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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 2001
REGISTRATION NO. 333-50562
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PROCOM TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0268063
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
58 DISCOVERY, IRVINE, CALIFORNIA, 92618
(949) 852-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
FREDERICK L. JUDD
VICE PRESIDENT, FINANCE AND GENERAL COUNSEL
PROCOM TECHNOLOGY, INC.
58 DISCOVERY
IRVINE, CALIFORNIA 92618
(949) 852-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
J. JAY HERRON, ESQ. GLEN HETTINGER
O'MELVENY & MYERS LLP HUGHES & LUCE LLP
114 PACIFICA, SUITE 100 1717 MAIN STREET
IRVINE, CALIFORNIA 92618 SUITE 2800
(949) 760-9600
DALLAS, TEXAS 75201
(214) 939-5723
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
MAXIMUM PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES TO AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BE REGISTERED REGISTERED(2) SHARE(1) PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value
issuable upon the conversion
of debentures or the payment
of interest 1,553,312 $22.79 $35,399,980.48 $9,345.60
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Common Stock, $.01 par value
to be issued upon exercise of
warrant 32,916 $32.55 $1,071,415.80 $ 282.85
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933, as amended, based on the
price of Procom's Common Stock as reported on the Nasdaq National Market on
November 6, 2000.
(2) The outstanding warrants and debentures were issued in connection with a
private placement financing. For purposes of estimating the number of
shares of common stock to be included in this registration statement, we
included (i) 1,553,312 shares, representing 200% of the number of shares of
common stock issuable on full conversion of the debentures, determined as
if the debentures were converted on October 30, 2003 and the interest,
calculated at 6%, was not paid in cash and (ii) 32,916 shares, representing
the shares issuable upon full exercise of the warrants. The convertible
debentures are convertible at a conversion price equal to $22.79 per share.
The warrants are exercisable at an exercise price of $32.55 per share.
In addition to the shares of common stock set forth on the Calculation of
Registration Fee Table, pursuant to Rule 416 of the Securities Act of 1933, as
amended, this registration statement also registers such additional number of
shares of common stock as may become issuable as a result of stock splits, stock
dividends or similar transactions.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
PROSPECTUS
1,586,228 SHARES OF COMMON STOCK
PROCOM TECHNOLOGY, INC.
COMMON STOCK ($.01 PAR VALUE)
The selling shareholder listed in this prospectus is offering and
selling up to 1,586,228 shares of our common stock. We will not receive any
proceeds from the sale of these shares. We will receive proceeds from the
exercise of warrants. These proceeds will be used for working capital and other
corporate purposes.
Our common stock is traded on The Nasdaq National Market under the
symbol "PRCM." The last reported sale price for our common stock on The Nasdaq
National Market on January 16, 2001 was $17.00 per share.
Each selling shareholder may sell any or all of its shares of common
stock on any stock exchange, market or trading facility on which the shares are
traded or in private transactions. These sales may be at fixed or negotiated
prices. We will bear all of the expenses and fees incurred in registering the
shares offered by this prospectus. Each selling shareholder will pay any
brokerage commissions and discounts attributable to the sale of its shares.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. PLEASE
SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS, AND THOSE RISK
FACTORS CONTAINED IN THE REPORTS INCORPORATED BY REFERENCE IN THIS PROSPECTUS,
FOR A DISCUSSION OF RISKS ASSOCIATED WITH OWNING OUR COMMON STOCK.
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or passed on the accuracy
or adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
Commissions received by a selling shareholder or any broker-dealers,
agents or underwriters that help distribute the shares and any profit on the
resale of the shares purchased by them may be considered underwriting
commissions or discounts under the Securities Act of 1933.
The date of this prospectus is January 16, 2001.
<PAGE> 3
PROSPECTUS
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................................... 1
Incorporation of Certain Documents by Reference...... 3
Where You Can Find More Information.................. 4
Risk Factors......................................... 5
Forward Looking Statements........................... 17
Use of Proceeds...................................... 17
Selling Shareholder.................................. 17
Description of Securities Issued to
Selling Shareholder................................ 18
Debentures........................................... 18
The Warrants......................................... 20
Transfer Agent and Registrar......................... 21
Plan of Distribution................................. 21
Legal Matters........................................ 22
Experts.............................................. 22
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Our executive offices are located at 58 Discovery, Irvine, California
92618, and the telephone number at that address is (949) 852-1000. Our Web site
address is procom.com. The information on our Web site does not constitute part
of this prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We have filed with the Securities and Exchange Commission a
registration statement on Form S-3 under the Securities Act of 1933, covering
the securities offered by this prospectus. This prospectus does not contain all
of the information that you can find in our registration statement and the
exhibits to the registration statement.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information filed with the
SEC will update and supersede this information. We incorporate by reference the
documents listed below and any future filings made with the SEC under Section
13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934.
(a) Our Annual Report on Form 10-K for the year ended July 31,
2000;
(b) Our Quarterly Report on Form 10-Q for the three-month period
ended October 31, 2000;
(c) Our Current Report on Form 8-K filed on November 3, 2000;
(d) Our Current Report on Form 8-K filed on January 12, 2001; and
(e) The description of our common stock contained in our Form S-1
registration statement dated October 30, 1996, including any
amendments or reports filed for the purpose of updating such
descriptions.
We will provide to each person, including any beneficial owner, to whom
a prospectus is delivered, a copy of any or all of the information that has been
incorporated by reference in the prospectus but not delivered with the
prospectus. We will provide this information upon written or oral request at no
cost to the requester. You may request this information by contacting our
corporate
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headquarters at the following address: Procom Technology, Inc., 58 Discovery,
Irvine, California 92618 (949) 852-1000.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's public reference room at the following locations:
- Main Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549
- Regional Public Reference Room
75 Park Place, 14th Floor
New York, New York 10007
- Regional Public Reference Room
Northwestern Atrium Center
500 West Madison Street, Suite 1400
Chicago, Illinois 60661-2511
You may obtain information on the operation of the SEC's public
reference rooms by calling the SEC at (800) SEC-0330.
We are required to file these documents with the SEC electronically.
You can access the electronic versions of these filings on the Internet at the
SEC's web site, located at http://www.sec.gov. We have included this prospectus
in our registration statement that we filed with the SEC. The registration
statement provides additional information that we are not required to include in
the prospectus. You can receive a copy of the entire registration statement as
described above. Although this prospectus describes the material terms of
certain contracts, agreements and other documents filed as exhibits to the
registration statement, you should read the exhibits for a more complete
description of the document or matter involved.
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RISK FACTORS
COMPETING DATA STORAGE TECHNOLOGIES MAY EMERGE AS A STANDARD FOR DATA STORAGE
SOLUTIONS, WHICH COULD CAUSE GROWTH IN THE NAS MARKET NOT TO MEET OUR
EXPECTATIONS AND DEPRESS OUR STOCK PRICE.
The market for data storage is rapidly evolving. There are other
storage technologies in use, including storage area network technology, which
provide an alternative to network attached storage. We are not able to predict
how the data storage market will evolve. For example, it is not clear whether
usage of a number of different solutions will grow and co-exist in the
marketplace or whether one or a small number of solutions will be dominant and
displace the others. It is also not clear whether network attached storage
technology will emerge as a dominant or even prevalent solution. Whether NAS
becomes an accepted standard will be due to factors outside our control. If a
solution other than network attached storage emerges as the standard in the data
storage market, growth in the network attached storage market may not meet our
expectations. In such event, our growth and the price of our stock would suffer.
IF GROWTH IN THE NAS MARKET DOES NOT MEET OUR EXPECTATIONS, OUR FUTURE FINANCIAL
PERFORMANCE COULD SUFFER.
We believe our future financial performance will depend in large part
upon the continued growth in the NAS market and on emerging standards in this
market. We intend for NAS products to be our primary business. The market for
NAS products, however, may not continue to grow. Long-term trends in storage
technology remain unclear and some analysts have questioned whether competing
technologies, such as storage area networks, may emerge as the preferred storage
solution. If the NAS market grows more slowly than anticipated, or if NAS
products based on emerging standards other than those adopted by us become
increasingly accepted by the market, our operating results could be harmed.
