1
SCHEDULE 14A
(RULE 14a-101)
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. ___________)
Filed by the Registrant: |X|
Filed by a party other than the Registrant: |_|
Check the appropriate box:
|_| Preliminary Proxy Statement |_| Confidential for Use of the
|X| Definitive Proxy Statement Commission Only (as permitted
|_| Definitive Additional Materials by Rule 14a-6(e)(2))
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
NetSilicon, Inc.
-----------------
(Name of Registrant as Specified in Its Charter)
-----------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction applies:
- ----------------
(2) Aggregate number of securities to which transactions applies:
- ----------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
- ----------------
(4) Proposed maximum aggregate value of transaction:
- ----------------
(5) Total fee paid:
- ----------------
|_| Fee paid previously with preliminary materials.
- ----------------
|_| Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
- ----------------
(2) Form, Schedule or Registration Statement No.:
- ----------------
(3) Filing Party:
- ----------------
(4) Date Filed:
- ----------------
2
[GRAPHIC] NetSilicon
May 9, 2001
Dear Fellow Stockholder:
You are cordially invited to attend our Annual Meeting of Stockholders,
which will be held this year on Wednesday, June 13, 2001, at 9:00 A.M. local
time, at the Westin Hotel, 70 Third Avenue, Waltham, Massachusetts 02451.
At this year's meeting, you are asked to elect two Class II Directors, to
approve the 2001 Stock Option and Incentive Plan, and to ratify the selection of
the Company's auditors. The accompanying Notice of Meeting and Proxy Statement
describe these proposals. We urge you to read this information carefully.
Your Board of Directors unanimously believes that the election of its
nominees as directors, the approval of the 2001 Stock Option and Incentive Plan
and the ratification of its appointment of auditors are in the best interests of
NetSilicon, Inc., and its stockholders, and accordingly recommends a vote FOR
Items 1, 2 and 3 on the enclosed proxy card.
Whether or not you plan to attend the meeting in person, it is important
that your shares be represented and voted. After reading the enclosed Notice of
Annual Meeting and Proxy Statement, may I urge you to complete, sign, date and
return your proxy ballot in the envelope provided. If the address on the
accompanying material is incorrect, please advise the Company in writing at 411
Waverley Oaks Road, Bldg. 227, Waltham, Massachusetts 02452, Attention: Mary E.
Seaver.
For the Board of Directors,
Cornelius Peterson, VIII
Chairman of the Board
3
NETSILICON, INC.
411 Waverley Oaks Road, Bldg. 227
Waltham, Massachusetts 02452
-------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 13, 2001
-------------------
To The Stockholders:
The Annual Meeting of Stockholders of NetSilicon, Inc., a Massachusetts
corporation (the "Company"), will be held on Wednesday, June 13, 2001, at 9:00
A.M. local time, at the Westin Hotel, 70 Third Avenue, Waltham, Massachusetts
02451 for the following purposes:
1. To elect two Class II directors each to serve for a three-year
term.
2. To approve the 2001 Stock Option and Incentive Plan.
3. To ratify the selection of the firm of BDO Seidman, LLP as
auditors for the fiscal year ending January 31, 2002.
4. To transact such other business as may properly come before the
meeting and any adjournments thereof.
All stockholders of record at the close of business on Tuesday, May 1, 2001
are entitled to notice of and to vote at the meeting and any adjournments
thereof.
By Order of the Board of Directors,
Daniel J. Sullivan
Clerk
Waltham, Massachusetts
May 9, 2001
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED
STAMPED ENVELOPE IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES.
4
NETSILICON, INC.
411 Waverley Oaks Road, Bldg. 227
Waltham, Massachusetts 02452
-------------------
PROXY STATEMENT
-------------------
May 9, 2001
Proxies in the form enclosed with this proxy statement are solicited by the
Board of Directors of NetSilicon, Inc. (the "Company") for use at the Annual
Meeting of Stockholders of the Company to be held on Wednesday, June 13, 2001,
at 9:00 A.M. local time, at the Westin Hotel, 70 Third Avenue, Waltham,
Massachusetts 02451.
Only stockholders of record as of the close of business on May 1, 2001 (the
"Record Date") will be entitled to vote at the meeting and any adjournments
thereof. As of that date, there were outstanding and entitled to vote 7,064,434
shares of common stock, par value $.01 per share (the "Common Stock"), of the
Company. Each share of Common Stock outstanding and entitled to vote as of the
Record Date will be entitled to one vote and stockholders may vote in person or
by proxy. Execution of a proxy will not in any way affect a stockholder's right
to attend the meeting and vote in person. Any stockholder delivering a proxy has
the right to revoke it only by written notice to the Clerk delivered at any time
before it is exercised, including at the Annual Meeting. Each of the persons
named as a proxy in the proxy is a director and/or executive officer of the
Company.
An Annual Report to Stockholders, containing audited financial statements
for the fiscal year ended January 31, 2001, is being mailed together with this
proxy statement to all stockholders entitled to vote. It is anticipated that
this proxy statement and the accompanying proxy will be first mailed to
stockholders on or about May 9, 2001.
The mailing address of the Company's principal executive offices is 411
Waverley Oaks Road, Bldg. 227, Waltham, Massachusetts 02452.
All properly executed proxies returned in time to be counted at the meeting
and not revoked will be voted, and with respect to the election of members of
the Board of Directors, will be voted as stated below under "Election of
Directors." In addition to the election of directors, the stockholders will act
on proposals to approve the 2001 Stock Option and Incentive Plan and to ratify
the selection of auditors, as further described in this proxy statement. Where a
choice has been specified on the proxy with respect to the foregoing matters,
the shares represented by the proxy will be voted in accordance with the
specification and will be voted FOR the matters if no specification is
indicated.
The representation in person or by proxy of at least one-third of all
shares of Common Stock issued, outstanding and entitled to vote at the meeting
is necessary to constitute a quorum for the transaction of business. Votes
withheld from any nominee for election as director, or which contain one or more
abstentions or broker "non-votes," are counted as present or represented for
purposes of determining the presence or absence of a quorum for the meeting. A
"non-vote" occurs when a broker or other nominee holding shares for a beneficial
owner votes on one proposal, but does not vote on another proposal because, in
respect of such other proposal, the nominee does not have discretionary voting
power and has not received instructions from the beneficial owner.
5
The election of directors by the stockholders shall be determined by a
plurality of the votes cast by stockholders entitled to vote. On all other
matters being submitted to stockholders, an affirmative vote of a majority of
the shares present in person or by proxy and entitled to vote on each such
matter is required for approval; therefore, abstentions will have the practical
effect of voting against each such matter since they are included in the number
of shares present and voting on each such matter. However, broker "non-votes"
are not considered shares entitled to vote and therefore will have no impact on
the outcome of the vote. An automated system administered by the Company's
transfer agent tabulates the votes. The vote on each matter submitted to
stockholders is tabulated separately.
The Board of Directors knows of no other matter to be presented at the
meeting. If any other matter should be presented at the meeting upon which a
vote may be properly taken, shares represented by all proxies received by the
Board of Directors will be voted with respect thereto in accordance with the
judgment of the persons named as proxies in the proxy.
-2-
6
MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the Record Date (except as set
forth below): (i) by each person who, to the knowledge of the Company, owned
beneficially more than 5% of the 14,037,090 shares of Common Stock of the
Company outstanding at such date; (ii) by each director and nominee; (iii) by
each executive officer identified in the Summary Compensation Table set forth
below under "Compensation and Other Information Concerning Directors and
Officers," and (iv) by the directors, nominees and executive officers of the
Company as a group.
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL
BENEFICIAL OWNER OWNERSHIP (1)(2) PERCENT OF CLASS
------------------- ----------------- ----------------
Sorrento Networks, Inc. (3) 6,972,656 49.7%
2800 28th Street, Suite 100 (non-voting)
Santa Monica, California 90405
Firsthand Capital Management, Inc.(4) 1,261,200 9.0%
101 Park Center Plaza, Suite 1300
San Jose, California 95113
Cornelius Peterson, VIII (5) 262,184 1.9%
William E. Peisel (6) 87,210 *
Cornelius Peterson, IX (7) 79,768 *
Daniel J. Sullivan (8) 75,768 *
Michael Evensen (9) 44,372 *
Michael K. Ballard (10) 60,000 *
Francis E. Girard (11) 55,000 *
William Johnson (12) 53,000 *
Edward B. Roberts (13) 50,000 *
F. Grant Saviers (14) 68,300 *
All executive officers, nominees and 909,974 6.5%
directors as a group (13 persons) (15)
- -----------
* Less than 1% of the outstanding Common Stock.
(1) The persons and entities named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially
owned by them, except as noted in the footnotes below and except to the
extent authority is shared by spouses under applicable law.
(2) The number of shares of Common Stock deemed outstanding includes (i)
14,037,090 shares of Common Stock outstanding as of the Record Date and
(ii) shares of Common Stock issuable pursuant to options held by the
respective person or group which may be exercised within 60 days after the
Record Date, as set forth below.
(3) All shares owned by Sorrento Networks, Inc. ("Sorrento Networks"), formerly
Osicom Technologies, Inc., are shares of non-voting Common Stock.
-3-
7
(4) Based on a Schedule 13G dated February 8, 2001 filed by Firsthand Capital
Management, Inc. ("Firsthand Capital") reflecting beneficial ownership as
of December 31, 1999. According to the Schedule 13G, Firsthand Capital
exercises sole voting power and sole disposition power to all such shares.
Kevin Michael Landis, President of Firsthand Capital, disclaims beneficial
ownership of all such shares.
(5) Mr. Peterson's beneficial ownership includes of 199,899 options to purchase
shares of Common Stock which may be exercised within 60 days of the Record
Date.
(6) Mr. Peisel's beneficial ownership includes 87,210 options to purchase
shares of Common Stock which may be exercised within 60 days of the Record
Date.
(7) Mr. Peterson's beneficial ownership includes 79,768 options to purchase
shares of Common Stock which may be exercised within 60 days of the Record
Date.
(8) Mr. Sullivan's beneficial ownership includes 74,768 options to purchase
shares of Common Stock which may be exercised within 60 days of the Record
Date.
(9) Mr. Evensen's beneficial ownership includes 44,372 options to purchase
shares of Common Stock which may be exercised within 60 days of the Record
Date.
(10) Mr. Ballard's beneficial ownership includes 50,000 options to purchase
shares of Common Stock which may be exercised within 60 days of the Record
Date.
(11) Mr. Girard's beneficial ownership includes 50,000 options to purchase
shares of Common Stock which may be exercised within 60 days of the Record
Date.
(12) Mr. Johnson's beneficial ownership includes 50,000 options to purchase
shares of Common Stock which may be exercised within 60 days of the Record
Date.
(13) Mr. Roberts' beneficial ownership includes 50,000 options to purchase
shares of Common Stock which may be exercised within 60 days of the Record
Date.
(14) Mr. Saviers' beneficial ownership includes 50,000 options to purchase
shares of Common Stock which may be exercised within 60 days of the Record
Date.
(15) All current directors, nominees and executive officers as a group hold
options to purchase 810,389 shares of Common Stock which may be exercised
within 60 days of the Record Date.
-4-
8
PROPOSAL I
ELECTION OF DIRECTORS
No proxy may be voted for more people than the number of nominees set forth
below. Shares represented by all proxies received by the Board of Directors and
not so marked to withhold authority to vote for F. Grant Saviers and Francis E.
