998.
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
Net revenues for the quarters ended March 31, 1998 and 1997 were $575,886
and $3,302,586, respectively. The decrease in net revenues was $2,726,700 or
83%. The net revenue decrease was primarily due to the Company experiencing a
delay in the release of the new NV9200 series product and the reduced demand for
the Company's NV7500 and NV8500 series product lines. The majority of the first
quarter 1997 sales were for the NV7500 product line, whereas only approximately
$400,000 of the first quarter 1998 revenue was for this product line. The
Company's products are subject to intense competition in the switching market
characterized by frequent product introductions with improved price/performance
characteristics, significant price reductions, rapid technological changes and
continued emergence of new industry standards. The Company's revenue in any
period is also dependent upon the sales efforts and success of the Company's OEM
customers.
Cost of revenues for the three months ended March 31, 1998 and 1997 was
$4,126,647 or 717% of net revenues and $2,357,895 or 71% of net revenues,
respectively. The negative gross margins in the first quarter of 1998 were due
to the Company charging operations approximately $3.1 million for a reduction in
inventory valuation related primarily to a reduction in the estimated fair value
of the Company's NV7500 series and NV8500 series product lines, which the
Company believes were negatively affected by further market pricing pressure,
and losses on firm purchase order commitments related to the above mentioned
product lines. During the quarter, the Company also sold products to the
Company's largest customer at significantly reduced margins so as to decrease
the Company's exposure on certain previously purchased inventory. In addition,
the Company's operating model requires greater manufacturing volumes in order to
obtain the necessary purchasing economies of scale, production efficiencies and
reasonable overhead application rates required to significantly improve gross
margins. The Company expects margin improvement when the next generation
products begin to be sold in volume. The first quarter 1997 positive gross
margin of 29% was due in part to more favorable market conditions along with the
then market acceptance of the Company's NV7500 series product thus creating
increased manufacturing volumes resulting in component cost reductions. See
additional information under "Liquidity and Capital Resources".
In the future, the Company's gross margins may be affected by several
factors, including the mix of products sold, the price of products sold, price
competition, manufacturing volumes, fluctuations in material costs, changes in
other components of cost of revenue and the technological innovativeness of
products sold. The timing, cost, performance, feature set, ASIC revisions and
volume of the Company's new product lines may impact gross margins and could
result in excess or obsolete inventories.
Research and development expense for the quarters ended March 31, 1998 and
1997 was $1,844,928 or 320% of net revenues and $1,457,573 or 44% of net
revenues, respectively. The increase of expenses as a percentage of revenue from
the quarter ended March 31, 1998 to the same period of 1997 is due to
increases in expenditures and the decline in revenue. A significant portion of
the increase of expenditures of $387,355 or 27% was due to the addition of new
personnel and related incentive and recruitment costs, depreciation on new
equipment, and increased costs associated with new projects aimed at developing
the Company's next generation of product. Level or increasing research and
development expenditures are expected for the foreseeable future as the Company
continues with the development of additional products and features based upon
the next generation product
9
<PAGE>
architecture.
Selling and marketing expenses for the three months ended March 31, 1998
and 1997 were $462,454 or 80% of net revenues and $703,895 or 21% of net
revenues, respectively. The decrease of $241,441 or 34% was primarily due to a
reduction in commission expenses due to the lower net revenues, and the fact
that sales incentives were offered to customers in 1997 so as to expand product
distribution and increase market share. Management expects selling and marketing
costs to rise in 1998 as additional sales people, outside sales representatives
and customer support personnel are expected to be hired in order to provide
better world-wide coverage and support of the Company's current and anticipated
OEM customer account base.
General and administrative expenses for the quarters ended March 31, 1998
and 1997 were $787,494 or 137% of net revenues and $1,190,672 or 36% of net
revenues, respectively. The decrease of $403,178 or 34% was due to the reduction
in legal, accounting fees, consulting costs and public relations activity which
were incurred in 1997 primarily as a result of the resignation of the former
Chief Financial Officer in January 1997.
Interest income for three months ended March 31, 1998 and 1997 was $166,957
and $153,702, respectively. The change in interest income is not significant.