THE REVENUE AND PROFIT POTENTIAL OF NAS PRODUCTS IS UNPROVEN, AND WE MAY BE
UNABLE TO ATTAIN REVENUE GROWTH OR PROFITABILITY FOR OUR NAS PRODUCT LINES.
NAS technology is relatively recent, and our ability to be successful in
the NAS market may be negatively affected by not only a lack of growth of the
NAS market but also the lack of market acceptance of our NAS products.
Additionally, we may be unable to achieve profitability as we transition to a
greater emphasis on NAS products.
IF WE FAIL TO SUCCESSFULLY MANAGE OUR TRANSITION TO A FOCUS ON NAS PRODUCTS, OUR
BUSINESS AND PROSPECTS WOULD BE HARMED.
We began developing NAS products in 1997. Since then, we have focused
our efforts and resources on our NAS business, and we intend to continue to do
so. We expect to continue to wind down our non-NAS product development and
marketing efforts. In the interim, we expect to continue to rely in large part
upon sales of our non-NAS products to fund operating and development expenses.
Net sales of our non-NAS products have been declining in amount and as a
percentage of our overall net sales, and we expect these declines to continue.
If the decline in net sales of our non-NAS products varies significantly from
our expectations, or the decline in net sales of our non-NAS products is not
substantially offset by increases in sales of our NAS products, we may not be
able to generate sufficient cash flow to fund our operations or to develop our
NAS business.
We also expect our transition to a NAS-focused business to require us to
continue:
o engaging in significant marketing and sales efforts to achieve
market awareness as a NAS vendor;
o reallocating resources in product development and service and
support of our NAS appliances;
o modifying existing and entering into new channel partner
relationships to include sales of our NAS appliances; and
o expanding and reconfiguring manufacturing operations.
In addition, we may face unanticipated challenges in implementing our
transition to a NAS-focused company. We may not be successful in managing any
anticipated or unanticipated challenges associated with this transition.
Moreover, we expect to continue to incur costs in addressing these challenges,
and there is no assurance that we will be able to generate sufficient revenues
to cover these costs. If we fail to successfully implement our transition to a
NAS-focused company, our business and prospects would be harmed.
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OUR AGREEMENT WITH HEWLETT-PACKARD COMPANY MAY NOT GENERATE SIGNIFICANT NET
SALES, AND WE MAY NOT BE ABLE TO ENTER INTO OTHER BUSINESS ALLIANCES IN THE
FUTURE.
We believe our relationship with Hewlett-Packard Company is an important
element of our strategy to increase penetration in the NAS market. However,
Hewlett-Packard has not currently made significant purchase commitments for our
products, and there is no minimum purchase commitment under our agreement with
Hewlett-Packard. We do not currently, and may never, generate significant net
sales under this agreement. The Hewlett-Packard agreement has a five-year term,
and there is no assurance that the agreement can or will be renewed.
IF WE FAIL TO INCREASE THE NUMBER OF DIRECT AND INDIRECT SALES CHANNELS FOR OUR
NAS PRODUCTS, OUR ABILITY TO INCREASE NET SALES MAY BE LIMITED.
In order to grow our business, we will need to increase market awareness
and sales of our NAS appliances. To achieve these objectives, we believe it will
be necessary to increase the number of our direct and indirect sales channels.
We plan to significantly increase the number of our direct sales personnel.
However, there is intense competition for these professionals, and we may not be
able to attract and retain sufficient new sales personnel.
We also plan to expand revenues from our indirect sales channels,
including distributors, VARs, OEMs and systems integrators. To do this, we will
need to modify and expand our existing relationships with these indirect channel
partners, as well as enter into new indirect sales channel relationships. We may
not be successful in accomplishing these objectives. If we are unable to expand
our direct or indirect sales channels, our ability to increase revenues may be
limited.
BECAUSE WE DO NOT HAVE EXCLUSIVE RELATIONSHIPS WITH OUR DISTRIBUTORS OR
RESELLERS, THESE CUSTOMERS MAY GIVE HIGHER PRIORITY TO PRODUCTS OF COMPETITORS,
WHICH COULD HARM OUR OPERATING RESULTS.
Our distributors and resellers generally offer products of several
different companies, including products of our competitors. Accordingly, these
distributors and resellers may give higher priority to products of our
competitors, which could harm our operating results. In addition, our
distributors and resellers often demand additional significant selling
concessions and inventory rights, such as limited return rights and price
protection. We cannot assure you that sales to our distributors or resellers
will continue, or that these sales will be profitable.
BECAUSE OF OUR LIMITED OPERATING HISTORY IN THE NAS MARKET, WHICH IS NEW AND
RAPIDLY EVOLVING, OUR HISTORICAL FINANCIAL INFORMATION IS OF LIMITED VALUE IN
PROJECTING OUR FUTURE OPERATING RESULTS OR PROSPECTS.
We have been manufacturing and selling our NAS products for only
approximately three years. For the year ended July 31, 2000 and the quarter
ended October 31, 2000, these products accounted for less than 41% and 59%,
respectively, of our total net sales. We expect sales of our NAS products to
represent an increasing percentage of our net sales in the future. Because of
our limited operating history in the NAS product market, as well as the rapidly
evolving nature of the NAS market, it is difficult to evaluate our business or
our prospects. In particular, our historical financial information is of limited
value in projecting our future operating results.
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OUR MARKETS ARE INTENSELY COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE
EFFECTIVELY, WE MAY LOSE MARKET SHARE OR BE REQUIRED TO REDUCE PRICES.
The markets in which we operate are intensely competitive and
characterized by rapidly changing technology. Increased competition could result
in price reductions, reduced gross margins or loss of market share, any of which
could harm our operating results. We compete with other NAS companies,
direct-selling storage providers and smaller vendors that provide storage
solutions to end-users. In our non-NAS markets, we compete with computer
manufacturers that provide storage upgrades for their own products, as well as
with manufacturers of hard drives, CD servers and arrays and storage upgrade
products. Many of our current and potential competitors have longer operating
histories, greater name recognition, larger customer bases and greater
financial, technical, marketing and other resources than we do. As a result,
they may be able to respond more quickly to new or emerging technologies and
changes in customer requirements, devote greater resources to the development,
promotion, sale and support of their products, and reduce prices to increase
market share. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We may not be able to
compete successfully against current or future competitors. In addition, new
technologies may increase competitive pressures.
WE DEPEND ON A FEW CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR NET SALES AND
ACCOUNTS RECEIVABLE, AND CHANGES IN THE TIMING AND SIZE OF THESE CUSTOMERS'
ORDERS MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE.
Three customers accounted for approximately 42% and 45% of the Company's
total accounts receivable at July 31, 1999 and July 31, 2000, respectively, and
one individual customer accounted for approximately 9% and 7% of the Company's
net sales for fiscal 1999 and 2000. One customer accounted for approximately 25%
of our net sales for the quarter ended October 31, 2000, and three customers
accounted for approximately 61% of our total accounts receivable at October 31,
2000. In fiscal 1999 and 2000, we sold our non-NAS products principally to
distributors and master resellers such as Ingram Micro, Tech Data, Custom Edge
(previously Inacom) and Compucom. Unless and until we diversify and expand our
customer base for NAS products, our future success will depend to a large extent
on the timing and size of future purchase orders, if any, from these customers.
If we lose a major customer, or if one of our customers significantly reduces
its purchasing volume or experiences financial difficulties and is unable to pay
its debts, our results of operations could be harmed. We cannot be certain that
customers that have accounted for significant revenues in past periods will
continue to purchase our products in future periods.
OUR GROSS MARGINS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST AND MAY CONTINUE TO
FLUCTUATE SIGNIFICANTLY, THEREBY HARMING OUR RESULTS OF OPERATIONS.
