<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 17, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HI/FN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 3674 33-0732700
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
750 UNIVERSITY AVENUE
LOS GATOS, CALIFORNIA 95032
(408) 399-3500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RAYMOND J. FARNHAM
PRESIDENT, CHIEF EXECUTIVE OFFICER
HI/FN, INC.
750 UNIVERSITY AVENUE
LOS GATOS, CALIFORNIA 95032
(408) 399-3500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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<S> <C>
STEVEN E. BOCHNER THOMAS W. KELLERMAN
WILSON SONSINI GOODRICH & ROSATI CURTIS L. MO
PROFESSIONAL CORPORATION BROBECK, PHLEGER & HARRISON LLP
650 PAGE MILL ROAD TWO EMBARCADERO PLACE
PALO ALTO, CA 94304-1050 2200 GENG ROAD
(650) 493-9300 PALO ALTO, CA 94303
(650) 424-0160
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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, as amended (the "Securities Act"), check the following box. [ ]
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 delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
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Common Stock............. 2,300,000 shares $27.88 $64,124,000.00 $17,827.00
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(1) Includes 300,000 shares which the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) The proposed maximum offering price per share and the registration fee were
calculated in accordance with Rule 457(c) based on the average of the high
and low prices for Hi/fn's Common Stock on February 10, 1999, as quoted on
the Nasdaq National Market.
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 THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OF SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED FEBRUARY 17, 1999
LOGO
2,000,000 SHARES
COMMON STOCK
hi/fn, inc. is offering 1,600,000 shares of its Common Stock and the
Selling Stockholder is selling an additional 400,000 shares. hi/fn, inc.'s
Common Stock is traded on the Nasdaq National Market under the symbol "HIFN."
The last reported sale price of the Common Stock on the Nasdaq National Market
on February 16, 1999 was $29.00 per share.
-------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
-------------------------
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<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to hi/fn, inc...................................... $ $
Proceeds to the Selling Stockholder......................... $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
hi/fn, inc. has granted the underwriters a 30-day option to purchase up to
an additional 300,000 shares of Common Stock to cover over-allotments.
BancBoston Robertson Stephens Inc. expects to deliver the shares of Common Stock
to purchasers on , 1999.
-------------------------
BANCBOSTON ROBERTSON STEPHENS SOUNDVIEW TECHNOLOGY GROUP
The date of this prospectus is , 1999.
<PAGE> 3
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, REFERENCES TO
"HI/FN," "WE," "OUR" AND "US" REFER TO HI/FN, INC.
-------------------------
TABLE OF CONTENTS
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PAGE
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<S> <C>
Summary..................................................... 1
Risk Factors................................................ 5
Use of Proceeds............................................. 18
Price Range of Common Stock................................. 19
Dividend Policy............................................. 19
Capitalization.............................................. 20
Selected Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 32
Management.................................................. 49
Principal and Selling Stockholders.......................... 51
Description of Capital Stock................................ 53
Recent Spin-Off and Relationship with Stac.................. 55
Underwriting................................................ 57
Legal Matters............................................... 58
Experts..................................................... 59
Where You Can Find Additional Information................... 60
Index to Financial Statements............................... F-1
Glossary.................................................... G-1
</TABLE>
-------------------------
We own or have rights to the product names, trade names and trademarks that
we use in conjunction with the sale of our products. This prospectus also
contains product names, trade names and trademarks that belong to other
organizations.
i
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SUMMARY
Because this is only a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus, especially
"Risk Factors" and the Financial Statements and Notes, before deciding to invest
in our Common Stock. Some of the technical terms used in this prospectus are
defined in the Glossary of Terms beginning on page G-1.
HI/FN
We design, develop and market high-performance, multi-protocol packet
processors -- semiconductor devices designed to enable secure, high-bandwidth
network connectivity and efficient storage of business information. Our packet
processor products perform the computation-intensive tasks of compression,
encryption/compression and public key cryptography, providing our customers with
high-performance, interoperable implementations of a wide variety of
industry-standard networking and storage protocols. Our products are used in
networking and storage equipment like routers and back-up storage devices.
The dramatic growth of Internet technology has made it possible for anyone,
from anywhere to access information at any time. Businesses today are facing an
increasingly mobile workforce, increased telecommuting and the need to connect
branch offices, customers, suppliers and other trading partners to their
corporate network. Efforts to address these issues typically burden the
capabilities of existing network and storage systems. Therefore, to deliver on
the economic promise of Internet technology as a business tool and to address
these issues, we believe that businesses require two critical capabilities:
secure, high-bandwidth network connectivity among geographically dispersed
parties and efficient storage of business information.
Our encryption/compression and public key processors allow network
equipment vendors to add bandwidth enhancement and security capabilities to
their products. Our processors also provide key algorithms used in virtual
private networks, or "VPNs," which enable businesses to reduce wide area
networking costs by replacing dedicated leased-lines with lower-cost IP-based
networks such as the Internet. Using VPNs, businesses can provide secure,
authenticated access to their corporate networks, increasing productivity
through improved communications. Storage equipment vendors use our products to
improve the performance and capacity of mid- to high-end tape back-up systems.
We believe that our patented compression technology comprises the
fundamental know-how for the design and deployment of low-cost, high-performance
implementations of lossless data compression and gives our products a strong
competitive advantage. By offering a wide range of price-performance
implementations of our patented, standards-compliant technology, we are able to
sell products to network and storage equipment vendors that allow them to reduce
development costs and get their products to market faster. For example, our
patented Lempel-Ziv-Stac ("LZS") compression technology is incorporated into
several networking protocol standards, including the point-to-point protocol and
the frame relay protocol, allowing network equipment vendors to quickly
integrate proven solutions for lowering the costs associated with traditional
private leased-line network architectures. In addition, our IPSec protocol
network security processors with encryption and compression capabilities make it
possible to implement secure network connectivity in support of emerging VPNs.
Also, our line of compression processors targeted at back-up storage
applications provides storage equipment vendors high-
1
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performance implementations of our patented compression technology, doubling the
capacity and performance of mid- to high-end tape drive systems, thus making it
possible to store business information efficiently. For example, our LZS
compression technology is used in the DLT 4000 and DLT 7000 tape drive products
from Quantum. These encryption and compression technologies allow for secure,
high-bandwidth network connectivity and efficient storage of business
information.
Our goal is to become a leading provider of high-performance,
multi-protocol packet processors that enable our customers to create products
with enhanced bandwidth and high-performance security capabilities. We plan to
achieve this goal by:
- Focusing on network equipment markets;
- Leveraging our patented compression technology;
- Strengthening our presence in the storage equipment market;
- Maintaining our technology leadership;
- Contributing to the development of industry standards;
- Leveraging a "fabless" business model by continuing to subcontract all of
our semiconductor manufacturing; and
- Strengthening and expanding our customer relationships.
Prior to December 16, 1998, we were a subsidiary of Stac, Inc. ("Stac"). On
December 16, 1998, Stac distributed all of our outstanding shares held by Stac
to Stac stockholders. Our executive offices are located at 750 University
Avenue, Los Gatos, California 95032, and our telephone number is (408) 399-3500.
Our website is located at www.hifn.com. Information contained on our website is
not a prospectus or part of this prospectus.
2
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THE OFFERING
COMMON STOCK OFFERED BY HI/FN....... 1,600,000 shares
COMMON STOCK OFFERED BY THE SELLING
STOCKHOLDER....................... 400,000
COMMON STOCK TO BE OUTSTANDING AFTER
THE OFFERING...................... 8,156,781 shares
USE OF PROCEEDS..................... For repayment of short-term
indebtedness, working capital and
general corporate purposes. See "Use of
Proceeds."
NASDAQ NATIONAL MARKET SYMBOL....... HIFN
Unless otherwise stated in this prospectus, all information contained in
this prospectus assumes no exercise of the over-allotment option granted to the
underwriters.
3
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The balance sheets prior to September 30, 1997 reflect Hi/fn's structure as
a division of Stac prior to its formation as a subsidiary of Stac. Periods
subsequent to September 30, 1996 reflect the net assets contributed by Stac in
establishing the Hi/fn subsidiary. The transfer was recorded at the historical
net book value of the transferred assets and liabilities. In exchange for the
net assets contributed to Hi/fn, Stac received 6,000,000 shares of Series A
Preferred Stock and 100 shares of Common Stock of Hi/fn. The 6,000,000 shares of
Series A Preferred Stock were converted into 6,000,000 shares of Common Stock of
Hi/fn prior to the spin-off of Hi/fn from Stac on December 16, 1998. For all
periods prior to fiscal 1997, net income generated by Hi/fn has been treated as
if it were transferred to Stac in the form of dividends. No such transfers were
made for fiscal 1997 and the periods presented thereafter. The balance sheet
data for the three months ended December 31, 1998 is adjusted to reflect the
receipt and application of the net proceeds from the sale of 1,600,000 shares of
Common Stock by Hi/fn at an assumed public offering price of $29.00 per share,
after deducting the underwriting discount and estimated offering expenses. See
"Use of Proceeds" and "Capitalization."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
--------------------------------------------- ---------------
1994 1995 1996 1997 1998 1997 1998
------ ------ ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................ $5,666 $7,342 $12,894 $14,226 $21,533 $6,265 $6,139
Cost of revenue................................ 2,302 2,841 5,095 4,762 6,525 2,102 1,818
------ ------ ------- ------- ------- ------ ------
Gross margin................................... 3,364 4,501 7,799 9,464 15,008 4,163 4,321
Operating expenses:
Research and development....................... 564 551 1,641 2,985 5,403 1,326 1,445
Sales and marketing............................ 813 1,097 1,677 2,224 3,370 792 1,227
General and administrative..................... 379 492 889 1,203 2,407 494 866
------ ------ ------- ------- ------- ------ ------
Operating income............................... 1,608 2,361 3,592 3,052 3,828 1,551 783
Interest income................................ -- -- -- 16 17 5 128
Interest expense............................... -- -- -- -- -- -- 105
Provision for income taxes..................... 661 947 1,441 1,235 1,627 625 323
------ ------ ------- ------- ------- ------ ------
Net income..................................... $ 947 $1,414 $ 2,151 $ 1,833 $ 2,218 $ 931 $ 483
====== ====== ======= ======= ======= ====== ======
Net income per share, basic.................... $ 0.16 $ 0.24 $ 0.36 $ 0.30 $ 0.35 $ 0.15 $ 0.07
Net income per share, diluted.................. $ 0.16 $ 0.24 $ 0.36 $ 0.30 $ 0.33 $ 0.14 $ 0.07
Weighted average shares outstanding, basic..... 6,000 6,000 6,000 6,100 6,308 6,228 6,449
Weighted average shares outstanding, diluted... 6,000 6,000 6,000 6,174 6,800 6,707 7,274
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, DECEMBER 31, 1998
------------------------------------------ ---------------------
1994 1995 1996 1997 1998 ACTUAL AS ADJUSTED
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<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ -- $ -- $ -- $ 480 $ 4,084 $ 8,484 $ 46,668
Total assets................................. 1,583 2,254 2,611 5,898 16,611 14,773 52,962
Working capital (deficit).................... (193) (223) (383) 3,520 4,723 5,499 43,688
Total debt................................... -- -- -- -- -- 5,000 --
Total stockholders' equity................... -- -- -- 4,622 6,952 7,510 45,699
</TABLE>
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our operations.
If any of the following risks actually occur, our business, financial condition
or results of operations could suffer. In such case, the trading price of our
Common Stock could decline, and you may lose all or part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus.
WE HAVE A LIMITED OPERATING HISTORY AS AN INDEPENDENT COMPANY.
On August 14, 1996, we were incorporated by Stac, which transferred its
semiconductor business to us in exchange for shares of our Preferred Stock and
Common Stock. Because we are a relatively new company with a limited operating
history, we may experience financial and other difficulties as we attempt to
grow our business. For example, to expand our business we are increasing our
research and development and other operating expenses. This increase in expenses
will negatively affect our financial performance unless we are able to sustain
and grow revenues. In making an investment decision, you should evaluate this
risk, as well as the other difficulties and uncertainties frequently encountered
by early stage companies that operate in competitive markets. If we are not able
to evolve and expand our business, we may not remain profitable and therefore
may not be able to sustain a viable business.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
Our operating results have fluctuated significantly in the past and we
expect that they will continue to fluctuate in the future. This fluctuation is a
result of a variety of factors including the following:
- General business conditions in our markets as well as global economic
uncertainty;
- Reductions in demand for our customers' products;
- The timing and amount of orders we receive from our customers;
- Cancellations or delays of customer product orders;
- Any new product introductions by us or our competitors;
- Our suppliers increasing costs or changing the delivery of products to
us;
- Increased competition or reductions in the prices that we are able to
charge;
- The variety of the products that we sell as well as seasonal demand for
our products; and
- The availability of manufacturing capacity necessary to make our
products.