Girard (by writing that individual director's name where indicated on the proxy)
will be voted FOR the election of Messrs. Saviers and Girard, respectively. The
Board of Directors knows of no reason why Messrs. Saviers or Girard should be
unable or unwilling to serve, but if such should be the case, proxies may be
voted for the election of some other person or persons or for fixing the number
of directors at a lesser number.
INFORMATION PERTAINING TO DIRECTORS AND NOMINEES
The Company's Board of Directors is divided into three classes. William
Johnson, one of the Company's two Class I Directors, has served as a director
since July 1999. Michael K. Ballard, the Company's other Class I Director, has
served as a director since September 1999. The terms of Messrs. Johnson and
Ballard expire as of the date of the Annual Meeting of Stockholders to be held
in 2003. F. Grant Saviers and Francis E. Girard, the Company's two Class II
Directors, have served as directors since July 1999. The terms of Messrs.
Saviers and Girard expire as of June 13, 2001, the date of the Annual Meeting of
Stockholders to be held in 2001. Cornelius Peterson, VIII, one of the Company's
two Class III Directors and the Company's founder, has served as a director
since 1984. Edward B. Roberts, the Company's other Class III Director, has
served as a director since July 1999. The terms of Messrs. Peterson and Roberts
expire as of the date of the Annual Meeting of Stockholders to be held in 2002.
Each director serves for a three-year term, with one class of directors
being elected at each Annual Meeting. Each director holds office until his
successor is duly elected and qualified, or until his earlier death, resignation
or removal.
The following table sets forth for each nominee to be elected at the
meeting and for each director who will continue to serve as a director beyond
the meeting, the year such nominee or director was first elected as a director,
the positions currently held by such nominee or director with the Company, the
year such nominee's or director's term will expire and the class of director of
such nominee or director.
NOMINEE'S OR DIRECTOR'S NAME
AND YEAR NOMINEE OR DIRECTOR YEAR TERM CLASS OF
FIRST BECAME A DIRECTOR POSITION(S) HELD WILL EXPIRE DIRECTOR
- ---------------------------- ---------------- ----------- ---------
F. Grant Saviers Director 2001 II
(1999)
Francis E. Girard Director 2001 II
(1999)
Cornelius Peterson, VIII Chairman of the Board and 2002 III
(1984) Chief Executive Officer
Edward B. Roberts Director 2002 III
(1999)
Michael K. Ballard Director 2003 I
(1999)
William Johnson Director 2003 I
(1999)
-5-
9
OCCUPATIONS OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the Class II nominees to be elected at the
meeting, the current directors who will continue to serve as directors beyond
the meeting, and the current executive officers of the Company, their ages and
the positions currently held by each such person with the Company. The following
information is based, in part, upon information furnished by the directors and
nominees.
NAME AGE POSITION
- ---- --- --------
Cornelius Peterson, VIII 64 Chairman of the Board and Chief Executive Officer
George A. Barrios 36 President and Chief Operating Officer
William E. Peisel 57 Executive Vice President, Engineering, and Chief
Technical Officer
Cornelius Peterson, IX 41 Sr. Vice President, Intelligent Device Markets, North
America and Asia
Daniel J. Sullivan 44 Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Clerk
Richard C. Andersen 52 Vice President, Engineering and Product Marketing
John K. Brennan 47 Vice President, Operations
Michael Evensen 36 Vice President, Intelligent Device Markets, Europe,
Middle East and Africa
Francis E. Girard (1) 62 Director
William Johnson (1) 58 Director
Edward B. Roberts, Ph.D. (2) 65 Director
F. Grant Saviers (2) 56 Director
Michael K. Ballard (1) 46 Director
- ----------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
DIRECTORS TO BE ELECTED AT THE MEETING
F. Grant Saviers has been one of our directors since July 1999. Mr. Saviers
was the Chairman of the Board, Chief Executive Officer, and previously President
and Chief Operating Officer of Adaptec Inc. from 1992 through 1998. Prior to
working at Adaptec, he was employed in various capacities by Digital Equipment
Corporation for 24 years, most recently as Vice President for PC Systems and
Peripherals. Mr. Saviers is a Director of Analog Devices, Inc. and Chaparral
Network Storage, Inc. He is a Director of The Computer Museum History Center and
a member of the Advisory Boards of the College of Engineering at the University
of California, Berkeley and Leavey School of Business, Santa Clara University.
Francis E. Girard has been one of our directors since July 1999. He served
as Chief Executive Officer of Comverse Network Systems, Inc. from January 1998
through January 2001 and became Vice Chairman in January 2001. Mr. Girard has
also been a member of the Board of Directors of Comverse
-6-
10
Technology, Inc., the parent corporation of Comverse Network Systems, Inc.,
since January 1998. From May 1996 through January 1998, he was President, Chief
Executive Officer and a Director of Boston Technology, Inc., which merged into
Comverse Network Systems, Inc. in January 1998. From 1989 through May 1996, he
served in various senior executive positions with Boston Technology, Inc., most
recently as Executive Vice President of World Sales. Mr. Girard is a Director of
Artisoft, Inc. and the Massachusetts Telecommunications Council and a member of
the International Engineering Consortium. He holds a B.A. from Merrimack
College.
DIRECTORS WHOSE TERMS EXTEND BEYOND THE MEETING
Michael K. Ballard has been one of our directors since September 1999. Mr.
Ballard is a partner in Aragon Ventures, LLC, a private investment fund and has
been President and Chief Executive Officer of Savannah-Chanelle Vineyards since
1997. From 1999 to 2000, Mr. Ballard served as President and Chief Executive
Officer of e-lingo Corporation. He was the Director of the Dial-Up Technology
Division of Cisco Systems, Inc. from 1996 to 1997 and was Vice President of
Business Development for Telebit Corporation from 1994 through 1996. He was the
Chief Operating Officer of UUNET Technologies, Inc. from 1993 to 1994. Mr.
Ballard held various positions with Telebit Corporation prior to 1993. Mr.
Ballard holds a B.F.A. from the University of Utah.
William Johnson has been one of our directors since July 1999. Mr. Johnson
joined Global Network Technology Systems, a subsidiary of Cabletron Systems, in
February 2001 as President and Chief Executive Officer after serving as
Executive Vice President of Strategic Relations and Business Development since
1999 at Cabletron Systems. From 1997 to 1999, Mr. Johnson was Vice President and
General Manager, Networks & Access Communications Division of Compaq Computer
Corp., and served in other capacities with Compaq. From December 1996 through
May 1997, he was a principal in J & J Consulting, and he served as President and
Chief Executive Officer of Crosscomm Corp. from March through October 1996. He
was General Manager, Networking Hardware Division for International Business
Machines Corporation from 1993 through 1996. Mr. Johnson holds an M.S.E.E. and
an M.B.A. from Northeastern University.
Cornelius "Pete" Peterson, VIII has served as our Chief Executive Officer
and as one of our directors since founding the company in 1984, and as Chairman
of the Board of Directors since July 1999. Prior to founding NetSilicon, Mr.
Peterson founded Distribution Management Systems, Inc., a supplier of
distribution systems for Fortune 100 companies, which was sold in 1981 to
Cullinet Corporation. Mr. Peterson was also a founder of Softech, a leading
supplier of computer language and software development and services. Mr.
Peterson holds a B.S. and an M.S. from the Massachusetts Institute of
Technology. Mr. Peterson is the father of Neil Peterson, our Sr. Vice President,
Intelligent Device Markets, North America and Asia.
Edward B. Roberts, Ph.D. has been one of our directors since July 1999. Dr.
Roberts is the David Sarnoff Professor of Management of Technology at the
Massachusetts Institute of Technology, where he serves as Chairman of the Sloan
School's Management of Technological Innovation & Entrepreneurship Research and
Education Programs. In 1991, he founded, and now currently chairs the MIT
Entrepreneurship Center. He co-founded the MIT Enterprise Forum in 1979 and also
currently chairs this Forum. Dr. Roberts is a Director of Advanced Magnetics,
Inc., Pegasystems, Inc. and Selfcare, Inc., as well as several privately held
companies. In 1969, he founded and is now currently a member of the Board of
Directors of Medical Information Technology, Inc. and a General Partner of the
Zero Stage Capital group of venture capital funds. Dr. Roberts holds four
degrees from Massachusetts Institute of Technology, including a Ph.D. in
Economics.
-7-
11
EXECUTIVE OFFICERS
Richard C. Andersen joined NetSilicon in September 2000 as Vice President,
Engineering and Product Marketing. Prior to joining NetSilicon, Mr. Andersen
held various marketing and engineering positions at Compaq Computer Corporation
primarily relating to networking technologies from 1977 to 2000, most recently
serving as Director, eInfrastructure Strategy & Technology in the NonStop
eBusiness Solutions Division since January 2000. He holds a B.S.E.E. from
Northeastern University and an M.B.A. from Suffolk University.
George A. Barrios joined NetSilicon in November 2000 as President and Chief
Operating Officer. From 1995 to 2000, Mr. Barrios was employed by Praxair
Semiconductor, a division of Danbury, Connecticut-based Praxair, Inc., with more
than 300 employees, serving as general manager since 1997. In this position, Mr.
Barrios was responsible for all aspects of Sales and Marketing, Manufacturing,
Engineering, Information Technology, Quality, Finance and Human Resources for
each of the company's 45 operating locations. He served as Director, Sales and
Marketing from 1996 to 1997 and Director, Finance and Division Chief Financial
Officer from 1995 to 1996. From 1993 to 1995, he served as director of strategic
planning for CHI Development, an entrepreneurial company engaged in the
acquisition and operation of existing businesses. From 1989 to 1993, Mr. Barrios
served as Manager, Internal Consulting at Time Warner, Inc. He holds a B.A. and
M.B.A. from the University of Connecticut.
John K. Brennan joined NetSilicon in 1996 as Vice President, Manufacturing,
and has served as Vice President, Operations since 1999. From January 1996 to
July 1996, Mr. Brennan served as a Vice President of Manufacturing for Leaf
Systems, Inc., a manufacturer of high-end digital cameras. From 1995 to 1996,
Mr. Brennan served as Director of Materials for MA-Com, Inc., a division of Amp,
Inc. From 1993 to 1995, Mr. Brennan served as Director of Materials of Leaf
Systems, Inc. From 1986 to 1993, Mr. Brennan served as Manufacturing Operations
Manager for Whistler Corporation, a consumer electronics manufacturer in the
automotive industry. He holds a B.S. from Merrimack College and an M.B.A. from
Boston University.
Michael Evensen joined NetSilicon as Vice President, Industrial Automation,
Embedded Markets Europe in October 1998 and has served as Vice President,
Intelligent Device Markets, Europe, Middle East and Africa since 2000. From
September 1997 to September 1998, Mr. Evensen was Director of Business
Development at Richard Hirschmann Electronics UK Ltd., where he was responsible
for Hirschmann's entry into the industrial automation market. From July 1995 to
September 1998, Mr. Evensen served as Director of Anite Systems Ltd. From March
1991 to July 1995, Mr. Evensen served as OEM Business Manager for Cray
Communications, Ltd. in Europe, the United States and Asia. Prior to Cray
Communications, Mr. Evensen was a Sales Engineer for Dataco De Rex, Inc., where
he was responsible for European sales. Mr. Evensen holds a B.S. from Copenhagen
University.