The net loss for the three months ended March 31, 1998 and 1997 was
$6,483,767 and $2,287,060, respectively. The $4,196,707 increase in net loss was
due to a lower sales volume as well as sales at reduced margins, charges for
inventory valuation issues and losses on firm purchase order commitments and
continued research and development expense increases offset by decreases in
general and administrative expenses and selling and marketing costs during the
quarter.
VARIABILITY OF PERIODIC RESULTS AND SEASONALITY
Results from any one period cannot be used to predict the results for other
periods. Revenues fluctuate from period to period; however, management does not
see any overriding seasonality or a high level of predictability to these
fluctuations at this time. Revenues can be negatively affected by, among other
things, expected releases of both the Company's or its competitors' new product
lines. The Company's reliance on a few base product types also makes it more
susceptible to revenue shortfalls.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in March 1991, the Company has financed its development
activities through a combination of an initial public offering completed in 1995
and private transactions involving the issuance of common stock for cash,
convertible notes, bridge notes and the exercise of stock options and warrants.
For the period from March 12, 1991 (inception) to March 31, 1998, the Company
has raised $64,895,713 from such sources.
At March 31, 1998, the Company had working capital of $16,540,657, including
inventory of $4,388,592, accounts receivable of $4,318,109 and cash and cash
equivalents of $11,052,588. Inventory includes finished goods and parts and
materials of $1,882,000 and $1,305,607, respectively, related to the Company's
earlier generation NV7500 and NV8500 product lines. The Company has reduced the
carrying value of the inventory to its estimated net realizable value as of
March 31, 1998. While the Company will continue to negotiate sales for these
products, there can be no assurance that the Company will be successful in this
effort. In the event the market pricing or customer acceptance for these
products further decreases, additional charges to operations will be required.
The Company requires substantial working capital to fund its business,
particularly to finance new product development. In addition, capital is
needed to support product procurement and manufacturing and accounts receivable.
The Company's future capital requirements will depend on many factors, including
the rate of revenue growth, the timing and extent of spending to support product
development efforts and expansion of sales and marketing, the timing of
introductions of new products and enhancements to existing products, and market
acceptance of the Company's products. Management believes that there was some
negative impact on the Company's sales to Asian-based customers in the second
half of 1997 due to the Asian economic crisis, although it is difficult to
quantify such impact. In addition, this negative impact on sales to Asian-based
customers has continued into the early part of 1998 and may continue thereafter
if the situation in Asia does not improve.
On January 10, 1996, the Company completed a private sale of 854,993 shares of
its Class A Common Stock to two individuals for total net proceeds of
$5,000,000. In October 1996 and January 1997, the Company completed calls of
Class A and Class B Warrants resulting in the net receipt of approximately
$16,405,207 and $25,479,450, respectively.
At March 31, 1998, approximately $4 million or 85% of the Company's accounts
receivable were due from one customer located in Japan. This customer provided
57% and 56% of the Company's revenues for the first quarter of 1998 and for the
1997 year, respectively. Credit terms extended to this customer for individual
invoices had ranged from 60 to 90 days; however, this customer has tended to
delay full payment substantially beyond this range. As of May 11, 1998,
10
<PAGE>
approximately $1.7 million was due from this customer related to receivables
that were outstanding as of December 31, 1997. Management believes that all
amounts due the Company from this customer will ultimately be collected.
The Company believes that its existing cash balances are sufficient to meet
the liquidity requirements of the Company at least for the current year.
Management intends to supplement the Company's cash position through the
financial support of its key suppliers whose trade terms with the Company are
expected to provide a source of additional cash flow. The Company anticipates
that operating losses in 1998 and any accounts receivable resulting from new
sales of the next generation product will increase the cash demands of the
Company. The Company's operations utilized cash of $2,244,479 in the first
quarter of 1998 and management expects to continue to use cash in operations.