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<PAGE> 9
Our revenues and operating results depend upon the amount and timing of
customer orders that we receive in a given quarter. In the past we have
recognized a substantial portion of our revenues in the last month of a quarter.
If this trend continues, any failure or delay to fulfill orders by the end of a
particular quarter will harm our business, financial condition and results of
operations. As a result of these and other factors, we believe that
period-to-period comparisons of our historical results or operations are not a
good predictor of our future performance. If our future operating results are
below the expectations of stock market analysts, our stock price may decline.
WE DEPEND UPON A SMALL NUMBER OF CUSTOMERS.
Quantum Corporation ("Quantum") accounted for approximately 61% and 70%,
respectively, of our revenues in fiscal 1998 and 1997. Quantum is not under any
binding obligation to order from us. If our sales to Quantum decline, our
business, financial condition and results of operations could suffer. We expect
that our most significant customers in the future could be different from our
largest customers today for a number of reasons, including customers' deployment
schedules and budget considerations. As a result, we believe we may experience
significant fluctuations in our results of operations on a quarterly and an
annual basis.
Limited numbers of network and storage equipment vendors account for a
majority of packet processor purchases in their respective markets. In
particular, the market for network equipment that would include packet
processors, such as routers, remote access concentrators and firewalls, is
dominated by a few large vendors, including Ascend Communications, Inc., Cisco
Systems, Inc., Lucent Technologies Inc., Nortel Networks, Inc. and 3Com
Corporation. As a result, our future success will depend upon our ability to
establish and maintain relationships with these companies. If these network
equipment vendors do not incorporate our packet processors into their products,
our business, financial condition and results of operations could suffer.
OUR BUSINESS DEPENDS UPON THE DEVELOPMENT OF THE PACKET PROCESSOR MARKET.
Our prospects are dependent upon the acceptance of packet processors as an
alternative to other technology traditionally utilized by network and storage
equipment vendors. Many of our current and potential customers have substantial
technological capabilities and financial resources and currently develop
internally the application specific integrated circuit components and program
the general purpose microprocessors utilized in their products as an alternative
to our packet processors. These customers may in the future continue to rely on
these solutions or may determine to develop or acquire components, technologies
or packet processors that are similar to, or that may be substituted for, our
products. In order to be successful we must anticipate market trends and the
price, performance and functionality requirements of such network and storage
equipment vendors and must successfully develop and manufacture products that
meet their requirements. In addition, we must make products available to these
large customers on a timely basis and at competitive prices. If orders from
customers are cancelled, decreased or delayed, or if we fail to obtain
significant orders from new customers, or if any significant customer delays or
fails to pay, our business, financial condition and results of operations could
suffer.
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OUR BUSINESS DEPENDS UPON THE CONTINUED GROWTH AND OUR PENETRATION OF THE
VIRTUAL PRIVATE NETWORK MARKET.
We want to be a leading supplier of packet processors that implement the
network security protocols necessary to support the deployment of virtual
private networks. In making an investment decision, you should consider the
possibility that this market, which is still emerging, may not grow or that our
products may not successfully serve this market. Our ability to generate
significant revenue in the virtual private network market will depend upon,
among other things, the following:
- Our ability to demonstrate the benefits of our technology to
distributors, original equipment manufacturers and end users; and
- The increased use of the Internet by businesses as replacements for, or
enhancements to, their private networks.
If we are unable to penetrate the virtual private network market, or if
that market fails to develop, our business, financial condition and results of
operations could suffer.
WE FACE RISKS ASSOCIATED WITH EVOLVING INDUSTRY STANDARDS AND RAPID
TECHNOLOGICAL CHANGE.
The markets in which we compete are characterized by rapidly changing
technology, frequent product introductions and evolving industry standards. Our
performance depends on a number of factors, including our ability to do the
following:
- Properly identify emerging target markets and related technological
trends;
- Develop and maintain competitive products;
- Enhance our products by adding innovative features that differentiate our
products from those of competitors;
- Bring products to market on a timely basis at competitive prices; and
- Respond effectively to new technological changes or new product
announcements by others.
Our past success has been dependent in part upon our ability to develop
products that have been selected for design into new products of leading
equipment manufacturers. However, the development of our packet processors is
complex and, from time to time, we have experienced delays in completing the
development and introduction of new products. We may not be able to adhere to
our new product design and introduction schedules and our products may not be
accepted in the market at favorable prices, if at all.
In evaluating new product decisions, we must anticipate future demand for
product features and performance characteristics, as well as available
supporting technologies, manufacturing capacity, competitive product offerings
and industry standards. We must also continue to make significant investments in
research and development in order to continue to enhance the performance and
functionality of our products to keep pace with competitive products and
customer demands for improved performance, features and functionality. The
technical innovations required for us to remain competitive are complicated and
require a significant amount of time and money. We may experience substantial
difficulty in introducing new products and we may be unable to offer
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<PAGE> 11
enhancements to existing products on a timely or cost-effective basis, if at
all. For instance, the performance of our encryption/compression and public key
processors depends upon the integrity of our security technology. If any
significant advances in overcoming cryptographic systems are made, then the
security of our encryption/compression and public key processors will be reduced
or eliminated unless we are able to develop further technical innovations that
adequately enhance the security of these products. Our inability to develop and
introduce new products or enhancements directed at new industry standards could
harm our business, financial condition and results of operations.
OUR MARKETS ARE HIGHLY COMPETITIVE.
We compete in markets that are intensely competitive and are expected to
become more competitive as current competitors expand their product offerings
and new competitors enter the market. The markets in which we compete are
subject to frequent product introductions with improved price-performance
characteristics, rapid technological change, and the continued emergence of new
industry standards. Our products compete with offerings from companies such as
Analog Devices, Inc., Information Resource Engineering Inc., International
Business Machines Corporation ("IBM"), Rainbow Technologies, Inc. and VLSI
Technology, Inc. In 1994, Stac entered into two license agreements with IBM in
which Stac granted IBM the right to use, but not sublicense, our patented
compression technology in IBM hardware and software products. Stac also entered
into a license agreement with Microsoft Corporation ("Microsoft") in 1994
whereby Stac granted Microsoft the right to use, but not sublicense, our
compression technology in their software products. We expect significant future
competition from major domestic and international semiconductor suppliers.
Several established electronics and semiconductor suppliers have recently
entered, or expressed an interest to enter, the network equipment market. We
also may face competition from suppliers of products based on new or emerging
technologies. Furthermore, many of our existing and potential customers
internally develop solutions which attempt to perform all or a portion of the
functions performed by our products.
A key element of our packet processor architecture is our encryption
technology. In order to export our encryption-related products, we must obtain a
license from the U.S. Department of Commerce. Foreign competitors that are not
subject to similar requirements have an advantage over us in their ability to
rapidly respond to the requests of customers in the global market.
Many of our current and prospective competitors offer broader product lines
and have significantly greater financial, technical, manufacturing and marketing
resources than us. As a result, they may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or to devote greater
resources to promote the sale of their products. In particular, companies such
as Intel Corporation, Lucent Technologies Inc., Motorola, Inc., National
Semiconductor Corporation and Texas Instruments Incorporated have a significant
advantage over us given their relationships with many of our customers, their
extensive marketing power and name recognition and their much greater financial
resources. In addition, current and potential competitors may decide to
consolidate, lower the prices of their products or bundle their products with
other products. Any of the above would significantly and negatively impact our
ability to compete and obtain or maintain market share. If we are unable to
successfully compete against our competitors, our business, results of
operations and financial condition will suffer.
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We believe that the important competitive factors in our markets are the
following:
- Performance;
- Price;
- The time that is required to develop a new product or enhancements to
existing products;
- The ability to achieve product acceptance with major network and storage
equipment vendors;
- The support that exists for new network and storage standards;
- Features and functionality;
- Adaptability of products to specific applications;
- Reliability; and
- Technical service and support as well as effective intellectual property
protection.
If we are unable to successfully develop and market products that compete
with those of other suppliers, our business, financial condition and results of
operations could be harmed. In addition, we must compete for the services of
qualified distributors and sales representatives. To the extent that our
competitors offer distributors or sales representatives more favorable terms,
these distributors and sales representatives may decline to carry, or
discontinue carrying, our products. Our business, financial condition and
results of operations could be harmed by any failure to maintain and expand our
distribution network. See "Business -- Competition."
OUR BUSINESS DEPENDS UPON THE GROWTH OF THE NETWORK EQUIPMENT AND STORAGE
EQUIPMENT MARKETS.
Our success is largely dependent upon continued growth in the market for
network security equipment, such as routers, remote access concentrators,
switches, broadband access equipment, security gateways, firewalls and network
interface cards. In addition, our success depends upon storage equipment vendors
incorporating our packet processors into their systems. The network security
equipment market has in the past and may in the future fluctuate significantly
based upon numerous factors, including the lack of industry standards, adoption
of alternative technologies, changes in capital spending levels and general
economic conditions. We are unable to determine the rate or extent to which
these markets will grow, if at all. Any decrease in the growth of the network or
storage equipment markets or a decline in demand for our products could harm our
business, financial condition and results of operations.
OUR OPERATING RESULTS HAVE BEEN SUBSTANTIALLY DEPENDENT ON ONE PRODUCT FAMILY.
Historically, substantially all of our revenue has come from sales of our
compression processor products which accounted for 84%, 88% and 89% of revenue
in the fiscal years ended September 30, 1998, 1997 and 1996. A significant
decline in revenue from our compression processor products, which is not
adequately replaced by increased sales of our encryption/compression and public
key processors, would harm our business, financial condition and results of
operations.
9
<PAGE> 13
OUR SUCCESS DEPENDS UPON PROTECTING OUR INTELLECTUAL PROPERTY.
Our proprietary technology is critical to our future success. We rely in
part on patent, trade secret, trademark, maskwork and copyright law to protect
our intellectual property. We own 12 United States patents and four foreign
patents. We also have two pending patent applications in Japan. Our patents and
patent applications cover various aspects of our compression technology and have
expiration dates ranging from 2006 to 2013. Patents may not issue under our
current or future patent applications, and the patents issued under such patent
applications could be invalidated, circumvented or challenged. In addition,
third parties could make infringement claims against us in the future. Such
infringement claims could result in costly litigation. We may not prevail in any
such litigation or be able to license any valid and infringed patents from third
parties on commercially reasonable terms, if at all. Regardless of the outcome,
an infringement claim would likely result in substantial cost and diversion of
our resources. Any infringement claim or other litigation against us or by us
could harm our business, financial condition and results of operations. The
patents issued to us may not be adequate to protect our proprietary rights, to
deter misappropriation or to prevent an unauthorized third party from copying
our technology, designing around the patents we own or otherwise obtaining and
using our products, designs or other information. In addition, others could
develop technologies that are similar or superior to our technology.
We also claim copyright protection for certain proprietary software and
documentation. We attempt to protect our trade secrets and other proprietary
information through agreements with our customers, employees and consultants,
and through other security measures. However, our efforts may not be successful.
Furthermore, the laws of certain countries in which our products are or may be
manufactured or sold may not protect our products and intellectual property. See
"Business -- Intellectual Property."
THE LENGTH OF TIME IT TAKES TO DEVELOP OUR PRODUCTS AND MAKE A SALE TO OUR
CUSTOMERS MAY IMPAIR OUR OPERATING RESULTS.
Our customers typically take a long time to evaluate our products. In fact,
it usually takes our customers three to six months or more to test our products
with an additional nine to 18 months or more before they commence significant
production of equipment incorporating our products. As a result of this lengthy
sales cycle, we may experience a delay between increasing expenses for research
and development and sales and marketing efforts, on the one hand, and the
generation of higher revenues, if any, on the other hand. In addition, the
delays inherent in such a lengthy sales cycle raise additional risks of customer
decisions to cancel or change product plans, which could result in the loss of
anticipated sales. Our business, financial condition and results of operations
could suffer if customers reduce or delay orders or choose not to release
products using our technology.
WE DEPEND UPON INDEPENDENT MANUFACTURERS AND LIMITED SOURCES OF SUPPLY.
We rely on subcontractors to manufacture, assemble and test our packet
processors. We currently subcontract our semiconductor manufacturing to Atmel
Corporation, Motorola, Inc. and Toshiba Corporation. Since we depend upon
independent manufacturers, we do not directly control product delivery schedules
or product quality. None of our products are manufactured by more than one
supplier. Since the semiconductor industry is highly cyclical, foundry capacity
has been very limited at times in the past and may become limited in the future.
10
<PAGE> 14
We depend on our suppliers to deliver sufficient quantities of finished
products to us in a timely manner. We place orders on a purchase order basis and
do not have long-term volume purchase agreements with any of our suppliers. As a
result, our suppliers may allocate production capacity to other products while
reducing deliveries to us on short notice. For example, in June 1995, one of our
suppliers delayed the delivery of one of our products. As a result, we switched
production of the product to a new manufacturer. This caused a three month delay
in shipments to customers. We also experienced yield and test anomalies on a
different product manufactured by another subcontractor that could have
interrupted our customer shipments. In this case, the manufacturer was able to
correct the problem in a timely manner and customer shipments were not affected.