William E. Peisel joined NetSilicon in 1987, becoming Vice President,
Engineering in 1989, Chief Technical Officer in 1995 and Executive Vice
President in 1999. From 1985 to 1987, Mr. Peisel served as Vice President,
Engineering for EnMass Computer Corporation, a manufacturer of fault tolerant
transaction processing computers. From 1983 to 1985, Mr. Peisel served as
Director of Engineering for Computer Design and Application, and from 1981 to
1983, Director of Engineering for Honeywell Information Systems. He holds a
B.S.E.E. from Pratt Institute and an M.S.E.E. from Northeastern University.
Cornelius "Neil" Peterson, IX joined NetSilicon in 1986 and has served as
Sr. Vice President, Intelligent Device Markets, North America and Asia since
2000. Mr. Peterson served as Vice President,
-8-
12
Imaging and Embedded Markets, Asia from 1993 to 2000. From 1986 to 1993, Mr.
Peterson served as Regional Manager and Vice President of Commercial Sales. Mr.
Peterson has over 15 years of sales and management experience handling major
accounts in the manufacturer, systems integrator, reseller, distributor, and
direct sales channels. From 1984 to 1986, Mr. Peterson served in the Major
Account Sales Division for Unisys Corporation (formerly Burroughs). He holds a
B.S. from Roger Williams University. Mr. Peterson is the son of Pete Peterson,
our Chairman and Chief Executive Officer.
Daniel J. Sullivan has been Vice President, Finance and Administration, and
Chief Financial Officer since August 1998. Mr. Sullivan was Vice President,
Finance and Operations at ITK International (formerly Telebit) from 1996 to
August 1998. From 1995 to 1996, Mr. Sullivan served as Corporate Controller and
from 1989 to 1995 as Operations Controller of ITK. From 1985 to 1989, Mr.
Sullivan served as Corporate Manufacturing Financial Planning Manager at Apollo
Computers. He holds a B.S. from Merrimack College and an M.B.A. from New
Hampshire College.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until their successors have been duly elected and
qualified. Except as noted above, there are no family relationships among any of
the executive officers or directors of the Company.
BOARD MEETINGS AND COMMITTEES
The Board of Directors met five times, and took action by unanimous written
consent eleven times, during the fiscal year ended January 31, 2001. The
standing committees of the Board of Directors are the Audit Committee and the
Compensation Committee. The Audit Committee met twice during the fiscal year
ended January 31, 2001 and the Compensation Committee met twice, and took action
by unanimous written consent five times, during the fiscal year ended January
31, 2001. The Board of Directors does not currently have a standing nominating
committee. Each director attended at least 75% of the aggregate of all the
meetings of the Board of Directors and of all the committees of the Board of
Directors of which he is a member during the fiscal year ending January 31,
2001.
The Compensation Committee makes recommendations to the Board of Directors
concerning the compensation of executives and salaries of the employees and
consultants to the Company. The Compensation Committee also makes
recommendations to the Board of Directors concerning incentive compensation of
employees and directors of and consultants to the Company. During the fiscal
year ended January 31, 2001, the members of the Compensation Committee were
Edward B. Roberts and F. Grant Saviers.
The Audit Committee recommends the engagement of auditors and is
responsible for reviewing the results and scope of audits and other services
provided by the Company's independent auditors. From February 2000 until June
2000 the members of the Audit Committee were William Johnson and Michael K.
Ballard. In June 2000, Francis E. Girard was elected to the Audit Committee. The
current members of the Audit Committee are Messrs. Johnson, Girard and Ballard.
The Audit Committee adopted the Audit Committee Charter on February 22, 2000, a
copy of which is attached hereto as Appendix A.
COMPENSATION OF DIRECTORS
Outside directors have been granted stock options by the Company under the
Amended and Restated 1998 Director Stock Option Plan (the "Director Plan"). We
grant options to purchase 25,000 shares of Common Stock per year to each
independent director, initially upon completion of the initial public offering
and thereafter annually immediately following the annual meeting of our
stockholders.
-9-
13
The initial grant had an exercise price equal to the offer price of the initial
public offering, and the future grants will be at an exercise price equal to the
market price per share on the date of such grant. We compensate each director
who is not an employee $1,000 for each meeting of the Board or a committee
attended in person or by telephone. The Chairman of each committee is
compensated $1,500 for each committee meeting attended in person. We reimburse
the out-of-pocket expenses incurred by directors for attendance at Board or
committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee was at any time during the past
year an officer or employee of the Company, was formerly an officer of the
Company or had any relationship with the Company requiring disclosure herein.
During the past year, no executive officer of the Company served as a member of
the compensation committee (or other Board committee performing equivalent
functions, or, in the absence of any such committee, the entire Board) of
another entity, one of whose executive officers served as a member of the
Compensation Committee or as a director of the Company. In addition, during the
last year, no executive officer of the Company served on the Board of another
entity, one of whose executive officers served as a member of the Compensation
Committee.
-10-
14
COMPENSATION AND OTHER INFORMATION
CONCERNING DIRECTORS AND OFFICERS
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for
services in all capacities paid or accrued by the Company for the fiscal years
ended January 31, 2001, 2000, and 1999, to (i) the individual who served as the
Chief Executive Officer for the fiscal year ended January 31, 2001 and (ii) each
of the four other most highly compensated executive officers whose aggregate
salary and bonus exceeded $100,000 in the fiscal year ended January 31, 2001
(with the Chief Executive Officer, collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION (2)
----------------
ANNUAL COMPENSATION (1) AWARDS
------------------------------------- ----------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND OPTIONS/ COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(3) SARS (#) ($)(4)
- ------------------ ---- ---------- ------------ ---------- ------------
Cornelius Peterson, VIII 2001 246,244 101,197 225,000 3,564
Chairman of the Board and Chief 2000 171,992 96,046 906,736 4,624
Executive
Officer 1999 146,490 -- -- 3,510
Cornelius Peterson, IX 2001 174,583 113,035 77,000 360
Sr. Vice President, Intelligent 2000 161,054 82,110 259,067 521
Device
Markets, North America and Asia 1999 121,738 88,023 -- 4,557(5)
Daniel J. Sullivan 2001 159,638 58,519 55,000 324
Vice President, Finance and 2000 141,972 44,757 259,067 528
Administration,
Chief Financial Officer, Treasurer 1999 59,787 -- -- 213
and Clerk
William E. Peisel 2001 153,639 44,425 42,000 1,342
Executive Vice President, Engineering 2000 147,892 30,239 323,834 2,108
and
Chief Technology Officer 1999 148,529 12,425 -- 2,070
Michael Evensen 2001 140,000 68,990 49,000 --
Vice President, Intelligent Device 2000 130,000 42,143 142,487 --
Markets,
Europe, Middle East and Africa 1999 10,096 -- -- --
- -----------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
have been omitted because such perquisites and other personal benefits
constituted less than the lesser of $50,000 or 10% of the total annual
salary and bonus reported for the executive officer during the year ended
January 31, 2001.
(2) The Company did not grant any restricted stock awards or stock appreciation
rights during fiscal 2001, 2000 and 1999. The Company does not have any
long-term incentive plan.
(3) Bonuses are reported in the year earned, even if actually paid in a
subsequent year.
(4) Consists of life insurance premiums paid by the Company on behalf of the
Named Executive Officers.
(5) Includes $13,963 as stock based compensation related to the exercise of
options granted by Sorrento Networks.
-11-
15
OPTION GRANTS
The following table sets forth information concerning options granted
during the last fiscal year under the Company's Amended and Restated 1998
Incentive and Non-qualified Stock Option Plan (the "Employee Option Plan") to
the Named Executive Officers. The Company did not grant any stock appreciation
rights in the fiscal year 2001.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS/ AT
SECURITIES SARS ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE STOCK
OPTION/SARS EMPLOYEES OR BASE PRICE APPRECIATION FOR
GRANTED IN FISCAL PRICE EXPIRATION OPTION TERM (2)
NAME (#)(1) YEAR ($/SH) DATE 5%($) 10%($)
---- ----------- ---------- -------- ---------- ----- ------
Cornelius Peterson, VIII 150,000 5.9% $18.00 5/11/10 1,698,015 4,303,105
75,000 2.9% $3.0781 12/11/10 145,043 367,785
Cornelius Peterson, IX 60,000 2.4% $18.00 5/11/10 679,206 1,721,242
17,000 0.7% $4.0625 11/29/10 43,433 110,068
Daniel J. Sullivan 40,000 1.6% $18.00 5/11/10 452,804 1,147,495
15,000 0.6% $4.0625 11/29/10 38,323 97,119
William E. Peisel 25,000 1.0% $18.00 5/11/10 283,003 717,184
17,000 0.7% $4.0625 11/29/10 43,433 110,068
Michael Evensen 35,000 1.4% $18.00 5/11/10 396,204 1,004,058
14,000 0.5% $4.0625 11/29/10 35,768 90,644
- ---------------
(1) All options granted to Named Executive Officers on May 11, 2000, are
exercisable in four annual installments commencing May 11, 2001. The
Company granted options to purchase 75,000 shares to Cornelius Peterson,
VIII on December 11, 2000 and will vest and become exercisable at a rate of
25% of the shares subject to the option on the one-year anniversary of the
date of grant, and the remaining shares on the eighteen-month anniversary
of the date of grant. The Company granted options to Messrs. Peterson,
Sullivan, Peisel and Evensen on November 29, 2000 and will vest and become
exercisable at a rate of 25% of the shares subject to the option on the
one-year anniversary of the date of grant, and the remaining shares on the
eighteen-month anniversary of the date of grant.
(2) Amounts represent hypothetical gains that could be achieved for the option
if exercised at the end of the option term. These gains are based on the
fair market value on the date of grant and assumed rates of stock price
appreciation of 5% and 10% compounded annually from the date the respective
options were granted to their expiration date. These assumptions are
mandated by the rules of the Securities and Exchange Commission and are not
intended to forecast future appreciation of the Company's stock price. The
potential realizable value computation is net of the applicable exercise
price, but does not take into account federal or state income tax
consequences and other expenses of option exercises or sales of appreciated
stock. Actual gains, if any, are dependent upon the timing of such exercise
and the future performance of the Company's Common Stock. There can be no
assurance that the rates of appreciation in this table can be achieved.
This table does not take into account any appreciation in the price of the
Common Stock to date.
-12-
16
OPTION EXERCISES AND FISCAL YEAR-END VALUES
Shown below is information with respect to options to purchase the
Company's Common Stock granted under the Company's Amended and Restated 1998
Incentive and Non-qualified Stock Option Plan, including (i) the number of
shares of Common Stock received upon exercise of options in the fiscal year
ended January 31, 2001; (ii) the net value realized upon such exercise; (iii)
the number of unexercised options held at January 31, 2001; and (iv) the
aggregate dollar value of unexercised options held at January 31, 2001:
AGGREGATED OPTION/SAR EXERCISES IN THE LAST
FISCAL YEAR AND FY-END
OPTION/SAR VALUES
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS/SARS AT OPTIONS/SARS AT
ON VALUE FISCAL YEAR-END (#) FISCAL YEAR-END ($)(2)
EXERCISE REALIZED ---------------------------- ----------------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------- -------- ----------- ------------- ----------- -------------
Cornelius Peterson, VIII 64,285 1,311,595 162,399 905,052 0 265,875
Cornelius Peterson, IX -- -- 64,768 271,299 0 43,563
Daniel J. Sullivan -- -- 64,768 249,299 0 38,438
William E. Peisel -- -- 80,960 284,874 0 43,563
Michael Evensen -- -- 35,622 155,865 0 35,875
- ---------------
(1) Amounts disclosed in this column do not reflect amounts actually received
by the Named Executive Officers, but are calculated based on the difference
between the fair market value of the Company's Common Stock on the date of
exercise and the exercise price of the options. Named Executive Officers
will receive cash only if and when they sell the Common Stock issued upon
exercise of the options and the amount of cash received by such individuals
is dependent on the price of the Company's Common Stock at the time of such
sale.