Historically, our gross margins have fluctuated significantly. Our gross
margins vary significantly by product line and distribution channel, and,
therefore, our overall gross margin varies with the mix of products we sell. Our
markets are characterized by intense competition and declining average unit
selling prices over the course of the relatively short life cycles of individual
products. For example, we derive a significant portion of our sales from disk
drives, CD servers and arrays, and storage upgrade products. The market for
these products is highly competitive and subject to intense pricing pressures.
Sales of disk drive upgrade systems generally generate lower gross margins than
those of our NAS products. If we fail to increase sales of our NAS appliances,
we believe our overall gross margins will continue to decline.
Our gross margins have been and may continue to be affected by a variety
of other factors, including:
o new product introductions and enhancements;
o competition;
o changes in the distribution channels we use;
o the mix and average selling prices of products; and
o the cost and availability of components and manufacturing labor.
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IF WE ARE UNABLE TO INTRODUCE NEW PRODUCTS, OR IF OUR PRODUCTS FAIL TO KEEP PACE
WITH TECHNOLOGICAL CHANGES IN THE MARKETS WE SERVE, OUR OPERATING RESULTS COULD
BE MATERIALLY ADVERSELY AFFECTED.
Our future growth will depend in large part upon our ability to
successfully develop and introduce new hardware and software for the NAS market.
Due to the complexity of products such as ours, and the difficulty in estimating
the engineering effort required to produce new products, we face significant
challenges in developing and introducing new products. We may be unable to
introduce new products on a timely basis or at all. If we are unable to
introduce new products in a timely manner, our operating results could be
harmed.
Even if we are successful in introducing new products, we may be unable
to keep pace with technological changes in our markets and our products may not
gain any meaningful market acceptance. The markets we serve are characterized by
rapid technological change, evolving industry standards, and frequent new
product introductions and enhancements that could render our products obsolete
and less competitive. As a result, our position in these markets could erode
rapidly due to changes in features and functions of competing products or price
reductions by our competitors. In order to avoid product obsolescence, we will
have to keep pace with rapid technological developments and emerging industry
standards. We may not be successful in doing so, and if we fail in this regard,
our operating results could be harmed.
WE RELY UPON A LIMITED NUMBER OF SUPPLIERS FOR SOME OF THE COMPONENTS USED IN
OUR PRODUCTS, AND ANY DISRUPTION OR TERMINATION OF THESE SUPPLY ARRANGEMENTS
COULD DELAY SHIPMENT OF OUR PRODUCTS AND HARM OUR OPERATING RESULTS.
We rely upon a limited number of suppliers of several key components
used in our products, including disk drives, computer boards, power supplies and
microprocessors. In the past, we have experienced periodic shortages, selective
supply allocations and increased prices for these and other components. We may
experience similar supply issues in the future. Even if we are able to obtain
component supplies, the quality of these components may not meet our
requirements. For example, in order to meet our product performance
requirements, we must obtain disk drives of extremely high quality and capacity.
Even a small deviation from our requirements could render any of the disk drives
we receive unusable by us. In the event of a reduction or interruption in the
supply or a degradation in quality of any of our components, we may not be able
to complete the assembly of our products on a timely basis or at all, which
could force us to delay or reduce shipments of our products. If we were forced
to delay or reduce product shipments, our operating results could be harmed. In
addition, product shipment delays could adversely affect our relationships with
our channel partners and current or future end-users.
UNDETECTED DEFECTS OR ERRORS FOUND IN OUR PRODUCTS, OR THE FAILURE OF OUR
PRODUCTS TO PROPERLY INTERFACE WITH THE PRODUCTS OF OTHER VENDORS, MAY RESULT IN
DELAYS, INCREASED COSTS OR FAILURE TO ACHIEVE MARKET ACCEPTANCE, WHICH COULD
MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.
Complex products such as those we develop and offer may contain defects
or errors, or may fail to properly interface with the products of other vendors,
when first introduced or as new versions are released. Despite internal testing
and testing by our customers or potential customers, we do, from time to time,
and may in the future encounter these problems in our existing or future
products. Any of these problems may:
o cause delays in product introductions and shipments;
o result in increased costs and diversion of development resources;
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o require design modifications; or
o decrease market acceptance or customer satisfaction with these
products, which could result in product returns.
In addition, we may not find errors or failures in our products until
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance, which could significantly harm our operating results. Our
current or potential customers might seek or succeed in recovering from us any
losses resulting from errors or failures in our products.
IF WE ARE UNABLE TO MANAGE OUR INTERNATIONAL OPERATIONS EFFECTIVELY, OUR
OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED.
Net sales to our international customers, including export sales from
the United States, accounted for approximately 58% of our net sales for the
quarter ended October 31, 2000 as compared to 41% of our net sales for the
quarter ended October 31, 1999, 41% of our net sales for the year ended July 31,
2000 and approximately 33% of our net sales for the fiscal year ended July 31,
1999. We believe that our growth and profitability will require successful
expansion of our international operations to which we have committed significant
resources. Our international operations will expose us to operational challenges
that we would not otherwise face if we conducted our operations only in the
United States. These include:
o currency exchange rate fluctuations, particularly when we sell our
products in denominations other than U.S. dollars;
o difficulties in collecting accounts receivable and longer accounts
receivable payment cycles;
o reduced protection for intellectual property rights in some
countries, particularly in Asia;
o legal uncertainties regarding tariffs, export controls and other
trade barriers;
o the burdens of complying with a wide variety of foreign laws and
regulations; and
o seasonal fluctuations in purchasing patterns in other countries,
particularly in Europe.
Any of these factors could have an adverse impact on our existing
international operations and business or impair our ability to continue
expanding into international markets. For example, our reported sales can be
affected by changes in the currency rates in effect during any particular
period. The effects of currency fluctuations were evident in our results of
operations for the quarter ended October 31, 2000. During this quarter, the Euro
and two currencies whose values are pegged to the Euro, declined in value
significantly. Not only did this cause a foreign currency loss of approximately
$161,000, but it also caused us to report $240,000 less in sales than we would
have reported had the Euro remained constant over the quarter ended October 31,
2000.
In order to successfully expand our international sales, we must
strengthen foreign operations, hire additional personnel and recruit additional
international distributors and resellers. Expanding internationally and managing
the financial and business operations of our foreign subsidiaries will also
require significant management attention and financial resources. For example,
our foreign subsidiaries in Europe have incurred operational losses. To the
extent that we are unable to address these concerns in a timely manner, our
growth, if any, in international sales will be limited, and our operating
results could be materially adversely affected. In addition, we may not be able
to maintain or increase international market demand for our products.
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OUR PROPRIETARY SOFTWARE RELIES ON OUR INTELLECTUAL PROPERTY, AND ANY FAILURE BY
US TO PROTECT OUR INTELLECTUAL PROPERTY COULD ENABLE OUR COMPETITORS TO MARKET
PRODUCTS WITH SIMILAR FEATURES THAT MAY REDUCE DEMAND FOR OUR PRODUCTS, WHICH
WOULD ADVERSELY AFFECT OUR NET SALES.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our proprietary software
or technology. We believe the protection of our proprietary technology is
important to our business. If we are unable to protect our intellectual property
rights, our business could be materially adversely affected. We currently rely
on a combination of copyright and trademark laws, trade secrets and a patent to
protect our proprietary rights. In addition, we generally enter into
confidentiality agreements with our employees and license agreements with
end-users and control access to our source code and other intellectual property.
We have applied for the registration of some, but not all, of our trademarks. We
have applied for one U.S. patent with respect to the design of our NetFORCE
product, and we anticipate that we will apply for additional patents. It is
possible that no patents will issue from our currently pending applications. New
patent applications may not result in issued patents and may not provide us with
any competitive advantages over, or may be challenged by, third parties. Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy aspects of our products or to obtain and use information that we regard
as proprietary. In addition, the laws of some foreign countries, and the
enforcement of those laws, do not protect proprietary rights to as great an
extent as do the laws of the United States. We cannot assure you that our means
of protecting our proprietary rights will be adequate or that our competitors
will not independently develop similar technology, duplicate our products or
design around any patent issued to us or other intellectual property rights of
ours.