Additionally, the Company currently anticipates additional spending for capital
expenditures in 1998 for computer software and network test equipment. In
addition, the Company expects to procure an asset based credit line in 1998 to
provide further available liquidity to the operations. However, because of
continuing investments in research and development and operating losses, the
Company may need to seek additional credit sources, alternative financing and/or
further equity investment. The sources of such credit or equity investment may
include the issuance of additional securities. There can be no assurance,
however, that additional funds from equity or debt sources will be available on
favorable terms or at all. The Company's future capital requirements will depend
upon numerous factors, including the progress of the Company's cost reduction
efforts for its existing products, the success or lack thereof of its new
product development, the amount of resources devoted to manufacturing and
marketing, technological advances, the status of competitors and the success or
lack thereof of the Company's marketing activities.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is currently involved in various claims and legal actions
arising in the ordinary course of business. In the opinion of management, after
discussion with legal counsel, the ultimate resolution of such claims and
actions are not expected to have a material adverse effect on the Company's
financial position, results of operations or cash flows.
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
None
ITEM 5. Other Information
None
12
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.23 NetVantage, Inc. Management Incentive
Compensation Plan
Exhibit 10.24 Form of Change of Control Agreement - Tier 1
Exhibit 10.25 Form of Change of Control Agreement - Tier 2
Exhibit 27 Financial Data Schedule - Electronic Format Only
(b) Reports on Form 8-K
None
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Date: May 15, 1998
By: /s/ Stephen R. Rizzone
---------------------------------
STEPHEN R. RIZZONE,
Chairman of the Board, President
and Chief Executive Officer
By: /s/ Thomas Iwanski
----------------------------------
THOMAS IWANSKI,
Vice President of Finance,
Secretary and
Chief Financial Officer
13
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Number Title
------- -----
<S> <C>
10.23 NetVantage, Inc. Management Incentive Compensation Plan
10.24 Form of Change of Control Agreement - Tier 1
10.25 Form of Change of Control Agreement - Tier 2
27 Financial Data Schedule - Electronic Format Only
</TABLE>
14
<PAGE>
Exhibit 10.23
NETVANTAGE, INC.
MANAGEMENT INCENTIVE COMPENSATION PLAN
________________________________________________________________________
PURPOSE
This Management Incentive Compensation Plan (the "Plan") developed by
NetVantage, Inc., a Delaware corporation (the "Company") is intended to provide
incentive compensation to officers and other senior management personnel who
contribute substantially to the financial success of the Company as measured
primarily by increased stockholder value as reflected in increases in the price
of the Company's Class A common stock. The Board of Directors has determined
that it is in the best interests of the Company's stockholders to provide such
incentive compensation to Participants in the Plan in the event of a Change in
Control (as defined below) of the Company and to reward such Participants for
the services they have rendered to the Company which have resulted in a
substantial increase in stockholder value.
EFFECTIVE DATE
The Plan is effective as of January 1, 1998. No revision, modification or
amendment of the Plan shall adversely affect the rights and benefits granted to
existing Participants in the Plan.
PARTICIPATION
Participation in the Plan shall be limited to employees of the Company
whose positions have a direct influence on the growth and profitability of the
Company. The Board of Directors will approve all participants in the Plan.
Participation in the Plan will be established by agreements entered into between
selected employees and the Company ("Participants"). Participants' rights to
awards under the Plan will be set forth in each of their agreements.
INCENTIVE BONUS AWARDS
All Company incentive bonus awards shall be paid to Participants as
follows:
In the event of a Change in Control, Participant shall be entitled to
receive an incentive bonus award determined as follows:
(a) If the Participant is designated in such Participant's agreement as a
Tier I Participant, then, if the closing price, or if there is no closing
price, the average of the high and low bid prices of the Company's Class A
common stock as quoted on the Stock Market immediately prior to the
effective time of a change in control is (i) at least $10.00 per share but
less than $15.00 per share, then the Participant shall be entitled to
receive a bonus payment equal to 200% of such Participant's Annual
Compensation (as defined below), or (ii) at least $15.00 per share, then
the Participant shall be entitled to receive a bonus payment equal to 300%
of such Participant's Annual Compensation.
(b) If the Participant is designated in such Participant's agreement as a
Tier II Participant, then, if the closing price, or if there is no closing
price, the average of the high and low bid prices of the Company's Class A
common stock as quoted on the Stock Market immediately prior to the
effective time of a Change in Control is (i) at least $10.00 per share but
less than $15.00 per share, then the Participant shall be entitled to
receive a bonus payment equal to 100% of such Participant's Annual
Compensation, or (ii) at least $15.00 per share, then the Participant shall
be entitled to receive a bonus payment equal to 150% of such Participant's
Annual Compensation.