(2) Value is based on the difference between the option exercise price and the
fair market value at January 31, 2001 ($6.625 per share) multiplied by the
number of shares of Common Stock underlying the option.
-13-
17
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company is a party to an employment letter with Daniel J. Sullivan,
dated as of June 18, 1999, providing for his continued service as Chief
Financial Officer of the Company. The letter provides for a base salary per
calendar year of $150,000 with eligibility for bonuses in addition to his base
salary. The letter also provides that under certain circumstances, upon the sale
of the Company to an unaffiliated party, Mr. Sullivan may receive one quarter of
one percent of the total value of the transaction to be paid in kind and at such
time that Sorrento Networks receives its consideration in respect of the sale.
Upon the completion of such a sale, Mr. Sullivan's options shall immediately
vest and become exercisable. Additionally, under the terms of the letter, upon
termination without cause, Mr. Sullivan shall receive his then current salary
for the 12 months following the termination, receive medical benefits for those
12 months and have ninety days to exercise his stock options, whether vested or
unvested. If Mr. Sullivan leaves voluntarily and the Company has not agreed to
be sold to an unaffiliated party, he shall receive his then current salary for
the twelve months following his voluntary termination as well as a one-time
payment equal to nine months of his then current rate of pay. If a sale of all
or a majority of the shares of the Company has been completed, and Mr.
Sullivan's responsibilities are reduced within six months of the sale, and Mr.
Sullivan leaves the Company voluntarily, he shall receive his then current
salary for the twelve months following his voluntary termination.
Cornelius Peterson, IX stated his intention to resign as Sr. Vice
President, Intelligent Device Markets, North America and Asia on May 15, 2001.
In March 2001, the Company agreed to remunerate Cornelius Peterson, IX through
November 15, 2001 or until he gains new employment at his current salary rate
following his resignation on May 15, 2001. Payment of his salary is contingent
upon a positive transition on May 15 and Mr. Peterson providing transition and
consulting services. Mr. Peterson will also be entitled to receive insurance
coverage and his stock options will continue to vest until November 15, 2001.
The Company entered into an Employment Agreement with Michael Evensen,
dated as of October 1, 1998 and amended as of June 19, 1999. Mr. Evensen's
agreement provides, among other things, that he will receive an annual base
salary of $125,000 and will be eligible to receive incentive based commissions.
Additionally, under the terms of this agreement, Mr. Evensen shall obtain his
own medical coverage until the establishment of the Company's German subsidiary,
at which time Mr. Evensen will be entitled to participate in the Company's
medical and insurance plans. If Mr. Evensen is terminated without cause the
Company will be required to pay Mr. Evensen his base salary for six months
following his termination, provided, however, that Mr. Evensen executes a
release.
Pursuant to an offer letter dated as of October 24, 2000, the Company
agreed to pay George Barrios 18 months severance pay based on his base salary if
he is terminated without cause within the first 24 months of his employment with
the Company. If Mr. Barrios is appointed Chief Executive Officer within those 24
months, however, the provision for severance will no longer be in effect.
-14-
18
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is comprised of Dr.
Roberts (Chairman) and Mr. Saviers. The members of the Compensation Committee
are non-employee Directors. No member of the Compensation Committee has a
relationship that would constitute an interlocking relationship with executive
officers or directors of another entity. The Compensation Committee makes
recommendations to the Board of Directors concerning the compensation of the
chief executive officer, executive officers and key employees and directors of
the Company. The Compensation Committee also makes recommendations to the Board
of Directors concerning incentive compensation of the chief executive officer,
executive officers and key employees and directors of the Company.
The Company's executive compensation program is designed to provide levels
of compensation that assist the Company in attracting, motivating and retaining
qualified executive officers and aligning the financial interests of the
Company's executive officers and other employees with those of its stockholders
by providing a competitive compensation package based on corporate and
individual performance. In addition to cash compensation in the form of base
salary, compensation under the executive compensation program can be comprised
of quarterly cash incentive bonuses and long-term incentive awards in the form
of stock option grants. The compensation program is also comprised of various
benefits, including medical and insurance plans, which plans are generally
available to all employees of the Company.
BASE SALARY
Base salary compensation levels for each of the Company's executive
officers, including the Chief Executive Officer, are generally set within the
range of base salaries that the Compensation Committee believes are paid to
executive officers with comparable qualifications, experience and
responsibilities at other companies located in the northeastern United States of
similar size and engaged in similar business to that of the Company. In setting
compensation levels, the Compensation Committee generally takes into account
such factors as (i) the Company's past operating and financial performance and
future expectations, (ii) individual performance and experience and (iii) past
salary levels. The Compensation Committee does not assign relative weights or
rankings to these factors, but instead makes determinations based upon the
consideration of all of these factors as well as the progress made with respect
to the Company's long-term goals and strategies.
INCENTIVE COMPENSATION
Incentive Compensation in the form of performance-based bonuses for the
Chief Executive Officer and the Company's other executive officers is based upon
management's success in meeting the Company's financial and strategic goals as
well as meeting individual performance goals.
STOCK OPTIONS
Stock options ("Options") are the principal vehicle used by the Company to
provide long-term incentive-based compensation to improve the Company's
operating and financial performance and to support the recruitment, motivation
and retention of key professional and managerial personnel. The Company's stock
option plans are administered by the Compensation Committee of the Board of
Directors. To date, the Board of Directors has not granted stock options at less
than fair market value.
Stock options are granted from time to time to eligible employees and based
upon the Company's overall financial performance and their contributions
thereto. Stock options are designed to align the
-15-
19
interest of the Company's executive officers and other employees with those of
its stockholders by encouraging them to enhance the value of the Company, the
price of the Common Stock and, hence, the stockholders' return. In addition, the
vesting of stock options over a period of time is designed to defer the receipt
of compensation by the option holder, thus creating an incentive for the
individual to remain with the Company. The Company periodically grants new
options to provide continuing incentives for future performance.
During the fiscal year ended January 31, 2001, options to purchase 225,000
shares were awarded to Cornelius Peterson, VIII, Chairman of the Board and Chief
Executive Officer. Such grants were made in recognition of Mr. Peterson's
contributions to the Company's performance in fiscal 2001. In addition, during
the fiscal year ended January 31, 2001, options to purchase 77,000 shares were
awarded to Cornelius Peterson, IX, Sr. Vice President, Intelligent Device
Markets, North America and Asia; options to purchase 55,000 were awarded to
Daniel J. Sullivan, Vice President, Finance and Administration, Chief Financial
Officer, Treasurer and Clerk; options to purchase 42,000 shares were awarded to
William E. Peisel, Executive Vice President, Engineering, and Chief Technical
Officer; and options to purchase 49,000 shares were awarded to Michael Evensen,
Vice President, Intelligent Device Markets, Europe, Middle East and Africa. Such
grants were made in recognition of such officers' contributions to the Company's
performance in fiscal 2001 and to provide additional long-term incentive to the
executive officers and further strengthen the link between executive
compensation and shareholder return.
OTHER BENEFITS
The Company also has various broad-based employee benefit plans. Executive
officers participate in these plans on the same terms as eligible, non-executive
employees, subject to any legal limits on the amounts that may be contributed or
paid to executive officers under these plans. The Company maintains medical,
disability and life insurance plans and other benefit plans for its employees.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Compensation for the Company's Chief Executive Officer, Cornelius Peterson,
VIII, was determined in accordance with the policies applicable to the other
executive officers of the Company described above. The fiscal year end 2001 base
salary compensation for Mr. Peterson was $246,244. In addition to achievement of
performance targets in accordance with the Company's executive compensation
policies, the Compensation Committee determines the Chief Executive Officer's
cash compensation based upon the Company's overall performance, the performance
of his management team, the compensation paid at competing companies and the
Company's prospects, among other objective and subjective factors. The
Compensation Committee does not find it practicable to quantify or assign
relative weight to the factors on which the Chief Executive Officer's
compensation is based.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION
In general, under Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), the Company cannot deduct, for federal income tax
purposes, compensation in excess of $1,000,000 paid to certain executive
officers. This deduction limitation does not apply, however, to compensation
that constitutes "qualified performance-based compensation" within the meaning
of Section 162(m) of the Code and the regulations promulgated thereunder. The
Compensation Committee has considered the limitations on deductions imposed by
Section 162(m) of the Code, and it is the Compensation Committee's present
intention that, for so long as it is consistent with its overall
-16-
20
compensation objective, substantially all tax deductions attributable to
executive compensation will not be subject to the deduction limitations of
Section 162(m) of the Code.
The Compensation Committee is satisfied that the executive officers of the
Company are dedicated to achieving significant improvements in the long-term
financial performance of the Company and that the compensation policies and
programs implemented and administered have contributed and will continue to
contribute towards achieving this goal.*
Edward B. Roberts, Ph.D. (Chairman)
F. Grant Saviers
- ---------------
* The Compensation Committee Report is not deemed filed with the Securities and
Exchange Commission and is not to be incorporated by reference in any filing of
the Company under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, whether made before or after the date hereof
and irrespective of any general incorporation language in any such filing.
-17-
21
INDEPENDENT ACCOUNTANTS
BDO Seidman, LLP has acted as the Company's independent accountants for the
fiscal year ended January 31, 2001. On recommendation of the Audit Committee,
the Board of Directors has appointed BDO Seidman, LLP to audit the 2002
financial statements. A representative of BDO Seidman, LLP is expected to be
present at the annual meeting and will be afforded the opportunity to make a
statement, if he or she so desires, and to respond to appropriate questions.
The Audit Committee of the Company's Board of Directors reviews summaries
of the services provided by BDO Seidman, LLP and the related fees and has
considered whether the provision of non-audit services is compatible with
maintaining the independence of BDO Seidman, LLP.
AUDIT AND ALL OTHER FEES
The following sets forth the aggregate fees billed to NetSilicon, Inc. for
the fiscal year ended January 31, 2001 by BDO Seidman, LLP:
Audit fees..................................... $ 97,500
Financial information systems design
and implementation fees...................... 0
All other fees.................................. 85,900
---------
$ 183,400
=========
Audit fees represent fees billed for professional services rendered for the
audit of the Company's annual financial statements and the reviews of the
Company's financial statements included in the Company's Forms 10-Q during the
fiscal year.
All other fees represent fees billed for professional services rendered for
services other than the audit and review of the Company's financial statements.
A substantial portion of the fees in this category related to services
traditionally provided by auditors, including work performed in connection with
registration statements and other filings with the Securities and Exchange
Commission.
The Company's Audit Committee has determined that the non-audit services
provided by the Company's auditors in connection with the fiscal year ended
January 31, 2001 were compatible with the auditors' independence.
AUDIT COMMITTEE REPORT
The primary purpose of the Audit Committee of the Board of Directors is to
assist the Board in fulfilling its oversight responsibilities by reviewing (i)
the financial information which is provided to the stockholders, governmental
and regulatory bodies and others, (ii) the system of financial internal controls
which management and the Board have adopted and (iii) the audit process.