The delay and expense associated with qualifying a new supplier or foundry and
commencing volume production can result in lost revenue, reduced operating
margins and possible harm to customer relationships. The steps required for a
new manufacturer to begin production of a semiconductor product include:
- Adapting our product design, if necessary, to the new manufacturer's
process;
- Creating a new mask set to manufacture the product;
- Having the new manufacturer prepare sample products so we can verify the
product specification; and
- Providing sample products to customers for qualification.
In general, it takes from three to six months for a new manufacturer to
begin full-scale production of one of our products. We could have similar or
more protracted problems in the future with existing or new suppliers.
Toshiba Corporation manufactures products for us in plants located in Asia.
To date, the financial and stock market dislocations that have occurred in the
Asian financial markets have not harmed our business. However, present or future
dislocations or other international business risks, such as currency exchange
fluctuations or recessions, could force us to seek new suppliers. We must place
orders approximately 12 to 14 weeks in advance of expected delivery. This limits
our ability to react to fluctuations in demand for our products, and could cause
us to have an excess or a shortage of inventory of a particular product. In
addition, if global semiconductor manufacturing capacity does not increase as
quickly as demand, foundries could allocate available capacity to larger
customers or customers with long-term supply contracts. If we cannot obtain
adequate foundry capacity at acceptable prices, or our supply is interrupted or
delayed, our product revenues could decrease or our cost of revenues could
increase. This could harm our business, financial condition and results of
operations.
We regularly consider using smaller semiconductor dimensions for each of
our products to reduce costs. We have begun to decrease the dimensions in our
new product designs, and believe that we must do so to remain competitive. We
may have difficulty decreasing the dimensions of our products since, in the
future, we may change our supply arrangements to assume more product
manufacturing responsibilities. We may subcontract for wafer manufacturing,
assembly and test rather than purchase finished products. However, there are
additional risks associated with manufacturing, including variances in
production yields, the ability to obtain adequate test and assembly capacity at
reasonable cost and other general risks associated with the manufacture of
semiconductors. We may also enter into volume purchase agreements that require
us to commit to minimum purchase levels and which may require up-front
investments. If we fail to effectively
11
<PAGE> 15
assume greater manufacturing responsibilities or manage volume purchase
arrangements, our business, financial condition and results of operations will
suffer. See "Business -- Manufacturing."
NETWORK AND STORAGE EQUIPMENT PRICES TYPICALLY DECREASE.
Average selling prices in the networking, storage and semiconductor
industries have rapidly declined due to many factors, including:
- Rapidly changing technologies;
- Price-performance enhancements; and
- Product obsolescence.
The decline in the average selling prices of our products may cause
substantial fluctuations in our operating results. We anticipate that the
average selling prices of our products will decrease in the future due to
product introductions by our competitors, price pressures from significant
customers and other factors. Therefore, we must continue to develop and
introduce new products that incorporate features which we can sell at higher
prices. If we fail to do so, our revenues and gross margins could decline, which
would harm our business, financial condition and results of operations.
WE FACE PRODUCT RETURN, PRODUCT LIABILITY AND PRODUCT DEFECT RISKS.
Complex products such as ours frequently contain errors, defects and bugs
when first introduced or as new versions are released. We have discovered such
errors, defects and bugs in the past. Delivery of products with production
defects or reliability, quality or compatibility problems could hinder market
acceptance of our products. This could damage our reputation and harm our
ability to attract and retain customers. Errors, defects or bugs could also
cause interruptions, delays or a cessation of sales to our customers. We would
have to expend significant capital and resources to remedy these problems.
Errors, defects or bugs could be discovered in our new products after we begin
commercial production of them, despite testing by us and our suppliers and
customers. This could result in additional development costs, loss of, or delays
in, market acceptance, diversion of technical and other resources from our other
development efforts, claims by our customers or others against us or the loss of
credibility with our current and prospective customers. Any such event would
harm our business, financial condition and results of operations.
WE FACE ORDER AND SHIPMENT UNCERTAINTIES.
We generally make our sales under individual purchase orders that may be
canceled or deferred by customers on short notice without significant penalty,
if any. Cancellation or deferral of product orders could cause us to hold excess
inventory, which could harm our profit margins and restrict our ability to fund
our operations. We recognize revenue upon shipment of products to our customers,
net of an allowance for estimated returns. An unanticipated level of returns
could harm our business, financial condition and results of operations.
12
<PAGE> 16
WE DEPEND UPON KEY PERSONNEL.
Our success greatly depends on the continued contributions of our key
management and other personnel, many of whom would be difficult to replace. We
do not have employment contracts with any of our key personnel, nor do we
maintain any key man life insurance on any of our personnel. Several members of
our management team have joined us in the last 12 months. It may be difficult
for us to integrate new members of our management team. We must also attract and
retain experienced and highly skilled engineering, sales and marketing and
managerial personnel. Competition for such personnel is intense in the
geographic areas and market segments in which we compete, and we may not be
successful in hiring and retaining such people. If we lose the services of any
key personnel, or cannot attract or retain qualified personnel, particularly
engineers, our business, financial condition and results of operations could
suffer. In addition, companies in technology industries whose employees accept
positions with competitors have in the past claimed that their competitors have
engaged in unfair competition or hiring practices. We could receive such claims
in the future as we seek to hire qualified personnel. These claims could result
in material litigation. We could incur substantial costs in defending against
any such claims, regardless of their merits.
OUR RAPID GROWTH MAY STRAIN OUR OPERATIONS.
We have experienced a period of rapid growth and expansion which has
placed, and continues to place, a significant strain on our resources. To
accommodate this growth, we must implement a variety of new and upgraded
operational and financial systems, procedures and controls, including the
improvement of the accounting and other internal management systems which were
provided by Stac. This may require substantial management effort, and our
efforts to do so may not be successful. In addition, we have had to hire
additional employees to accommodate this growth and our product development
activities. This has resulted in increased responsibilities for our management.
Our systems, procedures and controls may not be adequate to support our
operations. If we fail to improve our operational, financial and management
information systems, or to hire, train, motivate or manage our employees, our
business, financial condition and results of operations could suffer.
OUR PRODUCTS ARE SUBJECT TO EXPORT RESTRICTIONS.
The encryption algorithms embedded in our products are a key element of our
packet processor architecture. These products are subject to U.S. Department of
Commerce export control restrictions. Our network equipment customers may only
export products incorporating encryption technology if they obtain an export
license. These U.S. export laws also prohibit the export of encryption products
to a number of countries deemed by the U.S. to be hostile. U.S. export
regulations regarding the export of encryption technology require either a
transactional export license or the granting of Department of Commerce commodity
jurisdiction. These restrictions may make foreign competitors facing less
stringent controls on their products more competitive in the global market than
our network equipment customers. The U.S. government may not approve any pending
or future export license requests. In addition, the list of products and
countries for which export approval is required, and the regulatory policies
with respect thereto, could be revised, and laws limiting the domestic use of
encryption could be enacted. The sale of our packet processors could be harmed
by the failure of our network equipment customers to obtain the required
licenses or by the costs of compliance.
13
<PAGE> 17
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL BUSINESS ACTIVITIES.
We sell most of our products to customers in the United States. If our
international sales increase, we may encounter risks inherent in international
operations. All of our international sales to date are denominated in U.S.
dollars. As a result, if the value of the U.S. dollar increases relative to
foreign currencies, our products could become less competitive in international
markets. We also obtain some of our manufacturing, assembly and test services
from suppliers located outside the United States. International business
activities could be limited or disrupted by any of the following:
- The imposition of governmental controls;
- Export license requirements;
- Restrictions on the export of technology;
- Currency exchange fluctuations;
- Political instability;
- Financial and stock market dislocations;
- Trade restrictions; and
- Changes in tariffs.
Demand for our products also could be harmed by seasonality of
international sales and economic conditions in our primary overseas markets.
These international factors could harm future sales of our products to
international customers and our business, financial condition and results of
operations in general.
YEAR 2000 ISSUES MAY HARM OUR BUSINESS.
Many existing computer systems and applications, and other control devices,
use only two digits to identify a year. These programs were designed without
considering the impact of the upcoming change in the century. If not corrected,
many computer software applications could fail or create erroneous results by,
at or beyond the year 2000. We utilize software, computer technology and other
services internally developed and provided by third-party vendors that may fail
due to the Year 2000 phenomenon, such as financial systems (including accounts
payable and payroll modules), customer services, networks and telecommunications
equipment and end products. We rely on external systems of business enterprises
such as customers, suppliers, financial organizations, and on governmental
entities, both domestic and international, for accurate exchange of data. Even
if our internal systems are not materially affected by Year 2000 issues, we
could be affected by disruptions in the operation of entities with which we
interact. Despite our efforts to address the Year 2000 impact on our internal
systems and business operations, this impact could disrupt our business and our
business, financial condition and results of operations could suffer. Our
efforts to address this issue are described in more detail in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Issues."
Customers' purchasing plans could be affected by Year 2000 issues as they
may need to expend significant resources to correct their existing systems. This
situation may result in reduced funds available to purchase our products.
14
<PAGE> 18
WE FACE RISKS ASSOCIATED WITH ACQUISITIONS.
We continually evaluate strategic acquisitions of businesses and
technologies that would complement our product offerings or enhance our market
coverage or technological capabilities. We are not currently negotiating any
acquisitions, but we may make acquisitions in the future. Future acquisitions
could be effected without stockholder approval, and could cause us to dilute
shareholder equity, incur debt and contingent liabilities and amortize
acquisition expenses related to goodwill and other intangible assets, any of
which could harm our operating results and/or the price of our Common Stock.
Acquisitions entail numerous risks, including:
- Difficulties in assimilating acquired operations, technologies and
products;
- Diversion of management's attention from other business concerns;
- Risks of entering markets in which we have little or no prior experience;
and
- Loss of key employees of acquired organizations.
We may not be able to successfully integrate businesses, products,
technologies or personnel that we acquire. If we fail to do so, our business,
financial condition and results of operations could suffer.
In addition, if we are a party to a transaction or series of transactions
that result in 50% or more of our outstanding stock being transferred to one or
more persons, the IRS may claim that our spin-off from Stac was a taxable event
to Stac and its stockholders. Under the Tax Allocation and Indemnity Agreement
that we entered into with Stac, we may be obligated to pay the taxes of Stac if
we caused the spin-off to be a taxable event. Our cash flows, business,
financial condition and results of operations would suffer if we became liable
for any such tax liability. See "Recent Spin-Off and Relationship with Stac."
THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY MAY HARM OUR BUSINESS.
The semiconductor industry has experienced significant downturns and wide
fluctuations in supply and demand. The industry has also experienced significant
fluctuations in anticipation of changes in general economic conditions. This has
caused significant variances in product demand, production capacity and rapid
erosion of average selling prices. Industry-wide fluctuations in the future
could harm our business, financial condition and results of operations.
WE FACE CERTAIN RISKS AS A RESULT OF OUR SPIN-OFF FROM STAC.
On December 8, 1998, Stac received a private letter ruling from the
Internal Revenue Service ("IRS") stating, among other things, that the
distribution of our Common Stock held by Stac on December 16, 1998 to Stac
stockholders would not result in recognition of taxable income or gain to Stac
or its stockholders under Section 355 of the Internal Revenue Code of 1986, as
amended ("Code") (except to the extent of cash received in lieu of fractional
shares). A tax ruling, while generally binding upon the IRS, is subject to
certain factual representations and assumptions. If the factual representations
and assumptions made by Stac were incorrect in a material respect, the rights of
taxpayers to rely on a tax ruling or Stac's ability to rely on the tax opinion
would be jeopardized.
15
<PAGE> 19
If the distribution were not to constitute a tax-free spin-off, then Stac
would be treated as recognizing a taxable gain equal to the difference between
(i) the fair market value of our Common Stock that was distributed to Stac
stockholders on December 16, 1998 and (ii) Stac's adjusted basis of such Common
Stock. In addition, under the consolidated tax return rules of the Code, each
member of Stac's consolidated group (including Hi/fn) would be severally liable
for such tax liability. Furthermore, in connection with the spin-off we entered
into a Tax Allocation and Indemnity Agreement with Stac whereby each of us
agreed that if either party took actions after the spin-off that caused Section
355(e) of the Code to apply to Hi/fn's Common Stock, then whichever party first
caused Section 355(e) of the Code to apply to Hi/fn's Common Stock would be
obligated to bear all taxes of Stac resulting from such action. Under recently
enacted Section 355(e) of the Code, if the spin-off were considered to be part
of a plan or series of related transactions (a "Plan") in which, after the
spin-off, a 50% or greater interest in Hi/fn or Stac was acquired by one or more
persons, the IRS would claim that the spin-off was taxable at the corporate
level. Although neither we nor Stac believes the spin-off is part of a Plan to
effect a 50% change in ownership of either Hi/fn or Stac, the IRS has issued no
guidance on the definition of a Plan and for the first two years following the
spin-off, any cumulative 50% change of ownership within the two-year period will
be rebuttably presumed to be the result of a Plan. Our cash flows, business,
financial condition and results of operations would suffer if we became liable
for any such tax liability. See "Recent Spin-Off and Relationship with Stac."