In addition, we may initiate claims or litigation against third parties
for infringement of our proprietary rights to establish the validity of our
proprietary rights. This litigation, whether or not it is resolved in our favor,
could result in significant expense to us and divert the efforts of our
technical and management personnel.
WE MAY FROM TIME TO TIME BE SUBJECT TO CLAIMS OF INFRINGEMENT OF OTHER PARTIES'
PROPRIETARY RIGHTS OR CLAIMS THAT OUR OWN TRADEMARKS, PATENTS OR OTHER
INTELLECTUAL PROPERTY RIGHTS ARE INVALID, AND IF WE WERE TO SUBSEQUENTLY LOSE
OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS WOULD BE MATERIALLY ADVERSELY
AFFECTED.
We may from time to time receive claims that we are infringing third
parties' intellectual property rights or claims that our own trademarks, patents
or other intellectual property rights are invalid. We expect that companies in
our markets will increasingly be subject to infringement claims as the number of
products and competitors in our industry segment grows and the functionality of
products in different industry segments overlaps. The resolution of any claims
of this nature, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays, require us to redesign our products
or require us to enter into royalty or licensing agreements, any of which could
harm our operating results. Royalty or licensing agreements, if required, might
not be available on terms acceptable to us or at all. The loss of access to any
key intellectual property right could harm our business.
OUR NET SALES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND ANY
FLUCTUATIONS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.
In recent periods, we have experienced significant declines in net sales
and gross profit and incurred operating losses, causing our quarterly operating
results to vary significantly. If we fail to meet the expectations of investors
or securities analysts, as well as our internal operating goals, as a result of
any future fluctuations in our quarterly operating results, the market price of
our common stock could decline significantly. Our net sales and quarterly
operating results are likely to fluctuate significantly in the future due to a
number of factors. These factors include:
o market acceptance of our new products and product enhancements or
those of our competitors;
o the level of competition in our target product markets;
o delays in our introduction of new products;
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<PAGE> 12
o changes in sales volumes through our distribution channels, which
have varying commission and sales discount structures;
o changing technological needs within our target product markets;
o the impact of price competition on the selling prices for our
non-NAS products, which continue to represent a majority of our net
sales;
o the availability and pricing of our product components;
o our expenditures on research and development and the cost to expand
our sales and marketing programs; and
o the volume, mix and timing of orders received.
Due to these factors, we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and should not be
relied upon as indicators of future performance.
In addition, it is difficult for us to forecast accurately our future
net sales. This difficulty results from our limited operating history in the
emerging NAS market, as well as the fact that product sales in any quarter are
generally booked and shipped in that quarter. Because we incur expenses, many of
which are fixed, based in part on our expectations of future sales, our
operating results may be disproportionately affected if sales levels are below
our expectations.
Our revenues in any quarter may also be affected by product returns and
any warranty obligations in that quarter. Many of our distribution and reseller
customers have limited return rights. In addition, we generally extend
warranties to our customers that correspond to the warranties provided by our
suppliers. If returns exceed applicable reserves or if a supplier were to fail
to meet its warranty obligations, we could incur significant losses. In fiscal
2000, we experienced a 14% product return rate. This rate may vary significantly
in the future, and we cannot assure you that our reserves for product returns
will be adequate in any future period.
IF WE ARE UNABLE TO ATTRACT QUALIFIED PERSONNEL OR RETAIN OUR EXECUTIVE OFFICERS
AND OTHER KEY PERSONNEL, WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
Our continued success depends, in part, on our ability to identify,
attract, motivate and retain qualified technical and sales personnel.
Competition for qualified engineers and sales personnel, particularly in Orange
County, California, is intense, and we may not be able to compete effectively to
retain and attract qualified, experienced employees. Should we lose the services
of a significant number of our engineers or sales people, we may not be able to
compete successfully in our targeted markets and our business would be harmed.
We believe that our success will depend on the continued services of our
executive officers and other key employees. In particular, we rely on the
services of our four founders, Messrs. Razmjoo, Alaghband, Aydin and
Shahrestany. We maintain employment agreements with each of our founders. We do
not maintain key-person life insurance policies on these individuals. The loss
of any of these executive officers or other key employees could harm our
business.
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<PAGE> 13
WE MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY, AND OUR FAILURE TO DO SO
COULD REQUIRE US TO SEEK ADDITIONAL FINANCING, WHICH MAY NOT BE AVAILABLE TO US
ON FAVORABLE OR ANY TERMS.
In recent periods, we have experienced significant declines in net sales
and gross profit, and we have incurred operating losses. We incurred operating
losses of $5.2 million for fiscal 1999, $ 12.1 million for fiscal 2000 and $1.6
million for the quarter ended October 31, 2000. We expect to continue to incur
operating losses through at least the third quarter of fiscal 2001. As part of
our strategy to focus on the NAS market, we plan to significantly increase our
direct sales force and to increase our investment in research and development
and marketing efforts. We will need to significantly increase our revenues from
our NAS products to achieve and maintain profitability. The revenue and profit
potential of these products is unproven. We may not be able to generate
significant or any revenues from our NAS products or achieve or sustain
profitability in the future. In addition, we have invested substantial cash in
our new corporate headquarters. If we are unable to achieve or sustain
profitability in the future, we will have to seek additional financing in the
future, which may not be available to us on favorable or any terms.
CONTROL BY OUR EXISTING SHAREHOLDERS COULD DISCOURAGE POTENTIAL ACQUISITIONS OF
OUR BUSINESS THAT OTHER SHAREHOLDERS MAY CONSIDER FAVORABLE.
Our executive officers, directors and 5% or greater shareholders and
their affiliates own 6,400,000 shares, or approximately 52% of the outstanding
shares of common stock. Acting together, these shareholders would be able to
exert substantial influence on matters requiring approval by shareholders,
including the election of directors. This concentration of ownership could have
the effect of delaying or preventing a change in our control or otherwise
discouraging a potential acquiror from attempting to obtain control of us, which
could in turn have an adverse effect on the market price of our common stock or
prevent our shareholders from realizing a premium over the market price for
their shares of common stock.
THE MARKET PRICE FOR OUR COMMON STOCK HAS FLUCTUATED SIGNIFICANTLY IN THE PAST
AND WILL LIKELY CONTINUE TO DO SO IN THE FUTURE, WHICH COULD RESULT IN A DECLINE
IN YOUR INVESTMENT'S VALUE.
The market price for our common stock has been volatile in the past, and
particularly volatile in the last twelve months, and may continue to fluctuate
substantially in the future. The value of your investment in our common stock
could decline due to the impact of any of the above or of the following factors
upon the market price of our common stock:
o fluctuations in our operating results;
o fluctuations in the valuation of companies perceived by investors to
be comparable to us;
o a shortfall in net sales or operating results compared to securities
analysts' expectations;
o changes in analysts' recommendations or projections;
o announcements of new products, applications or product enhancements
by us or our competitors; and
o changes in our relationships with our suppliers or customers.
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<PAGE> 14
WE HAVE ISSUED A CONVERTIBLE DEBENTURE, AND THE OBLIGATIONS OF THE DEBENTURE
POSE RISKS TO THE PRICE OF OUR COMMON STOCK AND OUR OPERATIONS.
As we have described below under the heading "Selling Shareholder," on
October 31, 2000, we issued 3-year $15 million convertible debentures to a
private investor. The debentures provide that in certain circumstances the
holder of the debentures may convert its position into our stock, or demand that
we repay amounts outstanding with cash or by issuing shares of our common stock.
The terms and conditions of the debentures pose unique and special risks to our
operations and the price of our common stock. Some of those risks are discussed
in more detail below.