The Company's Audit Committee consists of three members of the Board of
Directors, all of whom are "independent directors" for purposes of the National
Association of Securities Dealers' listing standards. All members of the Audit
Committee are financially literate and William Johnson, chairman of the Audit
Committee, has extensive management experience.
-18-
22
The Audit Committee adopted a written charter for the Audit Committee on
February 22, 2000, a copy of which is attached hereto as Appendix A.
The Audit Committee has reviewed and discussed the audited financial
statements for the fiscal year ended January 31, 2001 with the Company's
management and the independent auditors.
The Audit Committee discussed with the independent auditors the matters
required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees, as amended. In addition, the Committee has
discussed with the independent auditors the auditor's independence from
NetSilicon and its management, including the matters in the written disclosures
required by Independence Standards Board Standard No. 1, Independence
Discussions with Audit Committee.
Based upon these reviews and discussions, the Audit Committee recommended
to the Board of Directors, and the Board of Directors approved, that the audited
financial statements be included in the Company's Annual Report on SEC Form 10-K
for the fiscal year ended January 31, 2001. The Audit Committee and the Board
have also recommended, subject to shareholder approval, the selection of the
Company's independent auditors, BDO Seidman, LLP.
This report has been respectfully submitted by the members of the Audit
Committee of the Board of Directors.
William Johnson (Chairman)
Michael K. Ballard
Francis E. Girard
CERTAIN TRANSACTIONS
The Company has entered into two Promissory Notes with Cornelius Peterson,
VIII, the Company's Chairman of the Board and Chief Executive Officer. On April
17, 2000, the Company loaned Mr. Peterson $621,207.80 and on October 6, 2000,
the Company loaned Mr. Peterson $250,000. As of April 30, the total outstanding
balance of these loans was $871,207.80. The highest amount outstanding during
the fiscal year ended January 31, 2001 was $871,207.80.
-19-
23
STOCK PERFORMANCE GRAPH
The following graph compares the percentage change in the cumulative total
stockholder return on the Company's Common Stock during the period from the
Company's initial public offering through January 31, 2001 with the cumulative
total return on (i) the Nasdaq Market Index, and (ii) a broad peer group index
prepared by Media General Financial Services consisting of Nasdaq listed
companies grouped under SIC Code 3577.
COMPARISON OF FIVE YEAR* CUMULATIVE TOTAL RETURN** AMONG
NETSILICON, INC., NASDAQ MARKET INDEX
AND PEER GROUP INDEX
[CHART]
- -------------------------------------------------------------
9/15/99 1/31/00 1/31/01
- -------------------------------------------------------------
NetSilicon, Inc. 100.00 181.82 53.54
- -------------------------------------------------------------
Nasdaq Market Index 100.00 143.31 102.61
- -------------------------------------------------------------
Peer Group Index 100.00 159.24 122.48
- -------------------------------------------------------------
- ----------
* Prior to September 15, 1999 the Company's Common Stock was not publicly
traded. Comparative data is provided only for the period since that date.
This graph is not "soliciting material," is not deemed filed with the
Securities and Exchange Commission and is not to be incorporated by
reference in any filing of the Company under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, whether made
before or after the date hereof and irrespective of any general
incorporation language in any such filing.
** Cumulative Total Return assumes $100 was invested on September 15, 1999 in
the Company's Common Stock and in the Nasdaq Market Index and Peer Group
Index and assure reinvestment of dividends, if any.
The stock price performance shown on the graph above is not necessarily
indicative of future price performance. Information used in the graph was
obtained from Media General Financial Services, a source believed to be
reliable; however, the Company is not responsible for any errors or omissions in
such information.
-20-
24
PROPOSAL II
TO APPROVE THE 2001 STOCK OPTION AND INCENTIVE PLAN
On April 27, 2001, the Board of Directors adopted the 2001 Stock Option and
Incentive Plan (the "2001 Plan"), subject to the approval of the Company's
shareholders. The 2001 Plan provides for the grant of incentive stock options to
employees and the grant of non-qualified stock options to employees,
consultants, directors and officers of the Company. The proposed number of
shares of Common Stock authorized for issuance under the 2001 Plan is 2,000,000
shares.
The approval of the 2001 Plan will require the affirmative vote of a
majority of the outstanding shares of Common Stock eligible to vote and present
and voting on this matter. The Board of Directors recommends a vote FOR the
approval of the 2001 Plan.
Management of the Company believes that the adoption of the 2001 Plan is
important to permit the Board of Directors to provide incentives to present
employees, to attract and retain qualified candidates for future positions, and
to replenish the available stock option pool after option grants were issued to
current and new employees during the fiscal year ended January 31, 2001. It is
management's philosophy to grant options to all employees of the Company,
allowing each employee to have an equity interest in the Company. Management
believes that this policy provides better performance incentives to employees
than cash compensation alone. In furtherance of this policy, during the fiscal
year ended January 31, 2001, the Compensation Committee of the Board of
Directors granted options to new employees. The Company has not increased the
number of shares available for future grants since the 1998 Plan became
effective in September, 1999. Option grants over the last year fiscal year have
depleted the available pool of options under the 1998 Plan such that, as of the
date hereof, there is an inadequate number of shares available for future option
grants under the 1998 Plan to new or existing employees of the Company.
The adoption of the 2001 Plan will allow management of the Company to make
grants to key management and other employees in the future, consistent with the
corporate policy of granting options to all employees, as well as allow the
Company to meet its stock option grant needs at least through the next annual
meeting of stockholders.
The following description of the 2001 Plan is a summary and does not
purport to be a complete description. A copy of the 2001 Plan is attached to
this Proxy Statement as Appendix B and is incorporated herein by reference.
DESCRIPTION OF THE 2001 PLAN
The purpose of the 2001 Plan is to provide stock options and stock-based
awards (each an "Award") in the Company to employees, consultants, directors and
officers of the Company and its subsidiaries (each a "Participant"), all of whom
are eligible to receive Awards under the 2001 Plan.
Administration. The 2001 Plan is administered by the Compensation
Committee. The Compensation Committee has the authority to grant and amend
Awards, to adopt, amend and repeal rules relating to the 2001 Plan and to
interpret and correct the provisions of the 2001 Plan and any Award.
Eligibility. The 2001 Plan provides for (i) the grant of incentive stock
options ("ISOs") within the meaning of Section 422 of the Code to employees of
the Company, (ii) the grant of non-qualified stock options to employees,
consultants, directors and officers of the Company, (iii) the grant of
restricted
-21-
25
stock awards, and (iv) other Awards based upon the Common Stock having such
terms and conditions as the Compensation Committee may determine.
Per-Participant Limit. No Participant may be granted Awards during any one
fiscal year to purchase more than 1,000,000 shares of Common Stock.
Exercise of Options. Each option granted under the 2001 Plan shall either
be fully exercisable at the time of grant or shall become exercisable in such
installments as the Compensation Committee may specify. Each option or
installment may be exercised at any time or from time to time, in whole or in
part, for up to the total number of shares with respect to which it is then
exercisable. The Compensation Committee has the right to accelerate the date of
exercise of any installment of any option (subject to the $100,000 per year
limitation on the fair market value of stock subject to ISOs granted to any
employee which become exercisable in any calendar year).
Payment for Exercise of Options. Payment for the exercise of options under
the 2001 Plan may be made by one or any combination of the following forms of
payment (a) by check payable to the order of the Company, (b) except as
otherwise explicitly provided in the applicable option agreement, and only if
the Common Stock is then publicly traded, delivery of an irrevocable and
unconditional undertaking by a creditworthy broker to deliver promptly to the
Company sufficient funds to pay the exercise price, or delivery by the
Participant (as defined in the 2001 Plan) to the Company of a copy of
irrevocable and unconditional instructions to a creditworthy broker to deliver
promptly to the Company cash or a check sufficient to pay the exercise price,
(c) to the extent explicitly provided in the applicable option agreement, by (x)
delivery of shares of Common Stock owned by the Participant valued at fair
market value (as determined by the Board or as determined pursuant to the
applicable option agreement), (y) delivery of a promissory note of the
Participant to the Company (and delivery to the Company by the Participant of a
check in an amount equal to the par value of the shares purchased), or (z)
payment of such other lawful consideration as the Board may determine.
Assignability. Options may be transferred by will or by the laws of descent
and distribution or pursuant to and in accordance with the Participant's stock
option agreement.
Adjustment. In the event of any stock split, stock dividend, extraordinary
cash dividend, recapitalization, reorganization, merger, consolidation,
combination, exchange of shares, liquidation, spin-off, split-up, or other
similar change in capitalization or event, (i) the number and class of
securities available for Awards under the Plan and the per-Participant share
limit, (ii) the number and class of securities, vesting schedule and exercise
price per share subject to each outstanding Option, (iii) the repurchase price
per security subject to repurchase, and (iv) the terms of each other outstanding
stock-based Award shall be adjusted by the Company (or substituted Awards may be
made) to the extent the Board of Directors shall determine, in good faith, that
such an adjustment (or substitution) is appropriate.
Effect of Termination, Disability or Death. The Board of Directors
determines the effect on an Award of the disability, death, retirement,
authorized leave of absence or other change in the employment or other status of
an Participant and the extent to which, and the period during which, the
Participant, or the Participant's legal representative, conservator, guardian or
designated beneficiary, may exercise rights under the Award.
Termination of Plan; Amendments. The Board of Directors may from time to
time amend, suspend or terminate the 2001 Plan or any portion thereof at any
time. If any Award expires, or is terminated, surrendered or forfeited, in whole
or in part, the unissued shares covered by such Award shall again be available
for the grant of Awards under the Plan.
-22-
26
Federal Income Tax Consequences. The following discussion of United States
federal income tax consequences of the issuance and exercise of Options and
stock-based awards granted under the 2001 Plan, and certain other rights granted
under the 2001 Plan is based upon the provisions of the Code as in effect on the
date of this Proxy Statement, current treasury regulations, and existing
administrative rulings of the Internal Revenue Service. It is not intended to be
a complete discussion of all of the United States federal income tax
consequences of these plans or of the requirements that must be met in order to
qualify for the described tax treatment. In addition, there may be foreign,
state or local tax consequences that are not discussed herein.
Incentive Stock Options. The following general rules are applicable under
current federal income tax law to incentive stock options ("ISOs") granted under
the 2001 Plan:
1. In general, no taxable income results to the optionee upon the grant
of an ISO or upon the issuance of shares to him or her upon the
exercise of the ISO, and no corresponding federal tax deduction is
allowed to the Company upon either grant or exercise of an ISO.
2. If shares acquired upon exercise of an ISO are not disposed of within
(i) two years following the date the option was granted or (ii) one
year following the date the shares are issued to the optionee pursuant
to the ISO exercise (the "Holding Periods"), the difference between
the amount realized on any subsequent disposition of the shares and
the exercise price will generally be treated as capital gain or loss
to the optionee.
3. If shares acquired upon exercise of an ISO are disposed of before the
Holding Periods are met (a "Disqualifying Disposition"), then in most
cases the lesser of (i) any excess of the fair market value of the
shares at the time of exercise of the ISO over the exercise price or
(ii) the actual gain on disposition will be treated as compensation to
the optionee and will be taxed as ordinary income in the year of such
disposition.