MANAGEMENT AND CERTAIN STOCKHOLDERS CAN EXERCISE SIGNIFICANT INFLUENCE
OVER HI/FN.
The present executive officers and directors and certain other stockholders
will beneficially own approximately 28% of our outstanding Common Stock
immediately following this offering. These stockholders, if acting together,
would be able to significantly influence all matters requiring approval of our
stockholders, including the election of directors and the approval of mergers or
other business combination transactions. See "Principal and Selling
Stockholders."
FUTURE SALES OF SHARES COULD AFFECT OUR STOCK PRICE.
If our stockholders sell substantial amounts of our Common Stock (including
shares issued upon the exercise of outstanding options) in the public market
following this offering, the market price of our Common Stock could fall. Such
sales also might make it more difficult for us to sell equity securities in the
future at a time and price we deem appropriate. Upon completion of this
offering, we will have outstanding 8,156,781 shares of Common Stock (based upon
shares outstanding as of December 31, 1998) assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options after
December 31, 1998. Of these shares, 6,560,893 are currently eligible for sale in
the public market. After the lock-up agreements with the underwriters expire 120
days from the date of this prospectus (or earlier if the underwriters terminate
the lock-up agreements before the lock-up period ends), an additional 1,595,888
shares will be eligible for public sale, subject to the volume limitations and
other conditions of Rule 144. These share numbers exclude 1,545,887 shares
subject to outstanding stock options and 947,262 shares reserved for future
issuance under our stock plans as of December 31, 1998.
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<PAGE> 20
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our Common Stock has fluctuated in the past and is
likely to fluctuate in the future. In addition, the securities markets have
experienced significant price and volume fluctuations and the market prices of
the securities of technology-related companies including networking, storage and
semiconductor companies have been especially volatile. Such fluctuations can
result from:
- Quarterly variations in operating results;
- Announcements of new products by us or our competitors;
- The gain or loss of significant customers;
- Changes in analysts' estimates;
- Short-selling of our Common Stock; and
- Events affecting other companies that investors deem to be comparable to
us.
Investors may be unable to resell their shares of our Common Stock at or
above the offering price. In the past, companies that have experienced
volatility in the market price of their stock have been the object of securities
class action litigation. If we were the object of securities class action
litigation, it could result in substantial costs and a diversion of management's
attention and resources. See "Price Range of Common Stock."
OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS
THAT COULD DISCOURAGE A TAKEOVER.
Our Certificate of Incorporation and Bylaws contain provisions which may
discourage takeover attempts, including transactions in which stockholders might
receive a premium for their shares. This may limit stockholders' ability to
approve a transaction that stockholders may think is in their best interests.
Such provisions include:
- A requirement that certain procedures must be followed before matters can
be proposed for consideration at meetings of our stockholders;
- The ability of the Board of Directors to fix the rights and preferences
of and issue 10,000,000 shares of Preferred Stock without stockholder
action; and
- A classified Board of Directors.
Provisions of the Delaware General Corporation Law also restrict certain
business combinations with interested stockholders. The provisions of our
Certificate of Incorporation and Bylaws and of Delaware law are intended to
encourage potential acquirers to negotiate with us and allow the Board the
opportunity to consider alternative proposals in the interest of maximizing
stockholder value. However, such provisions may also discourage acquisition
proposals or delay or prevent a change in control, which could harm our stock
price. See "Description of Capital Stock."
In addition, if we are a party to a transaction or series of transactions
that result in 50% or more of our outstanding stock being transferred to one or
more persons, the IRS may claim that our spin-off from Stac was a taxable event
to Stac and its stockholders. Under the Tax Allocation and Indemnity Agreement
that we entered into with Stac, we may be obligated to pay the taxes of Stac if
we caused the spin-off to be a taxable event.
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<PAGE> 21
Our cash flows, business, financial condition and results of operations would
suffer if we became liable for any such tax liability. See "Recent Spin-Off and
Relationship with Stac."
MANAGEMENT HAS BROAD DISCRETION IN THE USE OF PROCEEDS.
After repaying the $5.0 million short-term loan we received from Stac prior
to our spin-off from Stac, we plan to use the proceeds from this offering
primarily for working capital and general corporate purposes. Therefore, we will
have discretion as to how we will spend the proceeds, which could be in ways
with which the stockholders may not agree. We cannot predict that the proceeds
will be invested to yield a favorable return. See "Use of Proceeds."
WE DO NOT PLAN TO PAY CASH DIVIDENDS ON OUR COMMON STOCK.
We intend to retain any future earnings to finance the growth and
development of our business. We no not plan to pay cash dividends in the
foreseeable future. See "Dividend Policy."
USE OF PROCEEDS
The net proceeds from the sale of the 1,600,000 shares of Common Stock
offered by Hi/fn are estimated to be $43.2 million ($51.4 million if the
underwriters' over-allotment option is exercised in full) after deducting the
underwriting discount and estimated offering expenses payable by Hi/fn. Hi/fn
will not receive any proceeds from the sale of the shares by the Selling
Stockholder.
Hi/fn intends to use approximately $5.0 million of the proceeds to repay
the short-term loan received from Stac prior to the spin-off in order to finance
Hi/fn's operating and capital needs. The loan becomes due and payable on
September 30, 1999, but may be prepaid in whole or part without penalty. The
loan bears interest at the prime rate set by Silicon Valley Bank plus 0.5% per
annum, payable quarterly, and is secured by a first priority security interest
in all of Hi/fn's assets, including Hi/fn's intellectual property. The remaining
proceeds will be used for working capital and general corporate purposes. In
addition, Hi/fn may use a portion of the net proceeds to acquire complementary
products, technologies or businesses. Hi/fn currently has no commitments or
agreements and is not involved in any negotiations with respect to any such
transactions. Pending use of the net proceeds of this offering, Hi/fn intends to
invest the net proceeds in short-term, interest-bearing securities. See
"Principal and Selling Stockholders" and "Recent Spin-Off and Relationship with
Stac."
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<PAGE> 22
PRICE RANGE OF COMMON STOCK
The Common Stock has been quoted on the Nasdaq National Market under the
symbol "HIFN" since December 16, 1998, the date upon which Stac consummated the
dividend distribution of the Common Stock to Stac stockholders. The following
table lists quarterly information on the price range of the Common Stock based
on the high and low reported closing bid prices for the Common Stock as reported
on the Nasdaq National Market for the periods indicated below:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED SEPTEMBER 30, 1999:
First Quarter............................................. $24 $17 1/2
Second Quarter (through February 16, 1999)................ 30 7/8 22 1/2
</TABLE>
The last reported sale price for the Common Stock on the Nasdaq National
Market was $29 per share on February 16, 1999. As of February 16, 1999, there
were approximately 413 holders of record of our Common Stock.
DIVIDEND POLICY
Hi/fn has never declared or paid any dividends on its capital stock. Hi/fn
intends to retain any future earnings to finance the growth and development of
its business and does not expect to pay any cash dividends in the foreseeable
future.
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<PAGE> 23
CAPITALIZATION
The following table sets forth the actual capitalization of Hi/fn as of
December 31, 1998, and such capitalization as adjusted to reflect the receipt
and application by Hi/fn of the net proceeds from the sale of 1,600,000 shares
of Common Stock offered hereby by Hi/fn at an assumed public offering price of
$29.00 per share, after deducting the underwriting discount and estimated
offering expenses. The capitalization information set forth in the table below
is qualified by the more detailed Financial Statements and Notes beginning on
page F-1 of this prospectus. The table should be read in conjunction with such
Financial Statements and Notes.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and short-term investments............................ $ 8,484 $ 46,668
======= =========
Notes payable.............................................. 5,000 --
------- ---------
Stockholders' equity:
Preferred Stock, $0.001 par value; 10,000,000 shares
authorized;
no shares outstanding.................................... -- --
Common Stock(1), $0.001 par value; 100,000,000 shares
authorized; 6,556,781 shares issued, actual; 8,156,781
shares issued, as adjusted............................... 7 8
Additional paid-in capital................................. 3,069 41,257
Stockholder's note receivable.............................. (100) (100)
Retained earnings.......................................... 4,534 4,534
------- ---------
Total stockholders' equity....................... 7,510 45,699
------- ---------
Total capitalization............................. $12,510 $ 45,699
======= =========
</TABLE>
- -------------------------
(1) Excludes 1,545,887 shares of Common Stock issuable upon exercise of stock
options at a weighted average exercise price of $2.645 per share outstanding
as of December 31, 1998.
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<PAGE> 24
SELECTED FINANCIAL DATA
The selected financial data of Hi/fn as of and for each of the three years
ended September 30, 1998, have been derived from Hi/fn's audited financial
statements as included herein. The selected financial data of Hi/fn as of and
for the year ended September 30, 1995, have been derived from audited financial
statements not included herein. The selected financial data of Hi/fn as of and
for the year ended September 30, 1994, have been derived from unaudited
financial statements not included herein. The selected financial data of Hi/fn
as of and for the three months ended December 31, 1997 and 1998, have been
derived from unaudited financial statements included elsewhere in this
prospectus and contain all adjustments, consisting only of normal recurring
accruals, which Hi/fn believes is necessary for a fair statement of Hi/fn's
financial position and results of operations for such periods. The financial
information may not reflect Hi/fn's future performance or the future financial
position or results of operations of Hi/fn, nor does it provide or reflect data
as if Hi/fn had actually operated as a separate, stand-alone entity during all
of the periods covered. The financial information for the three months ended
December 31, 1997 and 1998 may not be indicative of the results that may be
expected for the entire fiscal year ended September 30, 1999. The following
selected financial data should be read in conjunction with the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and Notes beginning on page F-1 of this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
--------------------------------------------- ---------------
1994 1995 1996 1997 1998 1997 1998
------ ------ ------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................ $5,666 $7,342 $12,894 $14,226 $21,533 $6,265 $6,139
Cost of revenue................................ 2,302 2,841 5,095 4,762 6,525 2,102 1,818
------ ------ ------- ------- ------- ------ ------
Gross margin................................... 3,364 4,501 7,799 9,464 15,008 4,163 4,321
Operating expenses:
Research and development....................... 564 551 1,641 2,985 5,403 1,326 1,445
Sales and marketing............................ 813 1,097 1,677 2,224 3,370 792 1,227
General and administrative..................... 379 492 889 1,203 2,407 494 866
------ ------ ------- ------- ------- ------ ------
Operating income............................... 1,608 2,361 3,592 3,052 3,828 1,551 783
Interest income................................ -- -- -- 16 17 5 128
Interest expense............................... -- -- -- -- -- -- 105
Provision for income taxes..................... 661 947 1,441 1,235 1,627 625 323
------ ------ ------- ------- ------- ------ ------
Net income..................................... $ 947 $1,414 $ 2,151 $ 1,833 $ 2,218 $ 931 $ 483
====== ====== ======= ======= ======= ====== ======
Net income per share, basic.................... $ 0.16 $ 0.24 $ 0.36 $ 0.30 $ 0.35 $ 0.15 $ 0.07
Net income per share, diluted.................. $ 0.16 $ 0.24 $ 0.36 $ 0.30 $ 0.33 $ 0.14 $ 0.07
Weighted average shares outstanding, basic..... 6,000 6,000 6,000 6,100 6,308 6,228 6,449
Weighted average shares outstanding, diluted... 6,000 6,000 6,000 6,174 6,800 6,707 7,274
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, DECEMBER 31, 1998
------------------------------------------ ------------------------
1994 1995 1996 1997 1998 ACTUAL AS ADJUSTED(1)
----- ------ ------ ------ ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(2):
Cash and cash equivalents................. $ -- $ -- $ -- $ 480 $ 4,084 $ 8,484 $ 46,668
Total assets.............................. 1,583 2,254 2,611 5,898 16,611 14,773 52,962
Working capital (deficit)................. (193) (223) (383) 3,520 4,723 5,499 43,688
Total debt................................ -- -- -- -- -- 5,000 --
Total stockholders' equity................ -- -- -- 4,622 6,952 7,510 45,699
</TABLE>
- -------------------------
(1) The balance sheet data for the three months ended December 31, 1998 is
adjusted to reflect the receipt and application of the net proceeds from the
sale of 1,600,000 shares of Common Stock by Hi/fn at an assumed public
offering price of $29.00 per share, after deducting the underwriting
discount and estimated offering expenses. See "Use of Proceeds" and
"Capitalization."