OUR ISSUANCE OF STOCK UPON THE CONVERSION OR "PUT" OF THE DEBENTURES AND THE
EXERCISE OF THE WARRANTS, AS WELL AS ADDITIONAL SALES OF OUR COMMON STOCK BY THE
SELLING SHAREHOLDER, MAY DEPRESS THE PRICE OF OUR COMMON STOCK AND SUBSTANTIALLY
DILUTE YOUR SHARES
We have registered for potential resale by the selling shareholder a
total of 1,586,228 shares of our common stock. This number represents 200% of
the number of shares of our common stock issuable if the selling shareholder's
warrant is exercised in full and our debentures were to remain outstanding until
their stated maturity on October 31, 2003 and all interest on the debentures is
paid in shares of our stock. As is noted in the risk factor immediately below,
if the selling shareholder were to exercise its "put" right and we were to
satisfy this right by issuing shares of our common stock, we could be required
to issue a substantially greater number of our shares to the selling
shareholder. The issuance of all or any significant portion of these shares
could result in substantial dilution to the interests of our other shareholders
and a decrease in the price of our stock. Sales by the selling shareholder of
our common stock received upon the exercise or "put" of the debentures or upon
exercise of the selling shareholder's warrant could also cause our stock price
to decline due to the additional supply of shares relative to demand in the
market. A decline in the price of our common stock could encourage short sales
of our stock, which could place further downward pressure on the price of our
stock.
THE SELLING SHAREHOLDER HAS A RIGHT TO DEMAND REPAYMENT OF PART OR ALL OF THE
DEBENTURES, AND IF A DEMAND FOR REPAYMENT IS MADE, AND WE ARE UNABLE OR
UNWILLING TO REPAY THE DEBENTURES IN CASH, WE MAY HAVE TO ISSUE SHARES
SUBSTANTIALLY IN EXCESS OF THOSE ORIGINALLY CONTEMPLATED, AND THOSE ADDITIONAL
SHARES WILL DILUTE YOUR SHARES.
The debentures provide the selling shareholder with a "put" right, the
opportunity to demand at specified times that we repay the debentures in cash,
or else we must issue shares at 90% of the then market price for shares of our
common stock, but not more than $22.79 per share. Accordingly, if a selling
shareholder exercises its "put" right, and we are either unwilling or unable to
repay the cash, and the market price of our shares is lower than $22.79, we will
have to issue shares to satisfy the "put" right of the selling shareholder. The
number of shares that we may be required to issue to satisfy the selling
shareholder's exercise of the "put" right could be substantial. For example, if
the market price of our common stock were to decline by 75% from the market
price of $11.25 per share on December 20, 2000, which represents the lowest
closing price reached by our shares since the date the debentures were issued,
we would be required to issue the selling shareholder approximately 5,926,000
shares, which would result in the selling shareholder owning nearly 33% of our
outstanding stock. See "Description of Securities Issued to Selling
Shareholder."
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<PAGE> 15
IF OUR SHARES ARE ISSUED TO THE SELLING SHAREHOLDER, THOSE SHARES MAY BE SOLD
INTO THE MARKET, WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND ENCOURAGE SHORT
SALES OF OUR STOCK.
To the extent the debentures are converted or interest on the
debentures is paid in shares of our common stock rather than cash, a significant
number of these shares of our common stock may be sold into the market, which
could decrease the price of our common stock and encourage short sales. Short
sales could place further downward pressure on the price of our common stock. In
that case, we could be required to issue an increasingly greater number of
shares of our common stock upon future conversions of the debentures as a result
of the adjustments described above, sales of which could further depress the
price of our common stock.
THE DEBENTURES PROVIDE FOR VARIOUS EVENTS OF DEFAULT THAT WOULD ENTITLE THE
SELLING SHAREHOLDERS TO REQUIRE THE COMPANY TO REPAY THE ENTIRE AMOUNT OWED IN
CASH WITHIN THREE DAYS. IF AN EVENT OF DEFAULT OCCURS, WE MAY BE UNABLE TO
IMMEDIATELY REPAY THE AMOUNT OWED, AND ANY REPAYMENT MAY LEAVE US WITH LITTLE OR
NO WORKING CAPITAL IN OUR BUSINESS.
The debentures provide for various events of default, including
the following:
- the occurrence of an event of default under our loan agreements with
The CIT Group;
- our failure to pay the principal, interest or any liquidated damages
due under the debentures;
- our failure to make any payment on any indebtedness of $1 million or
more to any third party if that failure results in the acceleration
of the maturity of that indebtedness;
- an acquisition after October 31, 2000 by any individual or entity,
other than the selling shareholder and its affiliates, of more than
40% of our voting or equity securities;
- the replacement of more than 50% of the persons serving as our
directors as of October 31, 2000, unless the replacement director or
directors are approved by our directors as of October 31, 2000 or by
successors whose nominations they have approved;
- a merger or consolidation of our company or a sale of more than 50%
of its assets unless the holders of our securities immediately prior
to such transaction continue to hold at least a majority of the
voting rights and equity interests of the surviving entity or the
acquirer of our assets;
- our entry into bankruptcy;
- our common stock fails to be listed or quoted for trading on the New
York Stock Exchange, the American Stock Exchange, the Nasdaq
National Market or the Nasdaq SmallCap Market;
- our completion of a "going private" transaction under SEC Rule
13e-3;
- a holder of shares issuable under the debentures or the warrant is
not permitted to sell those securities under our registration
statement covering those shares for a period of five or more trading
days;
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<PAGE> 16
- our registration statement covering the shares of our common stock
underlying the debentures and the warrant is not declared effective
by the Commission by the 150th day following October 31, 2000;
- we fail to deliver certificates evidencing shares of our common
stock underlying the debentures or the warrant within five days
after the deadline specified in our transaction documents with the
selling shareholder;
- we fail to have a sufficient number of authorized but unissued and
otherwise unreserved shares of our common stock available to issue
such stock upon any exercise or conversion of the warrant and the
debentures;
- the exercise or conversion rights of the selling shareholder under
the warrant or the debentures are suspended for any reason, except
as provided in the applicable transaction documents;
- we default on specified obligations under our registration rights
agreement with the selling shareholder and fail to cure any such
default within 60 days; and
- other than the specified defaults under the registration rights
agreement referred to above, we default in the timely performance of
any obligation under the transaction documents with the selling
shareholder and fail to cure any of these defaults for 20 days after
we are notified of the default.
If an event of default occurs, the selling shareholder can require us
to repurchase all or any portion of the principal amount of any outstanding
debentures at a repurchase price equal to the greater of 110% of such
outstanding principal amount, plus all accrued but unpaid interest on such
outstanding debentures through the date of payment, or the total value of all of
our shares issuable upon conversion of such outstanding debentures, valued based
on the average closing price of our common stock for the preceding five trading
days, plus any accrued but unpaid interest on such outstanding debentures. In
addition, upon an event of default under the debentures, the selling shareholder
could also require us to repurchase from the selling shareholder any of our
shares of common stock issued to the selling shareholder upon conversion of the
debentures within the preceding 30 days, which would be valued at the average
closing price of our common stock over the preceding five trading days. We would
be required to complete these repurchases no later than the third trading day
following the date an event of default notice is delivered to us.
If we were required to make a default payment at a time when all of the
debentures were outstanding, the payment required would be a minimum of $16.5
million and could be substantially greater depending upon the market price of
our common stock at the time. In addition, if we default in the timely
performance of specified obligations under our registration rights agreement
with the selling shareholder, we would also be obligated to pay as liquidated
damages to the selling shareholder an amount equal to $300,000 each month until
any such default is cured.
Some of the events of default include matters over which we may have
some, little or no control, such as various corporate transactions in which the
control of our company changes, or if our common stock ceases to be listed on a
trading market. If an event of default occurs, we may be unable to repay any
part or all of the entire amount in cash. Any such repayment could leave us with
little or no working capital for our business.
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<PAGE> 17
THE DEBENTURES RESTRICT OUR ABILITY TO RAISE ADDITIONAL EQUITY, WITHOUT THE
CONSENT OF THE SELLING SHAREHOLDER, WHICH COULD HINDER OUR EFFORTS TO OBTAIN
ADDITIONAL NECESSARY FINANCING TO OPERATE OUR BUSINESS, OR TO REPAY THE
DEBENTURE HOLDERS.