DEFINITIONS
<PAGE>
"Annual Compensation" shall mean at the time of the Change of Control the
greater of (i) Participant's current annual base salary and target annual bonus
or (ii) the actual salary and bonus paid to Participant by the Company during
the twelve month period immediately preceding the Change of Control, or if the
Participant has been employed by the Company for less than twelve months, the
actual salary and bonus paid to Participant by the Company during such period on
an annualized basis.
"Change of Control" shall mean the reorganization, merger, consolidation,
sale of assets or other transaction or series of transactions in which the
stockholders of the Company immediately preceding the consummation of such
transaction or transactions own less than 50% of the voting power of the entity
surviving or resulting from such transaction or transactions.
PLAN ADMINISTRATION
The day-to-day administration of the Plan is the responsibility of the
President of the Company under the guidance of the Compensation Committee of the
Board of Directors.
Approved by the Board of Directors on December 18, 1997.
/s/ Stephen R. Rizzone
-----------------------
Stephen R. Rizzone
Chairman of the Board
2
<PAGE>
EXHIBIT 10.24
CHANGE OF CONTROL AGREEMENT- TIER 1
This AGREEMENT dated as of January 1, 1998, is by and between NetVantage,
Inc., a Delaware corporation (the "Company") and _____________ ("Employee").
RECITAL
The board of directors of the Company has determined that it is in the best
interests of the Company and its stockholders to provide to certain key
executives, including Employee, benefits as provided in this Agreement in the
event of a Change of Control.
THE PARTIES AGREE AS FOLLOWS:
1. Definitions.
-----------
"Annual Base Salary" means the Employee's current annualized salary
rate which is in effect at the time of a Change of Control. Annual Base Salary
excludes any bonus or incentive compensation whether earned or paid.
"Change of Control" has the meaning set forth in the Definitions
section of the Plan.
"Incentive Compensation" means the entitlement of Employee to payments
under the Plan in the event of a Change of Control.
"Plan" means the NetVantage, Inc. Management Incentive Compensation
Plan attached to this Agreement as Exhibit A.
2. Incentive Compensation. Employee is entitled to receive compensation
----------------------
under the Plan as a Tier 1 Participant. The Plan is incorporated by reference
as an integral part of this Agreement. In order to receive any payment of
Incentive Compensation Employee must at the effective time of the Change of
Control be an employee in good standing of the Company.
<PAGE>
3. Severance. If Employee's employment with the Company is terminated by
---------
the Company without cause within one year from the effective time of a Change of
Control, Employee shall be entitled to a lump sum severance compensation payment
in the amount of Employee's Annual Base Salary.
4. Termination for Cause. A termination of Employee's employment shall be
---------------------
deemed for "cause" only if it is by reason of Employee's commission of willful
and material acts of neglect, dishonesty, fraud or other acts involving moral
turpitude which materially and adversely affect the business or affairs of the
Company or if the Employee is insubordinate or if the Employee demonstrates
repeated failure to perform duties assigned. If such termination is for cause
then all rights and obligations of the parties under this Agreement shall cease
upon the effective date of termination, including any right Employee may have
had to Incentive Compensation.
5. At Will Employment and Severance. Employee acknowledges that
--------------------------------
Employee's employment with the Company is at will, and that there is no
employment agreement between the Company and Employee, express or implied. Any
prior agreement, formal or informal, oral or written, with respect to the
subject matter of employment on a basis other than at will is hereby superseded
in its entirety. Any prior agreement, formal or informal, oral or written, with
respect to the subject matter of employee severance other than as included in
this agreement is hereby superseded in its entirety.
6. Miscellaneous Provisions.
------------------------
6.1 Governing Law. This Agreement is governed by the laws of the
-------------
State of California.
2
<PAGE>
6.2 Modification. This Agreement may only be modified by an
------------
instrument in writing signed by both parties.
6.3 Binding Effect. This Agreement shall be binding upon and inure to
--------------
the benefit of the parties and their successors, assigns, heirs and legal
representatives.