21
<PAGE> 25
(2) The balance sheets prior to September 30, 1997 reflect Hi/fn's structure as
a division of Stac prior to its formation as a subsidiary of Stac. Periods
subsequent to September 30, 1996 reflect the net assets contributed by Stac
in establishing the Hi/fn subsidiary. The transfer was recorded at the
historical net book value of the transferred assets and liabilities. In
exchange for the net assets contributed to Hi/fn, Stac received 6,000,000
shares of Series A Preferred Stock and 100 shares of Common Stock of Hi/fn.
The 6,000,000 shares of Series A Preferred Stock were converted into
6,000,000 shares of Common Stock of Hi/fn prior to the spin-off of Hi/fn
from Stac on December 16, 1998. For all periods prior to fiscal 1997, net
income generated by Hi/fn has been treated as if it were transferred to Stac
in the form of dividends. No such transfers were made for fiscal 1997 and
the periods presented thereafter. See Note 1 to the Financial Statements.
22
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes beginning on page F-1 of this prospectus. The results shown
in this prospectus are not necessarily indicative of the results to be expected
in any future periods. This discussion contains forward-looking statements based
on current expectations which involve risks and uncertainties. Actual results
and the timing of certain events may differ significantly from those projected
in such forward-looking statements due to the factors set forth in the section
entitled "Risk Factors" and appearing elsewhere in this prospectus.
OVERVIEW
Hi/fn designs, develops and markets high-performance multi-protocol packet
processors -- semiconductor devices designed to enable secure, high-bandwidth
network connectivity and efficient storage of business information. Hi/fn's
packet processor products perform the computation-intensive tasks of
compression, encryption/compression and public key cryptography, providing its
customers with high-performance, interoperable implementations of a wide variety
of industry-standard networking and storage protocols. Hi/fn's products are used
in networking and storage equipment such as routers, remote access
concentrators, firewalls and back-up storage devices.
Hi/fn's encryption/compression and public key processors allow network
equipment vendors to add bandwidth enhancement and security capabilities to
their products. Hi/fn's encryption/compression and public key processor products
provide key algorithms used in virtual private networks ("VPNs"), which enable
businesses to reduce wide area networking costs by replacing dedicated
leased-lines with lower-cost IP-based networks such as the Internet. Using VPNs,
businesses can also provide trading partners and others with secure,
authenticated access to the corporate network, increasing productivity through
improved communications. Storage equipment vendors use Hi/fn's compression
processor products to improve the performance and capacity of mid- to high-end
tape back-up systems.
Prior to December 16, 1998, Hi/fn was a majority-owned subsidiary of Stac,
Inc. ("Stac"). On December 16, 1998, Stac distributed all of Hi/fn's outstanding
shares held by Stac to Stac stockholders.
23
<PAGE> 27
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenue for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- ------------
1996 1997 1998 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue.................................. 100% 100% 100% 100% 100%
Cost of revenue.......................... 39 33 30 33 30
--- --- --- --- ---
Gross margin............................. 61 67 70 67 70
--- --- --- --- ---
Research and development................. 13 21 25 21 23
Sales and marketing...................... 13 16 16 13 20
General and administrative............... 7 8 11 8 14
--- --- --- --- ---
Total operating expenses................. 33 45 52 42 57
--- --- --- --- ---
Operating income......................... 28 22 18 25 13
Interest income.......................... -- -- -- -- --
--- --- --- --- ---
Income before income taxes............... 28 22 18 25 13
Provision for income taxes............... 11 9 8 10 5
--- --- --- --- ---
Net income............................... 17% 13% 10% 15% 8%
=== === === === ===
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
Revenue. Revenue decreased 2% to $6.1 million for the quarter ended
December 31, 1998 from $6.3 million for the quarter ended December 31, 1997. The
decline in revenue was due primarily to lower sales of semiconductor units to
storage customers, partially offset by higher sales of semiconductors to
networking customers. During the fourth calendar quarter of 1998, sales to the
only storage customer, Quantum Corporation ("Quantum"), represented 58% of total
revenue as compared to 82% of total revenue represented by sales to storage
customers (including Quantum) for the quarter ended December 31, 1997. In the
quarter ended December 31, 1997, storage customers were building inventory,
which was subsequently reduced over the next several quarters. By the fourth
calendar quarter of 1998, storage customers had reduced their inventory levels
and were receiving semiconductor products at a rate which we believe more
closely matched production needs. Revenue from networking customers represented
42% of total revenue in the quarter ended December 31, 1998 as compared to 18%
of total revenue for the quarter ended December 31, 1997. This increase was
attributable to increased shipments of semiconductor products to networking
customers to accommodate their increased installations of network equipment for
VPNs and Internet infrastructure.
Gross Margin. Cost of revenue consists primarily of semiconductors which
were manufactured to Hi/fn's specifications by third parties for resale by
Hi/fn. Gross margin increased to 70% for the quarter ended December 31, 1998
from 66% for the quarter ended December 31, 1997 primarily due to the increase
in the portion of total sales of semiconductors to networking customers.
Semiconductors sold to networking customers
24
<PAGE> 28
typically have been recently introduced and generate higher gross margins than
the older products which are currently sold to customers manufacturing storage
devices.
Research and Development. The cost of product development consists
primarily of salaries, employee benefits, overhead, outside contractors and
non-recurring engineering fees. Such expenses were approximately $1.4 million
and $1.3 million for the quarters ended December 31, 1998 and 1997,
respectively. The increase was due primarily to activities associated with the
development of semiconductor products. Hi/fn has made and intends to continue to
make substantial investments in the technologies that form the core of its
packet processors, with the goal of providing price-performance product
alternatives and enabling broad adoption and deployment of packet processing
functionality. However, there can be no assurance that product development
programs invested in by Hi/fn will be successful or that the products resulting
from such programs will achieve market acceptance.
Sales and Marketing. Sales and marketing expenses consist primarily of the
salaries, commissions and benefits of sales, marketing and support personnel,
and consulting, advertising, promotion and overhead expenses. Such expenses were
approximately $1.2 million and $792,000 for the quarters ended December 31, 1998
and 1997, respectively. The increase was due primarily to additional personnel
costs and overhead as Hi/fn prepared for operations as an independent, stand
alone entity following the spin-off from Stac.
General and Administrative. General and administrative expenses are
comprised primarily of salaries for administrative and corporate services
personnel, legal and other professional fees. Such expenses were $866,000 and
$494,000 for the quarters ended December 31, 1998 and 1997, respectively. The
increase was due primarily to additional personnel costs, overhead and fees and
expenses associated with the spin-off from Stac.
Interest Income and Expense. Net interest income was $23,000 for the
quarter ended December 31, 1998 and $5,000 for the quarter ended December 31,
1997. The increase in interest income was due to the higher availability of cash
during the quarter ended December 31, 1998. Interest expense during the quarter
ended December 31, 1998 partially offset the increase in interest income. During
the quarter ended December 31, 1998, Hi/fn entered into a $5.0 million loan
agreement with its former parent company, Stac. The loan will become due and
payable on September 30, 1999 and may be prepaid in whole or part without
penalty. The loan bears interest at the prime rate set by Silicon Valley Bank
plus 0.5% per annum, payable quarterly, and is secured by a first priority
security interest in all of Hi/fn's assets, including Hi/fn's intellectual
property.
Income Taxes. The effective income tax rate for each of the quarters ended
December 31, 1998 and 1997 was 40%.
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
Revenue. Revenue from sales of semiconductors and licenses of software
libraries increased 51% to $21.5 million in 1998 compared to 1997 revenue, and
increased 10% to $14.2 million in 1997 from revenue of $12.9 million in 1996.
The increase in revenue in each of 1998 and 1997 compared to the prior year was
due primarily to increased sales of Hi/fn's data compression processors to
original equipment manufacturer ("OEM") providers of storage devices and
manufacturers of networking equipment. Semiconductor
25
<PAGE> 29
sales to Quantum, an OEM producer of high-performance tape storage devices,
comprised 61%, 70% and 43% of revenue in each of 1998, 1997 and 1996,
respectively.
Gross Margin. Gross margin was 70% in 1998, 67% in 1997, and 61% in 1996.
The increase in gross margin in 1998 from that of 1997 was due primarily to cost
efficiencies achieved through design modifications made to compression
processors. The increase in gross margin in 1997 from that of 1996 was due to
shipments of higher speed compression processors in 1997 that carry higher gross
margins than the compression processors shipped in 1996 and an increase in
licenses of Hi/fn's software libraries which carry relatively high gross
margins.
Research and Development. Research and development expenses were $5.4
million for 1998, $3.0 million for 1997, and $1.6 million for 1996, an increase
of 81% in 1998 from 1997 and an increase of 82% in 1997 from 1996. The increase
in research and development costs in each successive period was due to the
addition of personnel and retention of outside contractors used to develop new
products which combine data compression and data encryption for the network
security markets and to develop additional products for the storage market.
Hi/fn expects its investments in research and development to increase in coming
periods on an absolute basis as it continues to develop products targeted at
meeting market needs. However, there can be no assurance that product
development programs invested in by Hi/fn will be successful or timely, or that
products resulting from such programs will achieve market acceptance.
Sales and Marketing. Sales and marketing expenses were $3.4 million in
1998, $2.2 million in 1997, and $1.7 million in 1996. The increases in sales and
marketing expenses in 1998 over those of 1997 and in 1997 expense over those of
1996 resulted from the addition of sales and marketing personnel and program
costs intended to increase customer awareness of Hi/fn's products.
General and Administrative. General and administrative expenses were
approximately $2.4 million in 1998, $1.2 million in 1997, and $900,000 in 1996.
The increase in 1998 expenses over those of 1997 and in 1997 over those of 1996
was primarily due to the addition of executive management personnel and
increased legal and accounting costs.
Income Taxes. For all periods presented, deferred income taxes and related
tax expense have been allocated to Hi/fn by applying the asset and liability
approach as if Hi/fn were a separate taxpayer. Under this approach, a deferred
income tax liability or asset, net of valuation allowance, is established for
the expected future consequences resulting from the differences between the
financial reporting and income tax basis of assets and liabilities and from net
operating loss and credit carryforwards. Deferred income tax expense or benefit
represents the net change during the year in the deferred income tax liability
or asset. Income taxes currently payable are deemed to have been remitted by
Stac on behalf of Hi/fn in the period that the liability arose. Income taxes
currently receivable are deemed to have been received by Stac in the period that
a refund could have been recognized by Hi/fn, had Hi/fn been a separate
taxpayer. Amounts due to or from Hi/fn and Stac for income tax payments and
refunds are included in the related party receivable and payable components of
the balance sheet.
QUARTERLY FINANCIAL DATA
The following table sets forth certain unaudited quarterly condensed
statement of operations data for each of the quarters during the fiscal years
ended September 30, 1997 and 1998, and the three months ended December 31, 1998.
In the opinion of management,
26
<PAGE> 30
this information has been prepared substantially on the same basis as the
Financial Statements appearing elsewhere in this prospectus, and all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly the unaudited quarterly results.
The quarterly data should be read in conjunction with the Financial Statements
and Notes beginning on page F-1 of this prospectus. The operating results for
any quarter are not necessarily indicative of the operating results for any
future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue..................... $2,067 $3,017 $3,908 $5,234 $6,265 $5,236 $5,012 $5,020 $6,139
Gross margin................ 1,343 1,975 2,719 3,427 4,163 3,674 3,534 3,637 4,321
Operating income............ 199 605 923 1,325 1,551 1,051 528 698 783
Net income.................. $ 118 $ 361 $ 555 $ 799 $ 931 $ 630 $ 291 $ 366 $ 483
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue..................... 100% 100% 100% 100% 100% 100% 100% 100% 100%
Gross margin................ 65 65 70 65 67 70 71 72 70
Operating income............ 10 20 24 25 25 20 11 14 13
Net income.................. 6% 12% 14% 15% 15% 12% 6% 7% 8%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The sequential decline in revenue, gross margin, operating income and net
income in the quarters ended March 31, 1998 and June 30, 1998 is primarily due
to a decline in sales to Hi/fn's most significant customer, Quantum, and other
non-networking customers. During late 1997 and early 1998, Quantum accumulated
inventories of compression processors that Quantum used during the quarters
ended March 31, 1998 and June 30, 1998. Hi/fn does not believe that Quantum has
purchased processors from alternative sources. Although there can be no
assurance as to Quantum's future purchase levels from Hi/fn, Hi/fn has no
current reason to believe Quantum will obtain an alternative or second source
for such processors.