The agreements we executed when we issued these debentures prohibit us
from obtaining additional equity or equity equivalent financing for a period of
90 trading days after the date we issued the debentures. We also agreed that for
a period of 180 trading days after the issuance of the debentures, we would not,
without the selling shareholder's consent, obtain additional equity or equity
equivalent financing unless we first offer the selling shareholder the
opportunity to provide such financing upon the terms and conditions proposed.
These restrictions have several exceptions, such as issuances of options to
employees and directors, strategic transactions and acquisitions and bona fide
public offerings with proceeds exceeding $20 million in gross proceeds. However,
the restrictions may make it extremely difficult to raise additional equity
capital during the 90 day and 180 day periods. We may need to raise such
additional capital, and if we are unable to do so, we may have little or no
working capital for our business, and the market price of our stock may decline.
WE MAY BE REQUIRED TO PAY LIQUIDATED DAMAGES IF WE DO NOT OBTAIN SHAREHOLDER
APPROVAL FOR ISSUANCE OF OUR COMMON STOCK, OR IF WE ARE UNABLE TO TIMELY
REGISTER THESE SHARES.
We are subject to National Association of Securities Dealers Rule 4460,
which generally requires shareholder approval of any transaction that would
result in the issuance of securities representing 20% or more of an issuer's
outstanding listed securities. Upon conversion or the payment of interest on
debentures we are not able to issue more than 2,322,150 shares, or 19.99% of our
outstanding common stock on October 30, 2000, the day prior to the date of
issuance of the debentures. The terms of the convertible debentures purchase
agreement also provide that the shareholder desiring to convert has the option
of requiring us either to seek shareholder approval within 75 days of the
request or to pay the converting holder the monetary value of the debentures
that cannot be converted, at a premium to the converting holder. If the
shareholder chooses that we convert the debentures into shares and we have not
obtained the requisite shareholder approval within 75 days, we would be
obligated to pay the monetary value to the purchaser as liquidated damages.
Also, under the terms of the Registration Rights Agreement, we will incur
liquidated damages of approximately $300,000 per month if we are unable to
register the shares, or maintain the registration of the shares, of common stock
issuable upon the conversion of the debentures and the exercise of those
warrants.
EVEN IF WE NEVER ISSUE OUR STOCK UPON EXERCISE OR PUT OF THE DEBENTURES OR UPON
EXERCISE OF THE SELLING SHAREHOLDER'S WARRANTS, WE MAY ISSUE ADDITIONAL SHARES,
WHICH WOULD REDUCE YOUR OWNERSHIP PERCENTAGE AND DILUTE THE VALUE OF YOUR
SHARES.
Events over which you have no control could result in the issuance of
additional shares of our common stock, which would dilute your ownership
percentage in Procom. We may issue additional shares of common stock or
preferred stock: to raise additional capital or finance acquisitions, upon the
exercise or conversion of outstanding options, warrants and shares of
convertible preferred stock, or in lieu of cash payment of dividends. For
example, on December 28, 2000, we issued 480,000 shares of our common stock to
acquire Scofima Software S.r.l. Our issuance of additional shares would dilute
your shares.
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<PAGE> 18
FORWARD LOOKING STATEMENTS
Certain forward-looking statements, including statements regarding our
expected financial position, business and financing plans are contained in this
prospectus or in documents incorporated by reference in this prospectus. These
forward-looking statements reflect our views with respect to future events and
financial performance. The words, "believe," "expect," "plans" and "anticipate"
and similar expressions identify forward-looking statements. Although we believe
that the expectations reflected in such forward-looking statements are
reasonable, we can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from such expectations are disclosed in this prospectus, including,
without limitation, under "Risk Factors" in reports filed by us with the
Securities and Exchange Commission and incorporated by reference in this
prospectus, and all subsequent written and oral forward-looking statements
attributable to us are expressly qualified in their entirety by the cautionary
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. We undertake no
obligations to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
USE OF PROCEEDS
The selling shareholder will receive all of the proceeds from the sale
of its common stock offered by this prospectus. We will not receive any of the
proceeds from the sale of the shares of common stock by the selling shareholder.
We will, however, receive the exercise price of the warrants if and when those
warrants are exercised. If all of the warrants are exercised, we estimate our
net proceeds will be $1,071,416. We intend to use any proceeds from warrant
exercises for working capital and other corporate purposes.
SELLING SHAREHOLDER
On October 31, 2000, Montrose Investments Ltd. acquired debentures and
a common stock purchase warrant convertible into shares of our common stock.
Montrose Investments Ltd. and its affiliates may not use these debentures and
warrant to acquire more than 4.999% of our outstanding common stock. Montrose
Investments Ltd. can waive this restriction on not less than 61 days notice to
us. The number of shares of our common stock listed in the table below as being
beneficially owned by the selling shareholder includes the shares that are
issuable to the selling shareholder, subject to a 4.999% limitation, upon
exercise of the warrants or conversion of the debentures. However, the 4.999%
limitation would not prevent the selling shareholder from acquiring and selling
in excess of 4.999% of our common stock through a series of acquisitions and
sales under the warrant or debentures, while never beneficially owning more than
4.999% at any one time.
This prospectus relates to the resale of shares of our common stock by
the selling shareholder. We determined the number of shares of common stock to
be offered for resale by this prospectus by agreement with the selling
shareholder and in order to adequately cover the number of shares required. This
prospectus covers the resale of 200% of the number of shares of common stock
issuable upon full conversion of the debentures, plus the number of shares
issuable in lieu of cash interest payable on the debentures over three years,
plus the number of shares issuable upon full exercise of the selling
shareholder's warrant. We will not receive any proceeds from the resale of
common stock by the selling shareholder, although we may receive proceeds from
the exercise of warrants. Assuming the selling shareholder sells all of the
shares of our common stock covered by this prospectus, the selling shareholder
will not continue to own any shares of our common stock.
Beneficial ownership includes shares of outstanding common stock and
the shares of common stock that a person has a right to acquire within 60 days
after the date of this prospectus.
<TABLE>
<CAPTION>
Number of shares
Number of shares of common stock/
of common stock Number of shares Percentage of Class to be
beneficially owned at to be offered owned after Completion
Name November 22, 2000(2) for resale of the Offering(3)
---- --------------------- ---------------- -------------------------
<S> <C> <C> <C>
Montrose Investments Ltd.(1) 610,966 1,586,228 --
</TABLE>
--------------
(1) HBK Investments L.P. has voting and investment control over the securities
of Montrose Investments Ltd. pursuant to an Investment Management Agreement.
Each of Harlan B. Korenvaes, Kenneth M. Hirsh, Laurence H. Lebowitz, William
E. Rose, Richard L. Booth, David C. Haley and Jamiel A. Akhtar may be deemed
to have voting and investment control as the members of HBK Management LLC,
the general partner of HBK Partners II L.P., which is the general partner of
HBK Investments L.P.
(2) This amount reflects the maximum amount of shares of our common stock into
which the common stock purchase warrants and debentures owned by the selling
shareholder are exercisable or convertible within the next 60 days.
(3) Assumes sale of all shares offered hereby.
There is no assurance that the selling shareholder will exercise any
part or all of its warrant or will otherwise opt to sell any of the shares
offered under this prospectus. To the extent required, the specific shares to be
sold, the names of the selling shareholder, other additional shares of common
stock beneficially owned by the selling shareholder, the public offering price
of the shares to be sold, the names of any agent, dealer or underwriter employed
by the selling shareholder in connection with such sale, and any applicable
commission or discount with respect to a particular offer will be set forth in
an accompanying prospectus supplement.
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<PAGE> 19
DESCRIPTION OF SECURITIES ISSUED TO SELLING SHAREHOLDER
DEBENTURES
General
On October 31, 2000 we issued to the selling shareholder a total of
$15.0 million of our convertible debentures due October 31, 2003. We also issued
the selling shareholder warrants to purchase up to 32,916 shares of our common
stock at an exercise price of $32.55 per share, subject to adjustment as
described below. The net proceeds to us from this private placement were
approximately $14.4 million. At the current exercise price, we would receive an
additional $1.1 million if the warrants were exercised in full.