4. In any year that an optionee recognizes compensation income as the
result of a Disqualifying Disposition of stock acquired by exercising
an ISO, the Company generally should be entitled to a corresponding
deduction for federal income tax purposes.
5. Any excess of the amount realized by the optionee as the result of a
Disqualifying Disposition over the sum of (i) the exercise price and
(ii) the amount of ordinary income recognized under the above rules
will be treated as capital gain.
6. Capital gain or loss recognized by an optionee upon a disposition of
shares will be long-term capital gain or loss if the optionee's
holding period for the shares exceeds one year.
7. An optionee may be entitled to exercise an ISO by delivering shares of
the Company's Common Stock to the Company in payment of the exercise
price, if the optionee's ISO agreement so provides. If an optionee
exercises an ISO in such fashion, special rules will apply.
8. In addition to the tax consequences described above, the exercise of
an ISO may result in additional tax liability to the optionee under
the alternative minimum tax rules. The Code provides that an
alternative minimum tax (at a maximum rate of 28%) will be applied
against a taxable base which is equal to "alternative minimum taxable
income," reduced by a statutory exemption. In general, the amount by
which the value of the Common Stock received upon exercise of the ISO
exceeds the exercise price is included in the optionee's alternative
minimum taxable income. A taxpayer is required to pay the higher of
his or her regular tax liability or the alternative minimum tax. A
taxpayer that pays alternative minimum tax attributable to the
exercise of an ISO may be entitled to a tax credit against his or her
regular tax liability in later years.
9. Special rules apply if the stock acquired is subject to vesting, or is
subject to certain restrictions on resale under federal securities
laws applicable to directors, officers or 10% stockholders.
-23-
27
Non-Qualified Options. The following general rules are applicable under
current federal income tax law to options that do not qualify as ISOs
("Non-Qualified Options") granted under the 2001 Plan:
1. The optionee generally does not realize any taxable income upon the
grant of a Non-Qualified Option, and the Company is not allowed a
federal income tax deduction by reason of such grant.
2. The optionee generally will recognize ordinary compensation income at
the time of exercise of a Non-Qualified Option in an amount equal to
the excess, if any, of the fair market value of the shares on the date
of exercise over the exercise price.
3. When the optionee sells the shares acquired pursuant to a
Non-Qualified Option, he or she generally will recognize a capital
gain or loss in an amount equal to the difference between the amount
realized upon the sale of the shares and his or her basis in the
shares (generally, the exercise price plus the amount taxed to the
optionee as compensation income). If the optionee's holding period for
the shares exceeds one year, such gain or loss will be a long-term
capital gain or loss.
4. The Company generally should be entitled to a corresponding tax
deduction for federal income tax purposes when the optionee recognizes
compensation income.
5. An optionee may be entitled to exercise a Non-Qualified Option by
delivering shares of the Company's Common Stock to the Company in
payment of the exercise price. If an optionee exercises a
Non-Qualified Option in such fashion, special rules will apply.
6. Special rules apply if the stock acquired is subject to vesting, or is
subject to certain restrictions on resale under federal securities
laws applicable to directors, officers or 10% stockholders.
Awards and Purchases. The following general rules are applicable under
current federal income tax law to awards of stock ("Awards") or the granting of
opportunities to make direct stock purchases ("Purchases") under the 2001 Plan:
1. Persons receiving Common Stock pursuant to an Award or Purchase
generally will recognize compensation income equal to the fair market
value of the shares received, reduced by any purchase price paid.
2. The Company generally should be entitled to a corresponding deduction
for federal income tax purposes when such person recognizes
compensation income. When such Common Stock is sold, the seller
generally will recognize capital gain or loss equal to the difference
between the amount realized upon the sale and the seller's tax basis
in the Common Stock (generally, the amount that the seller paid for
such stock plus the amount taxed to the Seller as compensation
income).
3. Special rules apply if the stock acquired pursuant to an Award or
Purchase is subject to vesting, or is subject to certain restrictions
on resale under federal securities laws applicable to directors,
officers or 10% stockholders.
-24-
28
PROPOSAL III
RATIFICATION OF SELECTION OF AUDITORS
The Board of Directors has selected the firm of BDO Seidman, LLP,
independent auditors, to serve as auditors for the fiscal year ending January
31, 2002. BDO Seidman, LLP has served as the Company's auditors and outside
accountants since 1997. It is expected that a member of the firm will be present
at the Annual Meeting of Stockholders with the opportunity to make a statement
if so desired and will be available to respond to appropriate questions. The
Board of Directors recommends a vote FOR ratification of this selection.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, executive officers and
holders of more than 10% of the Company's Common Stock (collectively, "Reporting
Persons") to file with the Securities and Exchange Commission initial reports of
ownership and reports of changes in ownership of Common Stock of the Company.
Such persons are required by regulations of the Commission to furnish the
Company with copies of all such filings. Based on its review of the copies of
such filings, if any, received by it with respect to the fiscal year ended
January 31, 2001 and written representations from certain Reporting Persons, the
Company believes that all Reporting Persons complied with all Section 16(a)
filing requirements in the fiscal year ended January 31, 2001.
SHAREHOLDER RIGHTS PLAN
On September 12, 2000, the Company's Board of Directors adopted a
Shareholder Rights Plan, amended as of January 12, 2001 (the "Rights Plan"), the
adoption of which did not require stockholder approval, under which preferred
share repurchase rights (a "Right") were distributed as a Rights dividend on
September 23, 2000. One Right was distributed for each share of Common Stock
held as of the close of business on that date.
The Rights Plan is designed to prevent an acquirer from gaining control of
the Company without offering a fair price to all of the Company's stockholders.
The Rights Plan was not adopted by the Board in response to any specific offer
or threat, but rather is intended to protect the interests of stockholders in
the event the Company is confronted in the future with takeover tactics.
Each Right will entitle holders of Common Stock to buy a unit consisting of
1/1000th of a share of a series of junior participating preferred stock (which
is intended to be essentially the economic equivalent of one share of Common
Stock) of the Company at an exercise price of $200. The Rights will be
exercisable only (i) after 10 days following a public announcement that a person
or group has acquired more than 15%; or (ii) in the case of Sorrento Networks
and its affiliates and associates, an additional 1% of the voting common stock
of the Company after September 12, 2000; or (iii) in the case of Firsthand
Capital Management, Inc. and its affiliates and associates, an additional 1% of
the voting common stock after January 12, 2001 (together with (i) and (ii)
above, the "Stock Acquisition Date"); or (iv) 10 business days after such person
or group announces a tender or exchange offer which would result in its
ownership of 15%, or in the case of Sorrento Networks and Firsthand Capital
Management, Inc., an additional 1%, or more of the Common Stock.
If any person or group becomes the beneficial owner of 15% or more of the
Company's Common Stock except pursuant to a tender offer for all shares at a
price that a majority of the independent directors determines to be fair; if a
more-than-15% stockholder engages in a merger with the Company in which the
Company survives and its Common Stock remains outstanding and unchanged; or if
certain other events involving the Company and a more-than-15% stockholder
occur, then each Right not owned
-25-
29
by such person or related parties will entitle its holder to purchase, at the
then current exercise price of the Right, Common Stock of the Company (or, in
certain circumstances as determined by the Board, including the failure of the
stockholders to increase the authorized Common Stock as proposed herein, a
combination of cash, property, Common Stock or other securities or a reduction
in the exercise price) having a value of twice the Right's exercise price. In
such circumstances, the Company may also exchange one share of Common Stock for
each Right outstanding. In addition, if the Company is involved in a merger or
other business combination transaction with another person in which its Common
Stock is changed or converted, or sells or transfers more than 50% of its assets
or earning power to another person, each Right that has not previously been
exercised will entitle its holder to purchase, at the then current exercise
price of the Right, shares of Common Stock of such other person having a value
of twice the Right's exercise price.
In general, the Company can redeem the Rights at $0.01 per Right at any
time prior to ten days following the Stock Acquisition Date. The Rights will
expire on September 12, 2010, unless earlier redeemed or exchanged.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to the Company's Current Report on Form 8-K
dated September 13, 2000. A copy of the Rights Agreement, as amended, is
available free of charge from the Company.
RECENT BY-LAW AMENDMENTS
The Board of Directors of the Company has voted to amend and restate the
Company's By-Laws (as amended and restated, the "Amended and Restated By-Laws")
to: (i) change the date of the annual meeting from the second Wednesday in April
to the second Wednesday of June in each year; (ii) increase the number of audit
committee members from two to three in order to comply with the National
Association of Securities Dealers newly promulgated rules regarding audit
committees; (iii) include provisions regarding the presentation of matters by
shareholders at any annual or special meeting of the shareholders of the
Company; (iv) increase the percentage of shareholders required to call a special
meeting from 10% to 66-2/3%; (v) to provide that only the Board of Directors may
fill vacancies in the Board of Directors; (vi) provide that shareholders may
only remove directors for cause by supermajority vote; and (vii) add a provision
regarding amending the provisions so changed by the Board of Directors.
The Amended and Restated By-Laws generally require that a shareholder
seeking to have any business conducted at a meeting of shareholders (without
seeking to have a proposal relating to such business included in the Company's
proxy statement pursuant to Rule 14a-8 of the Exchange Act) give notice to the
Company not less than 60 and not more than 90 days prior to the corresponding
month and day of the previous year's annual meeting, or the 7th day after the
announcement of a stockholder-proposed special meeting date. The notice from the
shareholder must describe the proposed business to be brought before the meeting
and include information about the shareholder making the proposal, any
beneficial owner on whose behalf the proposal is made, and any other shareholder
known to be supporting the proposal. The Amended and Restated By-Laws require
that a shareholder seeking to present a proposal at any meeting of shareholders
(other than those submitted for inclusion in the proxy statement in accordance
with Rule 14a-8 of the Exchange Act) must comply with the rules set forth in the
Amended and Restated By-Laws and with all applicable requirements of the
Exchange Act.
The Company is subject to applicability of the provisions of Chapter 110F
of the Massachusetts General Laws, the so-called Business Combination Statute.
Under Chapter 110F, a Massachusetts corporation with over 200 stockholders, such
as the Company, may not engage in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person becomes an interested stockholder, unless (i) the interested
stockholder obtains the
-26-
30
approval of the Board of Directors prior to becoming an interested stockholder,
(ii) the interested stockholder acquires 90% of the outstanding voting stock of
the corporation (excluding shares held by certain affiliates of the corporation)
at the time it becomes an interested stockholder, or (iii) the business
combination is approved by both the Board of Directors and the holders of
two-thirds of the outstanding voting stock of the corporation (excluding shares
held by the interested stockholder). An "interested stockholder" is a person
who, together with affiliates and associates, owns (or at any time within the
prior three years did own) 5% of more of the outstanding voting stock of the
corporation. A "business combination" includes a merger, a stock or assets sale,
and other transactions resulting in a financial benefit to the stockholder.