During the quarters ended March 31, 1998, June 30, 1998, September 30, 1998
and December 31, 1998, Hi/fn's sales to network equipment companies increased,
partially offsetting the decline in sales to Quantum. The growth of these sales
reflects initial production volumes of encryption/compression processors from
selected network equipment customers. There can be no assurances that growth of
sales to network equipment companies will continue. See "Risk Factors -- Our
Operating Results May Fluctuate Significantly."
LIQUIDITY AND CAPITAL RESOURCES
From inception until the spin-off from Stac, Hi/fn depended upon Stac for
financing its operations and capital requirements. In November 1996, Hi/fn and
Stac entered into an Assignment, Assumption and License Agreement (the
"Assignment Agreement") which provided for the transfer of Stac's semiconductor
business to Hi/fn in exchange for 6,000,000 shares of Series A Preferred Stock
and 100 shares of Common Stock of Hi/fn. Concurrent with the transfer of the
semiconductor business, Hi/fn and Stac also entered into a Cross License
Agreement under which Hi/fn granted Stac a limited, worldwide, perpetual,
non-exclusive, non-transferable, royalty-free license to the patents transferred
by Stac to Hi/fn under the Assignment Agreement.
27
<PAGE> 31
For the fiscal year ended September 30, 1997, Hi/fn generated approximately
$2.0 million of cash from operations, which was comprised primarily of net
income of approximately $1.8 million (increased for adjustments to net income).
Adjustments to net income that increased cash include $303,000 of depreciation
and amortization and $566,000 of increases in balance sheet liabilities,
resulting primarily from $420,000 of general and administrative services
provided by Stac. Adjustments to net income that reduced cash include $129,000
of benefits from the generation of deferred tax assets and a $573,000 net
increase in all other balance sheet assets. Hi/fn's transfer of cash to Stac for
centralized cash management resulted in a net decrease to Hi/fn cash of
$788,000.
For the fiscal year ended September 30, 1998, Hi/fn generated approximately
$3.1 million of cash from operations, which was comprised primarily of net
income of approximately $2.2 million (increased for adjustments to net income).
Adjustments to net income that increased cash include $726,000 of depreciation
and amortization and approximately $2.4 million of increases in balance sheet
liabilities. Adjustments to net income that reduced cash include $469,000 of
benefits from the generation of deferred tax assets and a $1.7 million net
increase in all other balance sheet assets. Stac's transfer of cash to Hi/fn of
$9.4 million as discussed below, offset by transfers to Stac for centralized
cash management, resulted in a net increase to Hi/fn's cash of approximately
$2.4 million.
On September 28, 1998, Stac paid $4.4 million to Hi/fn, representing
payment in full for all amounts due to Hi/fn from Stac as of September 1, 1998.
Stac also loaned $5.0 million to Hi/fn under a short-term loan that becomes due
and payable on September 30, 1999, but which may be prepaid in whole or part
without penalty. The loan bears interest at the prime rate set by Silicon Valley
Bank plus 0.5% per annum, payable quarterly, and is secured by a first priority
security interest in all of Hi/fn's assets, including Hi/fn's intellectual
property. Hi/fn intends to use a portion of the proceeds from this offering to
repay this loan.
At December 31, 1998, cash and cash equivalents were approximately $8.5
million compared to $10.1 million at September 30, 1998. During the quarter
ended December 31, 1998, $2.1 million was used to pay 1998 income taxes due to
federal and state authorities. During the quarter ended December 31, 1998,
capital expenditures were $193,000. Hi/fn expects capital expenditures in the
foreseeable future to remain at approximately the same level.
Hi/fn uses a number of independent suppliers to manufacture substantially
all of its products. As a result, Hi/fn relies on these suppliers to allocate to
Hi/fn a sufficient portion of foundry capacity to meet Hi/fn's needs and deliver
sufficient quantities of Hi/fn's products on a timely basis. These arrangements
allow Hi/fn to avoid utilizing its capital resources for manufacturing
facilities and work-in-process inventory and to focus substantially all of its
resources on the design, development and marketing of its products.
Hi/fn requires substantial working capital to fund its business,
particularly to finance accounts receivable and inventory, and for investments
in property and equipment. Hi/fn's need to raise capital in the future will
depend on many factors including the rate of sales growth, market acceptance of
Hi/fn's existing and new products, the amount and timing of research and
development expenditures, the timing and size of acquisitions of businesses or
technologies, the timing of the introduction of new products and the expansion
of sales and marketing efforts. Hi/fn intends to use its cash balances, cash
from operations and the proceeds from this offering to repay the Stac loan and
to fund its operating and capital needs. Although Hi/fn believes the proceeds
from this offering will be sufficient to fund
28
<PAGE> 32
Hi/fn's operating and capital needs for at least 12 months following this
offering, there can be no assurance that additional financing will not be
required or, if required, that additional financing will be available on terms
satisfactory to Hi/fn, if at all.
YEAR 2000 ISSUES
Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the year 2000. Hi/fn relies on its systems,
applications and devices in operating and monitoring all major aspects of its
business, including financial systems (such as general ledger, accounts payable
and payroll modules), customer services, networks and telecommunications
equipment and end products. Because a large portion of Hi/fn's software is
obtained from its vendors on a non-custom basis, Hi/fn believes that upgrades
for its commercial programs are currently available. Hi/fn also relies, directly
and indirectly, on external systems of business enterprises such as customers,
suppliers, creditors, financial organizations, and of governmental entities,
both domestic and international, for accurate exchange of data. Even if the
internal systems of Hi/fn are not materially affected by the Year 2000 issue,
Hi/fn could be affected by disruptions in the operation of the enterprises with
which Hi/fn interacts or Year 2000 disruptions that affect Hi/fn's customers.
Hi/fn is in the process of completing an assessment of the impact these matters
might have on Hi/fn; and as of December 31, 1998, Hi/fn has completed its
internal and vendor assessments. Hi/fn expects to complete its assessment of its
customers' Year 2000 compliance by the end of June 1999.
To date, Hi/fn's primary focus has been on its own internal systems. Hi/fn
has completed its evaluation of Year 2000 compliance with respect to all of its
computer systems and applications. As a result of this evaluation, Hi/fn has
determined that all business critical systems are compliant or will be made
compliant through available product upgrades. In particular, the only critical
application affected was the Windows NT 4.0 Operating System. Hi/fn has since
implemented Service Pack 4, an upgrade to Windows NT 4.0 released by Microsoft,
which makes the operating system Year 2000 compliant. Hi/fn expects to complete
compliance testing by June 30, 1999. Hi/fn has also finished evaluating and
implementing Year 2000 compliant upgrades to the following non-business critical
applications: MS DOS 6.22 (a laboratory PC operating system), ACP Voice
Messaging (Carlsbad location voice mail software) and FRX Drill Down software
(an accounting productivity tool). Lastly, there are several Dell Systems PC
workstations shipped prior to January 1, 1997 that will require BIOS upgrades to
become fully Year 2000 compliant. Hi/fn has not incurred, nor does it expect to
incur, material costs for the acquisition and implementation of product upgrades
to achieve Year 2000 compliance.
Hi/fn also has reviewed the products it offers to customers. None of the
software or semiconductor products sold by Hi/fn contain any date-specific
information, nor do they rely upon any such information for their operation. As
a result, Hi/fn does not believe that its products will be susceptible to Year
2000 problems.
Hi/fn has had communications with certain significant third parties with
which it does business to evaluate their Year 2000 compliance plans and state of
readiness and to determine the extent to which Hi/fn's systems may be affected
by the failure of others to remedy their own Year 2000 issues. To date, Hi/fn
has received written feedback from
29
<PAGE> 33
such parties indicating that they are in the process of implementing measures to
ensure Year 2000 compliance, and further representing that they will achieve
compliance before the close of calendar 1999. Hi/fn has not independently
confirmed any information received from other parties with respect to the Year
2000 issues. As such, there can be no assurance that such other parties will
complete their Year 2000 conversion in a timely fashion or will not suffer a
Year 2000 business disruption that may adversely affect Hi/fn's business,
financial condition and results of operations.
To date, Hi/fn has not identified any system which presents a material risk
of not being Year 2000 ready in a timely fashion or for which a suitable
alternative cannot be implemented. However, Hi/fn may ultimately identify
systems that do present a material risk of Year 2000 disruption. Such disruption
may include, among other things, the inability to process transactions or
information, procure inventory or engage in similar normal business activities.
The failure of Hi/fn to identify systems that require Year 2000 conversion and
that are critical to Hi/fn's operations or the failure of Hi/fn or others with
which Hi/fn does business to become Year 2000 ready in a timely manner could
have a material adverse effect on Hi/fn's business, financial condition and
results of operations.
Hi/fn has not yet completed the development of a comprehensive Year 2000
contingency plan. However, as part of its Year 2000 effort, Hi/fn regularly
examines information received from external sources for date integrity before
integrating such information into Hi/fn's internal systems. In addition, Hi/fn
has established a plan to increase inventories of certain products by December
1999 if Hi/fn determines there is some risk of interruption of supply from a
third party as a result of Year 2000 compliance issues. This would allow Hi/fn
to continue to supply products to its customers while the third party corrects
its problems. Hi/fn has also incorporated alternatives into the Year 2000
contingency plan it is developing to address the possibility that the software
upgrades described above will not fully resolve Year 2000 compliance issues. If
Hi/fn determines that its business is at material risk of disruption due to
currently unforeseen Year 2000 issues or anticipates that its Year 2000
compliance will not be achieved in a timely fashion, Hi/fn will work to enhance
the Year 2000 contingency plan it develops.
The discussion above contains certain forward-looking statements. The costs
of the Year 2000 conversion and possible risks associated with the Year 2000
issue are based on Hi/fn's current estimates and are subject to various
uncertainties that could cause the actual results to differ materially from
Hi/fn's expectations. Such uncertainties include, among others, the success of
Hi/fn in identifying systems that are not Year 2000 compliant, the nature and
amount of programming required to upgrade or replace each of the affected
systems, the availability of qualified personnel, consultants and other
resources, and the success of the Year 2000 conversion efforts of others.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive
Income", and FAS No. 131, "Disclosures and Segments of an Enterprise and Related
Information," which will be required to be adopted by Hi/fn in fiscal 1999.
Adoption of FAS No. 130 is not expected to have a significant impact on Hi/fn's
financial position, results of operations or cash flows. Adoption of FAS No. 131
is not expected to impact Hi/fn's presentation of its financial statements as
Hi/fn operates in only one segment.
30
<PAGE> 34
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which will be
required to be adopted by Hi/fn in fiscal 2000. SOP 98-1 requires entities to
capitalize certain costs related to internal-use software once certain criteria
have been met. Adoption of SOP No. 98-1 is not expected to have a significant
impact on Hi/fn's financial position, results of operations or cash flows.
31
<PAGE> 35
BUSINESS
OVERVIEW
Hi/fn designs, develops and markets high-performance, multi-protocol packet
processors -- semiconductor devices designed to enable secure, high-bandwidth
network connectivity and efficient storage of business information. Hi/fn's
packet processor products perform the computation-intensive tasks of
compression, encryption/compression and public key cryptography, providing its
customers with high-performance, interoperable implementations of a wide variety
of industry-standard networking and storage protocols. Hi/fn's products are used
in networking and storage equipment such as routers, remote access
concentrators, firewalls and back-up storage devices.
Hi/fn's encryption/compression and public key processors allow network
equipment vendors to add bandwidth enhancement and security capabilities to
their products. Hi/fn's encryption/compression and public key processors provide
key algorithms used in virtual private networks ("VPNs"), which enable
businesses to reduce wide area networking costs by replacing dedicated
leased-lines with lower-cost IP-based networks such as the Internet. Using VPNs,
businesses can also provide trading partners and others with secure,
authenticated access to the corporate network, increasing productivity through
improved communications. Storage equipment vendors use Hi/fn's compression
processor products to improve the performance and capacity of mid- to high-end
tape back-up systems.
INDUSTRY BACKGROUND
The dramatic growth in business use of Internet technology has resulted in
the ability to make information available to anyone, from anywhere and at any
time. An increasingly mobile workforce, increased telecommuting and the need to
connect branch offices, customers, suppliers and other trading partners to the
corporate network, have stressed the capabilities of existing network and
storage infrastructures. To deliver on the economic promise of Internet
technology as a business tool, Hi/fn believes that corporations require two
critical capabilities: secure, high-bandwidth network connectivity among
geographically dispersed constituents and efficient storage of business
information.
The Need for Enhanced Bandwidth and Security in Corporate Networks
Data traffic over local and wide area networks ("LANs" and "WANs") is
growing at an unprecedented pace, forcing corporate network managers to upgrade
their network architectures to meet these demands. Traditional network
architectures deployed by businesses to meet these needs include leased-line
connections to branch/remote offices and dial-up (e.g., analog modem and ISDN)
connections to support mobile workers and telecommuters.