Interest
The Debentures bear interest at the rate of 6% per annum, payable
quarterly. We have the option of paying this interest in cash or in shares of
our common stock. If we pay interest in common stock, that stock will be valued
at the average of the closing prices of our common stock as reported by Nasdaq
for the five trading days preceding the date that interest payment is due or the
first trading day after that date if the interest payment date is not a trading
day.
Conversion
At the option of the selling shareholder. The debentures are convertible
at the option of the selling shareholder at any time after issuance at a
conversion price of $22.79, subject to anti-dilution adjustment as a result of
such events as stock dividends, distributions, subdivisions, combinations or
reclassifications of our common stock. The conversion price is also subject to a
weighted average adjustment if, subject to certain exceptions, we issue our
common stock (other than to the selling shareholder) at a price below the
conversion price then in effect for the debentures. The weighted average
adjustment means that if we issue our stock at a per share price less than the
debenture conversion price then in effect, the conversion price will be reduced
on a weighted average basis, which will allow the selling shareholder to convert
the debentures into a greater number of shares of our common stock. Under the
weighted average adjustment provisions of the debentures, the more shares we
issue (other than to the selling shareholder), and the greater the discount at
which these shares are issued to the conversion price then in effect, the
greater the resulting reduction in the conversion price.
At our option. If the market price of our common stock exceeds $27.04
per share for at least 20 trading days in any period of 30 consecutive trading
days after the effective date of the registration statement of which this
prospectus is a part, we can require the selling shareholder to convert the
outstanding debentures into shares of our common stock at the conversion price
then in effect. At the initial conversion price of $22.79 per share, the full
amount of the debentures would convert into 658,183 shares of our common stock,
or approximately 5.2% of our outstanding shares of common stock as of January 2,
2001.
Repurchase Right
We have the right, upon 20 trading days' notice to the selling
shareholder, to repurchase for cash all or any portion of the outstanding
debentures at a price equal to 110% of the outstanding principal amount of the
debentures plus all accrued but unpaid interest through the date of our
repurchase.
Put Right
The selling shareholder has a "put" right, which allows the selling
shareholder to require us either to repay in cash the face amount of the portion
of the debentures put by the selling shareholder, plus any accrued but unpaid
interest through such time, or pay such amount by issuing shares of our common
stock. In order to pay any portion of the debentures put to us in shares of our
common stock, we are required to deliver a written notice to the selling
shareholder not less than 20 trading days prior to each put date specifying the
maximum amount of cash that we would pay if the put right is exercised. If we
elect to satisfy any part or all of the selling shareholder's put in shares of
our common stock, those shares would be valued at 90% of the average closing
price of our common stock for the five trading day period preceding the
applicable put date. The selling shareholder may put up to $5 million of the
debentures to us on the six-month anniversary of October 31, 2000, $10 million
on the 12-month anniversary of that date, and $15 million on each of the
18-month, 24-month and 30-month anniversaries of October 31, 2000.
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<PAGE> 20
If the selling shareholder exercises its put right and we are unable or
unwilling to pay the cash required to satisfy the put, we will have to issue
shares of our common stock to the selling shareholder at a discount to the
average market price of our stock during the five days preceding the put date.
If the market price of our stock drops, the number of shares issuable to the
selling shareholder, and the percentage of our total outstanding common stock
that the selling shareholder would have the right to acquire, can increase
significantly. Sales of our common stock by the selling shareholder received
from any put or conversion of the debentures or from the exercise of the selling
shareholder's warrants could depress the price of our common stock, which would
in turn require us to issue a greater number of our shares upon any subsequent
puts or conversions of the debentures by the selling shareholder.
The following table sets forth the number of shares of our common stock
that we would be required to issue to the selling shareholder in lieu of cash if
the put right is exercised at assumed five-day average market prices for our
common stock, and the resulting percentage of our outstanding stock that would
then be owned by the selling shareholder.
<TABLE>
<CAPTION>
Assumed 5-trading-day Price of Shares Number of Shares Percentage of
Average Market Prices Issuable On Put(1) Issuable on Put(2) Outstanding Stock(3)
--------------------- ------------------ ------------------ --------------------
<S> <C> <C> <C>
$25.32(4) $22.79 658,183 5.2%
11.25(5) 10.13 1,481,481 10.9%
8.44(-25%)(6) 7.59 1,975,309 14.0%
5.63(-50%)(7) 5.60 2,962,963 19.7%
2.81(-75%)(8) 2.53 5,925,926 32.8%
</TABLE>
-------------
(1) Represents a 10% discount to the average closing price of our common stock
as reported by Nasdaq over the five trading days preceding the put.
(2) The number of shares of common stock issuable to satisfy a put by the
selling shareholder assumes that 100% of the principal amount of the
debentures is paid in shares of our common stock but does not include any
shares that may be issuable to pay interest on the debentures. The share
figure also does not include any shares issuable upon exercise of any part
or all of the selling shareholder's warrant.
(3) Calculated based on 12,116,607 shares of our common stock issued and
outstanding as of January 2, 2001.
(4) Represents the five-trading-day average closing price of our common stock
preceding the closing of the private placement transaction with the selling
shareholder on October 31, 2000.
(5) Represents the closing price of our common stock on December 20, 2000, which
was the lowest closing price of our common stock for any trading day since
the closing of the sale of the debentures and warrant to the selling
shareholder on October 31, 2000.
(6) Represents a 25% decline from the lowest recent closing price of our common
stock specified in footnote (5).
(7) Represents a 50% decline from the lowest recent closing price of our common
stock specified in footnote (5).
(8) Represents a 75% decline from the lowest recent closing price of our common
stock specified in footnote (5).
19
<PAGE> 21
THE WARRANTS
General
At the same time we issued the debentures to the selling shareholder,
we also issued the selling shareholder five-year warrants to purchase our common
stock at an exercise price equal to $32.55 per share.
Anti-Dilution Adjustments
The exercise price and the number of shares of our common stock
issuable upon exercise of the warrant are subject to anti-dilution adjustments
that are similar to those described above for the debentures. For example, the
exercise price is subject to adjustment as a result of such events as stock
dividends, distributions, subdivisions, combinations or reclassifications of our
common stock. The exercise price is also subject to a weighted average
adjustment if we issue our common stock at a price below the exercise price then
in effect for the warrants. The weighted average adjustment means that if we
issue our stock at a per share price less than the warrant exercise price then
in effect, the exercise price will be reduced on a weighted average basis, which
will allow the selling shareholder to receive a greater number of shares of our
common stock upon exercise of the warrants. Under the weighted average
adjustment provisions of the warrants, the more shares we issue in the future
(other than to the selling shareholder), and the greater the discount at which
these shares are issued to the warrant exercise price then in effect, the
greater the resulting reduction in the exercise price of the warrant.
20
<PAGE> 22
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is U.S. Stock
Transfer Corp., Glendale, California.
PLAN OF DISTRIBUTION
The selling shareholder and any of its pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling shareholder may use any one or more of the
following methods when selling shares: ordinary brokerage transactions and
transactions in which the broker-dealer solicits purchasers, block trades in
which the broker-dealer will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction, purchases by a broker-dealer as principal and resale by the
broker-dealer for its account, an exchange distribution in accordance with the
rules of the applicable exchange, privately negotiated transactions, short
sales, broker-dealers may agree with the selling shareholder to sell a specified
number of such shares at a stipulated price per share, a combination of any such
methods of sale, and any other method permitted pursuant to applicable law. The
selling shareholder may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus. The selling shareholder
may also engage in short sales against the box, puts and calls and other
transactions in our securities or derivatives of our securities and may sell or
deliver shares in connection with these trades. The selling shareholder may
pledge its shares to its brokers under the margin provisions of customer
agreements. If the selling shareholder defaults on a margin loan, the broker
may, from time to time, offer and sell the pledged shares. The selling
shareholder has advised us that it has not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of its shares other than ordinary course brokerage arrangements, nor is
there an underwriter or coordinating broker acting in connection with the
proposed sale of shares by the selling shareholder.