The Board of Directors also amended the Company's Amended and Restated
By-Laws to exclude the Company from Massachusetts General Laws Chapter 110D,
entitled "Regulation of Control Share Acquisitions." In general, this statute
provides that any stockholder of a corporation subject to this statute who
acquires 20% or more of the outstanding voting stock of a corporation (except in
certain transactions) may not vote such stock unless the stockholders of the
corporation so authorize. The Board of Directors may amend the Company's Amended
and Restated By-Laws at any time to subject the Company to this statute
prospectively
On April 18, 1990, Massachusetts enacted Chapter 156B sec. 50A of the
Massachusetts General Laws which, in general, requires that publicly held
Massachusetts corporations have a classified board of directors consisting of
three classes as nearly equal in size as possible. Once a corporation is subject
to the classified board provisions of this statute, directors may be removed by
a majority vote of the stockholders only for cause. The Board of Directors
amended the Company's Amended and Restated By-Laws to provide for removal of
directors by shareholders only for cause by the affirmative vote of 66-2/3% or
more of the shares of capital stock outstanding and entitled to vote.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended for inclusion in the proxy statement to
be furnished to all stockholders entitled to vote at the next Annual Meeting of
the Company must be received at the Company's principal executive offices no
later than April 17, 2002. Under the Company's By-Laws, stockholders who wish to
make a proposal at the next Annual Meeting--other than one that will be included
in the Company's proxy materials--must notify the Company no earlier than March
18, 2002 and no later than April 17, 2002. If a stockholder who wishes to
present a proposal fails to notify the Company by April 17, 2002, the
stockholder would not be entitled to present the proposal at the meeting. If,
however, notwithstanding the requirements of the Company's By-laws, the proposal
is brought before the meeting, then under the Securities and Exchange
Commission's proxy rules the proxies solicited by management with respect to the
next Annual Meeting will confer discretionary voting authority with respect to
the stockholder's proposal on the persons selected by management to vote the
proxies. If a stockholder makes a timely notification, the proxies may still
exercise discretionary voting authority under circumstances consistent with the
Securities and Exchange Commission's proxy rules. In order to curtail
controversy as to the date upon which such written notice is received by the
Company, it is suggested that such notice be submitted by Certified Mail, Return
Receipt Requested.
EXPENSES AND SOLICITATION
Proxies may be solicited by the Company, by personal interview, mail and
telephone. The Company may request banks, brokers and other custodians, nominees
and fiduciaries to solicit their customers who have stock of the Company
registered in the names of a nominee and, if so, will reimburse such banks,
brokers and other custodians, nominees and fiduciaries for their reasonable
out-of-pocket costs. The cost of solicitation of proxies will be borne by the
Company.
-27-
31
APPENDIX A
NETSILICON, INC.
AUDIT COMMITTEE CHARTER
The Audit Committee (the "Committee"), a standing committee of the Board of
Directors, is comprised of at least three non-employee directors all of whom are
independent and financially literate. At least one member is to have accounting
or financial management experience. The Committee is responsible for overseeing
and monitoring the quality of the Company's accounting practices and assisting
the Board of Directors in fulfilling its oversight role regarding the Company's
financial reporting process, its system of internal controls and its compliance
with applicable laws, regulations and policies.
The Committee meets several times during the year with the Company's management
and the Company's independent accountants to discuss audit activities, internal
controls and financial reporting matters. Both internal auditors and the
Company's independent accountants have full and free access to the Committee and
the Committee strongly supports enhanced dialogue about financial statements,
accounting principles, and financial reporting issues among management, internal
audit, independent accountants, and the Committee.
The duties of the Committee are:
a) To recommend to the Board of Directors a firm of independent accountants to
perform the examination of the Company's quarterly and annual financial
statements. To reinforce the independent auditor's ultimate accountability to
the Committee, Board of Directors and Company stockholders;
b) To review with the independent accountants and with the controller the
proposed scope of the audit, past audit experience, the Company's internal audit
program, recently completed internal audit procedures and other matters bearing
upon the scope of the annual audit;
c) To review and evaluate with management and independent accountants, the
quality of accounting principles and practices applied and significant estimates
made in preparing the Company's financial statements, any changes in accounting
policy, and the interpretation of new accounting principles;
d) To review the Company's procedures for the preparation of financial
statements and compliance with filing and other requirements of regulatory
agencies, including the SEC;
e) To evaluate internal audit activities, and the effectiveness of appointed
internal audit personnel and to review reports or other communication submitted
to the Committee by internal auditors;
f) To review with independent accountants, management, and internal auditors
significant matters revealed in the course of the independent audit of the
Company's annual financial statements and any significant matters arising as a
result of the review of the Company's quarterly financial information by the
independent accountants - including the independent accountant's audit report,
disagreements or disputes between management and independent accountants and
suggestions and recommendations of the independent accountants concerning
internal controls, accounting policies and other business practices and
management's responses to the recommendations;
32
g) To review the Company's quarterly and annual financial statements and
related disclosures;
h) To review the Company's operating policies and business standards to assist
in determining whether they are both adequate and appropriate and to evaluate
the procedures in place to communicate the Company's business standards to its
employees;
i) To meet periodically with management to discuss and identify business risks
and the potential impact of identified risks on the Company's financial
standing;
j) To serve as a communication channel between the independent accountants,
management, internal audit and the Board of Directors;
k) To submit an annual report as part of the Company's proxy statement stating
that the Committee has 1) reviewed audited financial statements with management
and the Company's independent accountants, 2) discussed with independent
accountants any disagreements with management, and 3) received mandatory
disclosure from the independent accountants about their independence. The
Committee's report must indicate whether, based on the review and discussions
noted above, the Committee recommended to the Board of Directors that the
audited financial statements be included in the Company's annual report on Form
10K.
l) To re-evaluate this Charter annually and include a copy of the Charter in
the Company's proxy statement once every three years.
A-2
33
APPENDIX B
NETSILICON, INC.
2001 STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE AND ELIGIBILITY
The purpose of this 2001 Stock Option and Incentive Plan (the "PLAN") of
NetSilicon, Inc. (the "Company") is to provide stock options and other equity
interests in the Company (each an "AWARD") to employees, officers, directors,
consultants and advisors of the Company and its Subsidiaries, all of whom are
eligible to receive Awards under the Plan. Any person to whom an Award has been
granted under the Plan is called a "PARTICIPANT." Additional definitions are
contained in Section 8.
2. ADMINISTRATION
a. ADMINISTRATION BY BOARD OF DIRECTORS. The Plan will be administered by
the Board of Directors of the Company (the "BOARD"). The Board, in its sole
discretion, shall have the authority to grant and amend Awards, to adopt, amend
and repeal rules relating to the Plan and to interpret and correct the
provisions of the Plan and any Award. All decisions by the Board shall be final
and binding on all interested persons. Neither the Company nor any member of the
Board shall be liable for any action or determination relating to the Plan.
b. APPOINTMENT OF COMMITTEES. To the extent permitted by applicable law,
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "COMMITTEE"). All references in the
Plan to the "BOARD" shall mean such Committee or the Board.
c. DELEGATION TO EXECUTIVE OFFICERS. To the extent permitted by
applicable law, the Board may delegate to one or more executive officers of the
Company the power to grant Awards and exercise such other powers under the Plan
as the Board may determine, provided that the Board shall fix the maximum number
of Awards to be granted and the maximum number of shares issuable to any one
Participant pursuant to Awards granted by such executive officers.
3. STOCK AVAILABLE FOR AWARDS
a. NUMBER OF SHARES. Subject to adjustment under Section 3(c), the
aggregate number of shares of Common Stock of the Company (the "COMMON STOCK")
that may be issued pursuant to the Plan is 2,000,000 shares. If any Award
expires, or is terminated, surrendered or forfeited, in whole or in part, the
unissued Common Stock covered by such Award shall again be available for the
grant of Awards under the Plan. If shares of Common Stock issued pursuant to the
Plan are repurchased by, or are surrendered or forfeited to, the Company at no
more than cost, such shares of Common Stock shall again be available for the
grant of Awards under the Plan; provided, however, that the cumulative number of
such shares that may be so reissued under the Plan will not exceed 2,000,000
shares. Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
b. PER-PARTICIPANT LIMIT. Subject to adjustment under Section 3(c), no
Participant may be granted Awards during any one fiscal year to purchase more
than 1,000,000 shares of Common Stock.
c. ADJUSTMENT TO COMMON STOCK. In the event of any stock split, stock
dividend, extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, combination, exchange of shares, liquidation, spin-off, split-up,
or other similar change in capitalization or event, (i) the number and class of
securities available for Awards under the Plan and the per-Participant share
limit, (ii) the number and class of securities, vesting schedule and exercise
price per share subject to each outstanding Option, (iii) the repurchase price
per security subject to repurchase, and (iv) the terms of each other outstanding
stock-based Award shall be adjusted by the Company (or
34
substituted Awards may be made) to the extent the Board shall determine, in good
faith, that such an adjustment (or substitution) is appropriate. If Section
7(e)(i) applies for any event, this Section 3(c) shall not be applicable.
4. STOCK OPTIONS
a. GENERAL. The Board may grant options to purchase Common Stock (each,
an "OPTION") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option and the Common Stock
issued upon the exercise of each Option, including vesting provisions,
repurchase provisions and restrictions relating to applicable federal or state
securities laws, as it considers advisable.
b. INCENTIVE STOCK OPTIONS. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "INCENTIVE
STOCK OPTION") shall be granted only to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Board and the Company shall have no liability if an Option
or any part thereof that is intended to be an Incentive Stock Option does not
qualify as such. An Option or any part thereof that does not qualify as an
Incentive Stock Option is referred to herein as a "NONSTATUTORY STOCK OPTION."
c. EXERCISE PRICE. The Board shall establish the exercise price (or
determine the method by which the exercise price shall be determined) at the
time each Option is granted and specify it in the applicable option agreement.
d. DURATION OF OPTIONS. Each Option shall be exercisable at such times
and subject to such terms and conditions as the Board may specify in the
applicable option agreement.
e. EXERCISE OF OPTION. Options may be exercised only by delivery to the
Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 4(f) for the number of shares for
which the Option is exercised.
f. PAYMENT UPON EXERCISE. Common Stock purchased upon the exercise of an
Option shall be paid for by one or any combination of the following forms of
payment:
(i) by check payable to the order of the Company;
(ii) except as otherwise explicitly provided in the applicable option
agreement, and only if the Common Stock is then publicly traded, delivery of an
irrevocable and unconditional undertaking by a creditworthy broker to deliver
promptly to the Company sufficient funds to pay the exercise price, or delivery
by the Participant to the Company of a copy of irrevocable and unconditional
instructions to a creditworthy broker to deliver promptly to the Company cash or
a check sufficient to pay the exercise price; or
(iii) to the extent explicitly provided in the applicable option
agreement, by (x) delivery of shares of Common Stock owned by the Participant
valued at fair market value (as determined by the Board or as determined
pursuant to the applicable option agreement), (y) delivery of a promissory note
of the Participant to the Company (and delivery to the Company by the
Participant of a check in an amount equal to the par value of the shares
purchased), or (z) payment of such other lawful consideration as the Board may
determine.
5. RESTRICTED STOCK
a. GRANTS. The Board may grant Awards entitling recipients to acquire
shares of Common Stock, subject to (i) delivery to the Company by the
Participant of a check in an amount at least equal to the par value of the
shares purchased, and (ii) the right of the Company to repurchase all or part of
such shares at their issue price or other stated or formula price from the
Participant in the event that conditions specified by the Board in the
applicable Award are not satisfied prior to the end of the applicable
restriction period or periods established by the Board for such Award (each, a
"RESTRICTED STOCK AWARD").