In witness whereof the parties have entered into this Agreement as of the
date first above written.
NetVantage, Inc.
By
--------------------------------
Stephen R. Rizzone, President
Employee
----------------------------------
3
<PAGE>
Exhibit 10.25
CHANGE OF CONTROL AGREEMENT- TIER 2
This AGREEMENT dated as of January 1, 1998, is by and between NetVantage,
Inc., a Delaware corporation (the "Company") and _____________ ("Employee").
RECITAL
The board of directors of the Company has determined that it is in the best
interests of the Company and its stockholders to provide to certain key
executives, including Employee, benefits as provided in this Agreement in the
event of a Change of Control.
THE PARTIES AGREE AS FOLLOWS:
1. Definitions.
-----------
"Annual Base Salary" means the Employee's current annualized salary rate
which is in effect at the time of a Change of Control. Annual Base Salary
excludes any bonus or incentive compensation whether earned or paid.
"Change of Control" has the meaning set forth in the Definitions section of
the Plan.
"Incentive Compensation" means the entitlement of Employee to payments
under the Plan in the event of a Change of Control.
"Plan" means the NetVantage, Inc. Management Incentive Compensation Plan
attached to this Agreement as Exhibit A.
2. Incentive Compensation. Employee is entitled to receive compensation
----------------------
under the Plan as a Tier 2 Participant. The Plan is incorporated by reference as
an integral part of this Agreement. In order to receive any payment of Incentive
Compensation Employee must at the effective time of the Change of Control be an
employee in good standing of the Company.
<PAGE>
3. Severance. If Employee's employment with the Company is terminated by
---------
the Company without cause within one year from the effective time of a Change of
Control, Employee shall be entitled to a lump sum severance compensation payment
in the amount of one half Employee's Annual Base Salary.
4. Termination for Cause. A termination of Employee's employment shall be
---------------------
deemed for "cause" only if it is by reason of Employee's commission of willful
and material acts of neglect, dishonesty, fraud or other acts involving moral
turpitude which materially and adversely affect the business or affairs of the
Company or if the Employee is insubordinate or if the Employee demonstrates
repeated failure to perform duties assigned. If such termination is for cause
then all rights and obligations of the parties under this Agreement shall cease
upon the effective date of termination, including any right Employee may have
had to Incentive Compensation.
5. At Will Employment and Severance. Employee acknowledges that Employee's
--------------------------------
employment with the Company is at will, and that there is no employment
agreement between the Company and Employee, express or implied. Any prior
agreement, formal or informal, oral or written, with respect to the subject
matter of employment on a basis other than at will is hereby superseded in its
entirety. Any prior agreement, formal or informal, oral or written, with respect
to the subject matter of employee severance other than as included in this
agreement is hereby superseded in its entirety.
6. Miscellaneous Provisions.
------------------------
6.1 Governing Law. This Agreement is governed by the laws of the State of
-------------
California.
2
<PAGE>
6.2 Modification. This Agreement may only be modified by an instrument in
------------
writing signed by both parties.
6.3 Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties and their successors, assigns, heirs and legal
representatives.
In witness whereof the parties have entered into this Agreement as of the
date first above written.
NetVantage, Inc.
By
-------------------------------
Stephen R. Rizzone, President
Employee
---------------------------------
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,052,588
<SECURITIES> 0
<RECEIVABLES> 4,702,168
<ALLOWANCES> (384,059)
<INVENTORY> 4,388,592
<CURRENT-ASSETS> 20,236,284
<PP&E> 3,772,487
<DEPRECIATION> (1,667,533)
<TOTAL-ASSETS> 22,695,094
<CURRENT-LIABILITIES> 3,695,627
<BONDS> 0
0
0
<COMMON> 10,931
<OTHER-SE> 64,884,782
<TOTAL-LIABILITY-AND-EQUITY> 22,695,094
<SALES> 575,886
<TOTAL-REVENUES> 575,886
<CGS> 4,126,647
<TOTAL-COSTS> 7,221,523
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,087)
<INCOME-PRETAX> (6,483,767)
<INCOME-TAX> 0
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,483,767)
<EPS-PRIMARY> (.62)
<EPS-DILUTED> (.62)
</TABLE>