Private Networks -- Traditional Network Architectures. Data traffic over
corporate networks often is facilitated by the use of leased-line connections,
which enable the interconnection of LANs. Typically, routers are used at each
end of such leased-line connections. These interconnections often take the form
of point-to-point links, which are fully managed by the corporate network
management staff. The advantage to this approach is that the bandwidth of the
link is known, and the corporation can use up to the maximum bandwidth of the
link because it is not shared by other users. In addition, because the line is
not shared, security is assured without encryption. The primary
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disadvantage of leased-line connections is the high cost of dedicated bandwidth.
The cost is also based on the distance separating the two end points of the
link. For large networks involving dedicated connections from corporate
headquarters to each remote site, such networks carry significant operating
costs.
With respect to the corporate data networking traffic, via dial-up
connections, the remote user or telecommuter "dials" to connect his or her
workstation to the corporate network over analog modem or digital (e.g., ISDN)
lines. The costs associated with these connections are also based on the
bandwidth and the distance of the link. Moreover, corporate support for dial-up
users requires significant equipment and service because the network manager
must accommodate the appropriate number of service lines needed to support the
remote user population. Like most networking equipment, the equipment needed to
provide these services is often complex and demands careful monitoring and
management. As a result, the service and management costs associated with
supporting a large dial-up user population can be significant.
As traditional private network architectures become more broadly adopted,
corporate network managers have begun to demand that network equipment be easier
to deploy and more cost-effective to operate. Network equipment vendors have
responded to these requirements by adopting standards-based, interoperable
networking protocols and implementing compression technology that allowed data
to be reduced in size prior to transmission without losing any of the data upon
receipt ("lossless compression").
Prior to the emergence of standard networking protocols, equipment used at
each of the two terminating points of leased-line and dial-up connections was
provided by the same vendor due to the proprietary nature of the data networking
protocols employed. As network equipment vendors implemented standards-based,
interoperable networking protocols, corporate customers could purchase products
from a variety of vendors, thereby increasing competition among vendors and
reducing equipment costs for the customer. One of the primary networking
protocol standards deployed to support leased-line connections is the
Point-to-Point Protocol ("PPP"), developed by the Internet Engineering Task
Force ("IETF"), the organization responsible for development of network
protocols for the Internet. PPP is a widely deployed standard and is embedded in
most of today's routers, remote access concentrators and personal computers.
Bandwidth enhancement, through the use of lossless compression, allows
businesses to reduce the costs of leased-line and dial-up connections. Lossless
compression is a feature of several standard networking protocols, including
PPP. The use of lossless compression provides the effect of an approximate
doubling of network bandwidth, thereby reducing the cost of transmission by
about half.
While traditional private network architectures have become more
cost-effective over time, the ubiquity of the Internet and its standard
protocols is ushering in a new era of more cost-effective and productive access
to corporate information resources.
Virtual Private Networks -- Emerging Cost-Effective Network
Architectures. Substantial economic benefits can be achieved by substituting
dedicated leased-lines and long distance dial-up lines, commonly used for
connecting branch offices and mobile/remote users to the corporate network, with
"local" connections (i.e., low-toll or no-toll) to the Internet. For
leased-lines, use of local Internet connections provides savings because of
shorter distance links. For dial-up lines, remote users can make local phone
calls to connect to the Internet and subsequently connect to the corporate
network. The corporate
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savings on dial-up access by remote users comes from two sources: the avoidance
of long distance toll charges and the "outsourcing" to Internet service
providers of the purchase, installation and management of the network equipment.
The use of the Internet also facilitates access to corporate information
resources by the users of broadband access technologies such as cable modems and
digital subscriber line services, which typically are connected directly to the
Internet.
The use of Internet connections also permits companies to greatly expand
the number and types of users who can access their networks. Internet
connections can be used to connect suppliers, customers and other constituents
to the corporate network in ways that are not practical using leased-lines or
dial-up links. However, when businesses use the Internet in place of
leased-lines and dial-up links, they must use network security protocols
incorporating encryption technology to maintain the privacy of data transmitted
over the network. Corporate networks implemented using network security
protocols are known as VPNs because they are implemented using a shared network
such as the Internet, but achieve their status as "private" through the use of
encryption technology.
Broad implementation of VPNs requires that standards-based network security
protocols be deployed in a wide variety of networking products, including
routers, remote access concentrators, switches, broadband access equipment,
network interface cards, security gateways and firewalls. The IETF has developed
a networking protocol called IP Security ("IPSec"), which processes packets
prior to being processed by PPP. The IPSec protocol provides bandwidth
enhancement through the use of compression and data integrity and
confidentiality through the use of encryption. Encryption makes data appear
random by removing any detectable patterns. Compression searches data for
patterns and replaces them with shorter representations of the information.
Accordingly, compression must occur prior to encryption. Thus, the use of
encryption in the IPSec protocol has the effect of rendering subsequent PPP
compression ineffective. The IPSec protocol is more scalable and has more robust
security capabilities than other network security protocols, such as the
Point-to-Point Tunneling Protocol ("PPTP") developed by Microsoft. Hi/fn
believes that the IPSec protocol, which can be deployed in both LAN and WAN
equipment, will become the most widely used protocol for the implementation of
VPNs.
Implementation of network security protocols places great processing
demands on networking equipment architectures. The initiation of secure
communications between two points in a network involves two processes: the
verification of the identities by each of the communicating parties and the
exchange of encryption keys. The verification step is performed using digital
certificates, an electronic form of identification that each party provides to
the other at the start of the communication process. Both of these processes are
computationally intensive and involve performing computations using very large
numbers, often greater than 150 digits in length. Once the identities of the two
parties are verified and the encryption keys have been exchanged, secure data
packets can be sent and received. When compared to sending and receiving
unsecured data packets, where only a small portion of the data packet requires
processing, each byte of a secure packet must be processed using
computation-intensive algorithms, stealing processing bandwidth from other
critical network processing functions such as routing, switching and packet
filtering. Processing of secure packets involves three distinct operations:
compression for bandwidth enhancement, encryption for data privacy, and data
authentication to ensure data integrity.
The traditional approach to the implementation of new network protocols has
been to provide the new capabilities in software. The processing demands of
security protocols, particularly the IPSec protocol, however, exceed the
capabilities of today's general purpose
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microprocessors that support unsecured network routing and switching protocols.
Software implementation of the IPSec protocol in a router, firewall or in other
network equipment often results in a significant degradation in the performance
of the equipment. These processing demands are driving network equipment vendors
to develop new protocol processing architectures. One approach is to divide the
security protocol processing elements of compression, encryption and data
authentication into separate, interconnected processing elements where the
processing for each function can be performed either by a general purpose
microprocessor, a custom-designed application specific integrated circuit
("ASIC"), or other logic circuit. However, the use of separate processing
elements for each function results in more complex system designs that require
higher performance interconnections to support data movements in and out of each
processing element.
Networking equipment vendors are responding to the VPN opportunity by
building a variety of products that integrate the IPSec protocol. The
technological challenges and the significant time-to-market pressures such
vendors face, however, have made it increasingly difficult for them to
internally develop the semiconductor devices necessary to implement the IPSec
protocol in their products. As a result, Hi/fn expects a market to develop for
high-performance, integrated, multi-protocol packet processors that perform the
computation-intensive tasks of compression, encryption and data authentication,
that comply with industry standard network security protocols and that can be
easily integrated into vendors' systems.
The Need for Efficient Storage of Corporate Data
The increasing connectivity of the corporate workforce also has caused
dramatic increases in the need to share data across locations, with the need for
online data to be available at all times and at all locations. Network servers,
based on the Unix and Microsoft Windows NT operating system platforms, are
proliferating because of the need to distribute data throughout the enterprise
for access and update at the lowest levels in the organizational hierarchy.
The growth in hard disk storage on network servers and user workstations
has stressed the capability of currently available back-up subsystems. While
there are a number of approaches to providing back-up, particularly for servers,
most revolve around the use of tape drives. Either stand-alone, or with multiple
drives configured in tape libraries or "jukeboxes," the demand for capacity and
performance of these subsystems continues to increase. The opportunity to back
up server disk storage, an administrative operation typically performed during
"off hours," has dwindled. Thus, the suitability for a tape subsystem to back up
server storage is increasingly dependent on the rate at which the tape subsystem
can accept data from host systems and subsequently write it to the media.
Today's mid- to high-end tape drive architectures typically consist of
three key elements: (i) a host interface such as a small computer systems
interface, (ii) a processing element that typically includes a general-purpose
microprocessor and an ASIC for tape formatting and memory management functions,
and (iii) motor control and front-end head interface electronics. The
performance requirements of mid- to high-end tape drives require that
compression functions, which typically provide doubling of capacity and
performance, be performed by dedicated semiconductor implementations within the
tape drive electronics.
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Accordingly, Hi/fn expects mid- to high-end tape back-up equipment vendors
to continue to demand high-performance, standards-based, interoperable
implementations of compression processors that can be easily integrated into
their tape drive architectures.
THE HI/FN SOLUTION
Hi/fn designs, develops and markets high-performance, multi-protocol packet
processors -- semiconductor devices designed to enable secure, high-bandwidth
network connectivity and efficient storage of business information. Hi/fn's
packet processor products perform the computation-intensive tasks of
compression, encryption/compression and public key cryptography, providing its
customers with high-performance, interoperable implementations of a wide variety
of industry-standard networking and storage protocols. Hi/fn believes that its
patented compression technology comprises the fundamental know-how for the
design and implementation of low-cost, high-performance implementations of
lossless data compression and gives its products a strong competitive advantage.
By offering a wide range of price-performance implementations of its patented,
standards-compliant technology, Hi/fn is able to sell products to network and
storage equipment vendors that allow them to reduce development costs and get
their product to market faster.
Hi/fn's patented Lempel-Ziv-Stac compression technology ("LZS") is
incorporated into several networking protocol standards, including PPP and the
frame relay protocol, allowing network equipment vendors to rapidly integrate
proven solutions for mitigating the costs associated with traditional private
leased-line network architectures. The Microsoft Point-to-Point ("MPPC")
implementation of Hi/fn's patents, developed by Microsoft, is incorporated into
the PPP and PPTP implementations of the Windows 95, 98 and NT operating systems.
Hi/fn offers high-performance compression processors that implement LZS and
MPPC. Hi/fn also licenses software implementations of LZS and MPPC to
industry-leading network equipment vendors for use in their networking products.
In support of emerging VPN architectures, Hi/fn has produced one of the
industry's first network security processors, integrating the critical functions
of compression, encryption and data authentication in compliance with the IPSec
protocol. This integration allows network equipment vendors to add
highly-integrated, high-performance VPN capabilities to their routers, remote
access concentrators, switches, broadband access equipment and firewalls. Hi/fn
also licenses a complete, portable software implementation of the IPSec
protocol, allowing network vendors to get to market more quickly with their VPN
implementations at a fraction of the cost of internal software development
efforts.
Hi/fn's line of compression processors targeted at back-up storage
applications provides storage equipment vendors high-performance implementations
of Hi/fn's patented compression technology, doubling the capacity and
performance of mid- to high-end tape drive systems. Hi/fn's LZS implementation
of Hi/fn's patents is used in the DLT 4000 and DLT 7000 tape drive products from
Quantum. The Adaptive Lossless Data Compression ("ALDC") implementation of
Hi/fn's patents, developed by IBM, is used in a variety of tape storage
products, including the Travan style of quarter-inch cartridge tape drives.
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[HI/FN NETWORKING SOLUTIONS GRAPHIC]
BUSINESS STRATEGY
Hi/fn's objective is to become a leading provider of high-performance,
multi-protocol packet processors that enable its customers to provide products
with enhanced bandwidth and high-performance security capabilities. Key elements
of Hi/fn's strategy include the following:
Focus on Network Equipment Markets. Hi/fn has targeted and intends to
continue to target the network equipment market, including the markets for
remote access concentrators, routers, switches, broadband access equipment,
network interface cards and firewalls, which are characterized by intense
time-to-market pressures, demanding performance requirements and demands for
interoperable, standards-based solutions. Hi/fn's 7711 and 7751 encryption
processors, which incorporate compression, encryption and data authentication
capabilities, were designed specifically to allow Hi/fn's network equipment
customers to add high-performance VPN capabilities to their networking products.
Leverage Proprietary Compression Technology. Hi/fn intends to leverage its
proprietary portfolio of compression technologies to establish a leadership
position in the market for integrated processors that perform the task of
compression, encryption and data authentication. Hi/fn's core compression
technology has been adopted throughout its target markets in a wide variety of
networking and storage standards. Hi/fn believes that its patents provide the
fundamental know-how for the design of high-performance, cost-effective
implementations of lossless compression of data.
Strengthen Presence in the Storage Equipment Market. Hi/fn intends to
continue to emphasize the development of high-performance packet processor
products that serve the
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mid- to high-end back-up storage equipment market. In addition, Hi/fn intends to
continue to leverage technologies developed for storage applications in its
products designed for network equipment markets because the performance
requirements of the back-up storage equipment market often exceed the
requirements of the network equipment market.