B-2
35
b. TERMS AND CONDITIONS. The Board shall determine the terms and
conditions of any such Restricted Stock Award. Any stock certificates issued in
respect of a Restricted Stock Award shall be registered in the name of the
Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). After the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or, if the Participant has died, to the
beneficiary designated by a Participant, in a manner determined by the Board, to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "DESIGNATED BENEFICIARY"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
6. OTHER STOCK-BASED AWARDS
The Board shall have the right to grant other Awards based upon the Common
Stock having such terms and conditions as the Board may determine, including,
without limitation, the grant of shares based upon certain conditions, the grant
of securities convertible into Common Stock and the grant of stock appreciation
rights, phantom stock awards or stock units.
7. GENERAL PROVISIONS APPLICABLE TO AWARDS
a. TRANSFERABILITY OF AWARDS. Except as the Board may otherwise determine
or provide in an Award, Awards shall not be sold, assigned, transferred, pledged
or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be exercisable only
by the Participant. References to a Participant, to the extent relevant in the
context, shall include references to authorized transferees.
b. DOCUMENTATION. Each Award under the Plan shall be evidenced by a
written instrument in such form as the Board shall determine or as executed by
an officer of the Company pursuant to authority delegated by the Board. Each
Award may contain terms and conditions in addition to those set forth in the
Plan provided that such terms and conditions do not contravene the provisions of
the Plan.
c. BOARD DISCRETION. The terms of each type of Award need not be
identical, and the Board need not treat Participants uniformly.
d. TERMINATION OF STATUS. The Board shall determine the effect on an
Award of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, or the Participant's legal
representative, conservator, guardian or Designated Beneficiary, may exercise
rights under the Award.
e. ACQUISITION OF THE COMPANY
(i) CONSEQUENCES OF AN ACQUISITION. Unless otherwise provided for in
the applicable Option or Award, upon the consummation of an Acquisition, the
Board or the board of directors of the surviving or acquiring entity (as used in
this Section 7(e)(i), also the "BOARD"), shall, as to outstanding Awards (on the
same basis or on different bases, as the Board shall specify), make appropriate
provision for the continuation of such Awards by the Company or the assumption
of such Awards by the surviving or acquiring entity and by substituting on an
equitable basis for the shares then subject to such Awards either (a) the
consideration payable with respect to the outstanding shares of Common Stock in
connection with the Acquisition, (b) shares of stock of the surviving or
acquiring corporation or (c) such other securities as the Board deems
appropriate, the fair market value of which (as determined by the Board in its
sole discretion) shall not materially differ from the fair market value of the
shares of Common Stock subject to such Awards immediately preceding the
Acquisition. In addition to or in lieu of the foregoing, with respect to
outstanding Options, the Board may, upon written notice to the affected
optionees, provide that one or more Options then outstanding shall become
immediately
B-3
36
exercisable in full and that such Options must be exercised within a specified
number of days of the date of such notice, at the end of which period such
Options shall terminate; or provide that one or more Options then outstanding
shall become immediately exercisable in full and shall be terminated in exchange
for a cash payment equal to the excess of the fair market value (as determined
by the Board in its sole discretion) for the shares subject to such Options over
the exercise price thereof; in the event of the acceleration of the
exercisability of one or more outstanding Options, the Board may provide, as a
condition of full exercisability or any or all such Options, that the Common
Stock as to which exercisability has been accelerated shall be restricted stock
subject to forfeiture and repurchase at the option of the Company at the cost
thereof upon termination of employment or other relationship, with the timing
and other terms of the vesting of such restricted stock being equivalent to the
timing and other terms of the superseded exercise schedule of the related
Option.
(ii) ACQUISITION DEFINED. An "ACQUISITION" shall mean: (x) the sale of
the Company by merger in which the shareholders of the Company in their capacity
as such no longer own a majority of the outstanding equity securities of the
Company (or its successor); or (y) any sale of all or substantially all of the
assets or capital stock of the Company (other than in a spin-off or similar
transaction) or (z) any other acquisition of the business of the Company, as
determined by the Board.
(iii) ASSUMPTION OF OPTIONS UPON CERTAIN EVENTS. In connection with a
merger or consolidation of an entity with the Company or the acquisition by the
Company of property or stock of an entity, the Board may grant Awards under the
Plan in substitution for stock and stock-based awards issued by such entity or
an affiliate thereof. The substitute Awards shall be granted on such terms and
conditions as the Board considers appropriate in the circumstances.
(iv) POOLING-OF INTERESTS-ACCOUNTING. If the Company proposes to
engage in an Acquisition intended to be accounted for as a pooling-of-interests,
and in the event that the provisions of this Plan or of any Award hereunder, or
any actions of the Board taken in connection with such Acquisition, are
determined by the Company's or the acquiring company's independent public
accountants to cause such Acquisition to fail to be accounted for as a
pooling-of-interests, then such provisions or actions shall be amended or
rescinded by the Board, without the consent of any Participant, to be consistent
with pooling-of-interests accounting treatment for such Acquisition.
(v) PARACHUTE AWARDS. Notwithstanding the provisions of Section
7(e)(i), if, in connection with an Acquisition described therein, a tax under
Section 4999 of the Code would be imposed on the Participant (after taking into
account the exceptions set forth in Sections 280G(b)(4) and 280G(b)(5) of the
Code), then the number of Awards which shall become exercisable, realizable or
vested as provided in such Section 7(e)(i) shall be reduced (or delayed), to the
minimum extent necessary, so that no such tax would be imposed on the
Participant (the Awards not becoming so accelerated, realizable or vested, the
"PARACHUTE AWARDS"); provided, however, that if the "AGGREGATE PRESENT VALUE" of
the Parachute Awards would exceed the tax that, but for this sentence, would be
imposed on the Participant under Section 4999 of the Code in connection with the
Acquisition, then the Awards shall become immediately exercisable, realizable
and vested without regard to the provisions of this sentence. For purposes of
the preceding sentence, the "AGGREGATE PRESENT VALUE" of an Award shall be
calculated on an after-tax basis (other than taxes imposed by Section 4999 of
the Code) and shall be based on economic principles rather than the principles
set forth under Section 280G of the Code and the regulations promulgated
thereunder. All determinations required to be made under this Section 7(e)(v)
shall be made by the Company.
f. WITHHOLDING. Each Participant shall pay to the Company, or make
provisions satisfactory to the Company for payment of, any taxes required by law
to be withheld in connection with Awards to such Participant no later than the
date of the event creating the tax liability. The Board may allow Participants
to satisfy such tax obligations in whole or in part by transferring shares of
Common Stock, including shares retained from the Award creating the tax
obligation, valued at their fair market value (as determined by the Board or as
determined pursuant to the applicable option agreement). The Company may, to the
extent permitted by law, deduct any such tax obligations from any payment of any
kind otherwise due to a Participant.
g. AMENDMENT OF AWARDS. The Board may amend, modify or terminate any
outstanding Award including, but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that, except as otherwise provided in Section 7(e)(iv), the
Participant's consent to such action shall be required unless the
B-4
37
Board determines that the action, taking into account any related action, would
not materially and adversely affect the Participant.
h. CONDITIONS ON DELIVERY OF STOCK. The Company will not be obligated to
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
i. ACCELERATION. The Board may at any time provide that any Options shall
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of some or all restrictions, or that any other stock-based
Awards may become exercisable in full or in part or free of some or all
restrictions or conditions, or otherwise realizable in full or in part, as the
case may be, despite the fact that the foregoing actions may (i) cause the
application of Sections 280G and 4999 of the Code if a change in control of the
Company occurs, or (ii) disqualify all or part of the Option as an Incentive
Stock Option.
8. MISCELLANEOUS
a. DEFINITIONS.
(i) "COMPANY," for purposes of eligibility under the Plan, shall
include any present or future subsidiary corporations of NetSilicon, Inc., as
defined in Section 424(f) of the Code (a "SUBSIDIARY"), and any present or
future parent corporation of NetSilicon, Inc., as defined in Section 424(e) of
the Code. For purposes of Awards other than Incentive Stock Options, the term
"COMPANY" shall include any other business venture in which the Company has a
direct or indirect significant interest, as determined by the Board in its sole
discretion.
(ii) "CODE" means the Internal Revenue Code of 1986, as amended, and
any regulations promulgated thereunder.
(iii) "EMPLOYEE" for purposes of eligibility under the Plan (but not
for purposes of Section 4(b)) shall include a person to whom an offer of
employment has been extended by the Company.
b. NO RIGHT TO EMPLOYMENT OR OTHER STATUS. No person shall have any claim
or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan.
c. NO SEVERANCE OR TERMINATION RIGHTS. Awards under this Plan do not
entitle the Participant to any benefit other than that granted under this Plan.
Any benefits granted under this Plan are not part of the Participant's ordinary
salary, and shall not be considered as part of such salary for pension purposes
or in the event of severance, redundancy or resignation.
d. NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the applicable
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder thereof.
e. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective on
the date on which it is adopted by the Board. No Awards shall be granted under
the Plan after the completion of ten years from the date on which the Plan was
adopted by the Board, but Awards previously granted may extend beyond that date.
f. AMENDMENT OF PLAN. The Board may amend, suspend or terminate the Plan
or any portion thereof at any time.
B-5
38
g. GOVERNING LAW. The provisions of the Plan and all Awards made
hereunder shall be governed by and interpreted in accordance with the laws of
the Commonwealth of Massachusetts, without regard to any applicable conflicts of
law.
Adopted by the Board of Directors on
April 27, 2001
Approved by the stockholders on
-----------------
B-6
39
- --------------------------------------------------------------------------------
PROXY PROXY
NETSILICON, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JUNE 13, 2001
The undersigned hereby appoints Cornelius Peterson VIII and Daniel J.
Sullivan, or any of them, proxies for the undersigned, each with full power of
substitution, to attend the Annual Meeting of Stockholders of NetSilicon, Inc.,
to be held on June 13, 2001 at 9:00 a.m., at the Westin Hotel, 70 Third Avenue,
Waltham, Massachusetts, and at any adjournments or postponements of the Annual
Meeting, and to vote as specified in this Proxy all the Common Stock of the
Company which the undersigned would be entitled to vote if personally present.
This Proxy when properly executed will be voted in accordance with your
indicated directions. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE
ELECTION OF THE DIRECTORS AND FOR PROPOSALS 2,3 AND 4.
The Board of Directors recommends a vote FOR the election of the Directors
and FOR Proposals 2,3 and 4.
YOUR VOTE IS IMPORTANT! PLEASE MARK, SIGN AND DATE THIS PROXY ON THE REVERSE
SIDE AND RETURN IT PROMPTLY IN THE ACCOMPANYING ENVELOPE.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
- --------------------------------------------------------------------------------
40
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
ANNUAL MEETING OF STOCKHOLDERS
NETSILICON, INC.
JUNE 13, 2001
Please Detach and Mail in the Envelope Provided
- --------------------------------------------------------------------------------
A [X] PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE.
1. To elect two Class II Directors each to serve for a three-year term.
NOMINEES: Francis E. Girard
F. Grant Saviers
FOR WITHHELD
[ ] [ ]
INSTRUCTIONS: To withhold for a specific nominee, write that nominee's name in
the space provided.
- -------------------------------
2. To approve the Company's 2001 Stock Option and Incentive Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. To ratify the selection of the firm of BDO Seidman, LLP as auditors for
the fiscal year ending January 31, 2002.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. To transact such other business as may property come before the meeting
and any adjournments thereof.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS AND THE PROXY STATEMENT.
Signature(s)____________________ ____________________ Dated:__________, 2001
Note: Please sign exactly as your name appears. Joint owners should each sign
separately. Where applicable, indicate your official position or representative
capacity.
- --------------------------------------------------------------------------------