Broker-dealers engaged by the selling shareholder may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling shareholder (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling shareholder does not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling shareholder and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by the broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling shareholder. We have agreed to indemnify the selling shareholder against
losses, claims, damages and liabilities, including liabilities under the
Securities Act.
21
<PAGE> 23
LEGAL MATTERS
The validity of the shares of common stock offered hereby and certain
other legal matters will be passed upon for us by Frederick Judd, our Vice
President and General Counsel.
EXPERTS
The consolidated financial statements and schedule as of July 31, 1998
and for the year then ended have been incorporated herein by reference and in
the registration statement in reliance upon the report of Arthur Andersen LLP,
independent public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements and schedule as of July 31, 1999
and 2000 and for the years then ended have been incorporated herein by reference
and in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
We have not authorized any person to make a statement that differs with
what is in this prospectus. If any person does make a statement that differs
from what is in this prospectus, you should not rely on it. This prospectus is
not an offer to sell, nor is it seeking an offer to buy, these securities in any
state in which the offer or sale is not permitted. The information in this
prospectus is complete and accurate as of its date, but the information may
change after that date.
Procom Technology, Inc.
1,586,228 Shares of Common Stock
------------------------------------------------
Prospectus
------------------------------------------------
______________, 2001
22
<PAGE> 24
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates.
SEC registration fee ............... $ 9,118.85
Nasdaq National Market listing fee.. 10,000.00
Printing and engraving.............. 10,000.00
Legal fees and expenses............. 50,000.00
Accounting fees and expenses........ 40,000.00
Blue sky fees and expenses.......... -0-
Transfer agent fees................. 1,000.00
Miscellaneous....................... 5,000.00
-----------
Total ............................ $125,118.85
===========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
We have adopted provisions in our Amended and Restated Articles of
Incorporation that limit the liability of our directors in certain instances. As
permitted by the California General Corporation Law, directors will not be
liable to us for monetary damages arising from a breach of their fiduciary duty
as directors in certain circumstances. See Item 17(a) of this registration
statement regarding the opinion of the Securities and Exchange Commission as to
indemnification of liabilities arising under the Securities Act. Such limitation
does not affect liability for any breach of a director's duty to us or our
shareholders (i) with respect to approval by the director of any transaction
from which he derives an improper personal benefit, (ii) with respect to acts or
omissions involving an absence of good faith, that he believes to be contrary to
our best interests or the best interest of our shareholders, that involve
intentional misconduct or a knowing and culpable violation of law, that
constitute an unexcused pattern of inattention that amounts to an abdication of
his duty to us or our shareholders, or that show a reckless disregard for his
duty to us or our shareholders in circumstances in which he was, or should have
been, aware, in the ordinary course of performing his duties, of a risk of
serious injury to us or our shareholders or (iii) based on transactions between
us and our directors or another corporation with interrelated directors or on
improper distributions, loans, or guarantees under applicable sections of the
California General Corporation Law. Such limitation of liability also does not
affect the availability of equitable remedies such as injunctive relief or
rescission, although in certain circumstances equitable relief may not be
available as a practical matter. The limitation may relieve the directors of
monetary liability to us for grossly negligent conduct, including conduct in
situations involving attempted takeovers. No claim or litigation is currently
pending against our directors that would be affected by the limitation of
liability.
Our Amended and Restated Articles of Incorporation and Amended and
Restated Bylaws provide that we shall indemnify our directors and may indemnify
our officers to the fullest extent permitted by California law, including
circumstances in which indemnification is otherwise discretionary under
California law.
II-1
<PAGE> 25
ITEM 16. EXHIBITS.
(a) EXHIBITS
Exhibit
Number Document
------- --------
4.1 Form of Convertible Debenture dated October 31, 2000
(incorporated by reference to Exhibit 4.1 in the
Registration Statement on Form S-3 of Procom filed on
November 22, 2000)
4.2 Form of Common Stock Purchase Warrant dated October 31,
2000 (incorporated by reference to Exhibit 4.2 in the
Report on Form 8-K filed on November 3, 2000)
4.3 Securities Purchase Agreement dated October 31, 2000
(incorporated by reference to Exhibit 4.3 in the Report on
Form 8-K filed on November 3, 2000)
4.4 Registration Rights Agreement dated October 31, 2000 by
and between the Registrant and Montrose Investments, Ltd.
(incorporated by reference to Exhibit 4.4 in the Report on
Form 8-K filed on November 3, 2000)
4.5 Subordination Agreement dated October 31, 2000 by and
between the Registrant, Montrose Investments, Ltd. and CIT
Group/Business Credit, Inc. (incorporated by reference to
Exhibit 4.5 in the Report on Form 8-K filed on November 3,
2000)
5.1 Opinion of Frederick Judd (incorporated by reference to
Exhibit 5.1 in the Registration Statement on Form S-3 of
Procom filed on November 22, 2000)
10.1 Agreement for Wholesale Financing (Security Agreement)
between Procom Technology, Inc. and IBM Credit
Corporation.
23.1 Consent of KPMG LLP
23.2 Consent of Arthur Andersen LLP, Independent Public
Accountants
23.3 Consent of Frederick Judd (included within Exhibit 5.1)
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act, and is,. therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than a payment by the Registrant
of expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of an action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to
include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-2
<PAGE> 26
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(5) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Procom Technology, Inc. certifies that it has reasonable ground to believe that
it meets all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Santa Ana, State of California, on this 16th day
of January, 2001.
PROCOM TECHNOLOGY, INC.
By: /s/ ALEX RAZMJOO
-------------------------------------
Alex Razmjoo
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Alex Razmjoo Chairman of the Board, President and January 16, 2001
------------------------------ Chief Executive Officer (Principal
Alex Razmjoo Executive Officer)
/s/ Alex Aydin Executive Vice President, Finance and January 16, 2001
------------------------------ Administration (Principal Financial
Alex Aydin Officer)
/s/ Frederick Judd Vice President, Finance and General January 16, 2001
------------------------------ Counsel (Principal Accounting Officer)
Frederick Judd
/s/ Frank Alaghband Director January 16, 2001
------------------------------
Frank Alaghband
/s/ Nick Shahrestany Director January 16, 2001
------------------------------
Nick Shahrestany
Director
------------------------------
Dom Genovese
Director
------------------------------
David Blake
</TABLE>
II-4
<PAGE> 28
INDEX TO EXHIBITS
Exhibit
Number Document
------- --------
4.1 Form of Convertible Debenture dated October 31, 2000 (incorporated
by reference to Exhibit 4.1 in the Registration Statement on Form
S-3 of Procom filed on November 22, 2000)
4.2 Form of Common Stock Purchase Warrant dated October 31, 2000
(incorporated by reference to Exhibit 4.2 in the Report on Form 8-K
filed on November 3, 2000)
4.3 Securities Purchase Agreement dated October 31, 2000 (incorporated
by reference to Exhibit 4.3 in the Report on Form 8-K filed on
November 3, 2000)
4.4 Registration Rights Agreement dated October 31, 2000 by and between
the Registrant and Montrose Investments, Ltd. (incorporated by
reference to Exhibit 4.4 in the Report on Form 8-K filed on
November 3, 2000)
4.5 Subordination Agreement dated October 31, 2000 by and between the
Registrant, Montrose Investments, Ltd. and CIT Group/Business
Credit, Inc. (incorporated by reference to Exhibit 4.5 in the
Report on Form 8-K filed on November 3, 2000)
5.1 Opinion of Frederick Judd (incorporated by reference to Exhibit 5.1
in the Registration Statement on Form S-3 of Procom filed on
November 22, 2000)
10.1 Agreement for Wholesale Financing (Security Agreement) between
Procom Technology, Inc. and IBM Credit Corporation.
23.1 Consent of KPMG LLP
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants
23.3 Consent of Frederick Judd (included within Exhibit 5.1)