Maintain Technology Leadership. Hi/fn has made and intends to continue to
make substantial investments in the technologies that form the core of its
packet processors, with the goal of providing price-performance product
alternatives and enabling broad adoption and deployment of packet processing
functionality. Hi/fn intends to continue to develop higher performance and more
fully integrated packet processing functionality. Hi/fn also intends to continue
to leverage its engineering resources and intellectual property portfolio to
develop additional products.
Contribute to Industry Standards. Hi/fn has been and intends to continue to
be an active contributor in the development of several industry standards in
networking and storage applications. Hi/fn has participated in a wide variety of
standards groups, including American National Standards Institute, the IETF, the
Frame Relay Forum, the ADSL Forum, Quarter-Inch Cartridge Drive Standards and
others. Various implementations of Hi/fn's patented compression technology have
been specified in a variety of networking and storage protocols. Hi/fn believes
this is due to the wide range of price-performance options available for
integrating Hi/fn's compression technology into equipment vendors' products,
including software implementations and high-performance semiconductor
implementations. Hi/fn believes its early involvement in these standards
activities provides it with insight into and influence over the technical
directions of emerging technologies. As a result, Hi/fn believes it is able to
evaluate market and technical opportunities at early stages in the market
development cycle.
Leverage the Fabless Semiconductor Business Model. Hi/fn intends to
continue to subcontract all of its semiconductor manufacturing. The use of
outside manufacturing partners, a "fabless" business model, allows Hi/fn to
focus substantially all of its resources on the design, development and support
of its products. Hi/fn believes this approach lowers technology and production
risks, reduces time-to-market and increases profitability.
Strengthen and Expand Customer Relationships. Hi/fn intends to maintain a
customer-oriented approach that stresses relationships with leading network and
storage equipment vendors and emphasizes strong customer input in the product
definition process. Hi/fn has developed relationships with several leading
network and storage equipment vendors, enabling Hi/fn to achieve design wins in
new systems at the time of initial product definition. Beyond the design stage,
Hi/fn's field applications engineering group offers full service technical
support and training. By working with customers throughout the entire product
life-cycle, Hi/fn is able to gain insights into its customer's future plans and
needs, identify emerging industry trends and better enable it to deliver high-
performance, cost-effective products.
CUSTOMERS AND PRODUCTS
A number of leading manufacturers of network and storage equipment have
designed products that incorporate Hi/fn's products. To date, Hi/fn has secured
several design wins with networking and storage equipment vendors. To qualify as
a design win, an equipment vendor must have ordered samples of Hi/fn's packet
processors or an evaluation board and initiated a product design that
incorporates Hi/fn's packet processors. During the design-in
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process, Hi/fn works with each customer, providing training on Hi/fn's products,
assisting in resolving technical questions and providing price and delivery
information to assist the customer in getting its products into volume
production. There can be no assurance that any of the design wins secured by
Hi/fn will result in demand for Hi/fn's products. See "Risk Factors -- Our
Business Depends Upon The Development Of The Packet Processor Market" and "-- We
Face Risks Associated With Evolving Industry Standards And Rapid Technological
Change."
At December 31, 1998, Hi/fn had a backlog of semiconductor orders
representing $9.8 million of products deliverable to customers over the next 12
months. Because Hi/fn quotes product lead times to customers of approximately
three months, most products shipped during a quarter are ordered during the
previous quarter. Since customers may reschedule or cancel orders, subject to
negotiated windows, orders scheduled for shipment in a quarter may be moved to a
subsequent quarter or cancelled altogether.
Hi/fn's products -- compression processors, encryption/compression
processors, public key processors and software -- provide a broad range of
price/performance alternatives for the implementation of secure,
high-performance networks and efficient, high-performance tape storage devices.
Hi/fn also offers evaluation boards to assist customers in the evaluation of
Hi/fn's products.
Network Bandwidth Enhancement Products. Hi/fn's 9710, 9711 and 9751 high-
performance compression processors provide essential bandwidth-enhancement for
network equipment such as routers, remote access concentrators, broadband access
equipment and switches. These products provide flexible bus interfaces and a
variety of memory configuration options to allow customers to tailor their uses
to meet a variety of network system requirements. Hi/fn licenses a line of
software compression libraries that provide similar functionality to its line of
compression processor products for low-performance applications such as modems
and ISDN links. The software products are offered in source and object code
toolkits.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION DATE OF INTRODUCTION
- ------- ----------- --------------------
<S> <C> <C>
9710 Compression processor, multi-history LZS, operating September 1996
at 8 Mbytes/sec
9711 Compression processor, multi-history LZS and MPPC, February 1997
operating at 8 Mbytes/sec
9751 Compression processor, multi-history LZS and MPPC, October 1998
operating at 8 Mbytes/sec, PCI 2.1 interface, DMA
master
LZS221 Compression software, multi-history, LZS offered in November 1995
C source code and other microprocessor-specific
implementations
MPPC Compression software, multi-history, MPPC, offered July 1996
in C source code
</TABLE>
Network Security Products. The Hi/fn 6500 public key processor provides
acceleration of the mathematical computations involved in public key
cryptography, supporting key exchange algorithms (such as the Rivest Shamir
Adelman public key cryptosystem ("RSA"), as developed by RSA Data Security, Inc.
and Diffie-Hellman) as well as digital signature algorithms (such as RSA and the
Digital Signature Algorithm ("DSA")). Hi/fn's 7711 and 7751 high-performance
encryption processors provide essential bandwidth-enhancement and security for
network equipment such as routers, remote access concentrators, switches and
firewalls. The 7711 and 7751 provide a flexible bus interface
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and a variety of memory configuration options to allow adaptation to meet a
variety of network system requirements. The 7711 and 7751 are pin-compatible
with the 9711 and 9751 compression processors, respectively, providing customers
with an easy upgrade path from compression to encryption/compression. Hi/fn also
licenses a portable, source code implementation of the IPSec protocol.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION DATE OF INTRODUCTION
------- ----------- --------------------
<S> <C> <C>
6500 Public key processor, RSA and January 1999
Diffie-Hellman key exchange algorithms,
RSA & DSA signature algorithms, random
number generator
7711 Encryption processor, DES/Triple-DES/RC4 October 1997
encryption, LZS/MPPC compression, MD5/
SHA1 data authentication, operating at 8
Mbytes/sec
7751 Encryption processor, DES/Triple-DES/RC4 October 1998
encryption, LZS/MPPC compression, MD5/
SHA1 data authentication, operating at 8
Mbytes/sec, PCI 2.1interface, DMA master
IPSECure IPSEC Source code toolkit, providing packet May 1998
processing functions of the IPSec
protocol
IPSECure ISAKMP Source code toolkit, providing key May 1998
management protocol functions of the
IPSec protocol
</TABLE>
Storage Enhancement Products. Hi/fn's 9610 and 9732 high-performance
compression processors provide a typical doubling of capacity and performance
for mid- to high-end tape drive products.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION DATE OF INTRODUCTION
- ------- ----------- --------------------
<S> <C> <C>
9732 Compression processor, single history LZS, operating June 1994
at 32 Mbytes/sec
9610 Compression processor, single history LZS, operating May 1997
at 50 Mbytes/sec
</TABLE>
Evaluation Boards. To facilitate the adoption of its semiconductor devices,
Hi/fn designs system-level boards that resemble actual end-products or
subsystems. Hi/fn's evaluation boards include basic hardware and software that
enable customers to expedite their designs by using the evaluation boards as a
reference or by incorporating portions of them into their own designs. These
boards are used as evaluation and development vehicles for each semiconductor
device designed by Hi/fn.
TECHNOLOGY
Hi/fn's multi-protocol packet processors are high-performance compression,
encryption/compression and public key processors that have been designed to meet
the needs of networking and storage equipment vendors. Hi/fn believes that its
patented compression technology, employed in its compression and
encryption/compression processors, gives it a strong competitive advantage. In
addition to core technologies that Hi/fn has developed, Hi/fn has enhanced the
features and functionality of its products through the licensing of certain
technologies from third parties.
Compression Algorithms and Architectures. Hi/fn is the holder of key
patents that cover a wide variety of lossless compression algorithms and their
implementations. Specific
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implementations of Hi/fn's compression patents include the following compression
algorithms: LZS, developed by Stac; MPPC, developed by Microsoft; and ALDC,
developed by IBM. Hi/fn has continued to improve the performance, functionality
and architectures of these compression techniques. For example, semiconductor
implementations of the LZS algorithm have improved in performance by a factor of
40 in under four years. Through the use of various architectural implementations
of its compression algorithms, Hi/fn is able to provide compression solutions
over a broad price-performance spectrum.
Encryption, Data Authentication and Public Key Algorithms. Hi/fn develops
high-performance implementations of industry standard encryption algorithms
(e.g., DES, Triple-DES and RC4) and data authentication algorithms (e.g., MD5
and SHA1). Coupled with its patent position in compression, Hi/fn is positioned
to combine compression with encryption and data authentication as specified in
the most widely used network security protocols, such as IPSec and PPTP. In
addition, Hi/fn also implements public key cryptography algorithms which are
used in a wide variety of network security protocols. Public key cryptography
algorithms implemented by Hi/fn include the RSA and Diffie-Hellman algorithms as
well as the RSA and DSA digital signature algorithms. Hi/fn has licensed the
rights to implement three algorithms of RSA Data Security, Inc. in Hi/fn's
semiconductor products, including the RSA public key cryptosystem and the Rivest
Cipher 4 ("RC4") and Rivest Cipher 5 ("RC5") symmetric key encryption
algorithms.
Integrated, High-Performance Packet Processing. Hi/fn is continuing to
develop additional packet processing functionality, including the implementation
of public key encryption algorithms and increased integration of
computation-intensive security protocol processing functions. Performance
improvements of Hi/fn's packet processing functions are expected to support
gigabit speeds in the future.
INTELLECTUAL PROPERTY
Hi/fn's future success and ability to compete are dependent, in part, upon
its proprietary technology. Hi/fn relies in part on patent, trade secret,
trademark, maskwork and copyright law to protect its intellectual property.
Hi/fn owns 12 United States patents and four foreign patents. Hi/fn also has two
pending patent applications in Japan. The issued patents and patent applications
primarily cover various aspects of Hi/fn's compression technology and have
expiration dates ranging from 2006 to 2013. There can be no assurance that any
patents will issue under Hi/fn's current or future patent applications or that
the patents issued under such patent applications will not be invalidated,
circumvented or challenged. There can be no assurance that any patents issued to
Hi/fn will be adequate to safeguard and maintain Hi/fn's proprietary rights, to
deter misappropriation or to prevent an unauthorized third party from copying
Hi/fn's technology, designing around the patents owned by Hi/fn or otherwise
obtaining and using Hi/fn's products, designs or other information. In addition,
there can be no assurance that others will not develop technologies that are
similar or superior to Hi/fn's technology.
In addition, Hi/fn claims copyright protection for certain proprietary
software and documentation. Hi/fn attempts to protect its trade secrets and
other proprietary information through agreements with its customers, suppliers,
employees and consultants, and through other security measures. Although Hi/fn
intends to protect its rights vigorously, there can be no assurance that these
measures will be successful. In addition,
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the laws of certain countries in which Hi/fn's products are or may be
manufactured or sold may not protect Hi/fn's products and intellectual property.
In 1996 and 1997, Hi/fn entered into agreements with RSA Data Security,
Inc., a subsidiary of Security Dynamics, Inc., granting Hi/fn the rights to
implement three encryption algorithms licensed by RSA Data Security, Inc.,
specifically the RSA public key cryptosystem and the RC4 and RC5 symmetric key
encryption algorithms.
Agreements with IBM. In April 1994, Stac entered into two related patent
cross license agreements with IBM, one related to software products and the
other to hardware products. The term of each agreement continues until all of
the patents licensed under such agreement have expired.
Under the software patent cross license, IBM granted Stac a nonexclusive
license under certain IBM patents for making, using and selling software
programs designed to operate with all operating systems (and their extensions or
emulations) other than IBM mainframe-type operating systems. IBM also granted
Stac the right to combine products licensed under IBM's patents with other
products and granted Stac's customers the right to use those combined products.
In exchange for the rights granted to Stac by IBM under the software patent
cross license, Stac granted IBM a nonexclusive license under certain Stac
patents for making, using and selling any software programs used in systems that
process information. Stac also granted IBM the right to combine products
licensed under Stac's patents with other products and granted certain IBM
customers the right to use those combined products.
Under the hardware cross license agreement, IBM granted Stac a nonexclusive
license under certain IBM patents for making, using and selling, and for
practicing any methods involved in making or using, lossless data compression
products. The license, however, restricts Stac from incorporating the IBM
patents in the manufacture of lossless data compression products for third
parties that are based upon third-party designs for lossless data compression.
IBM also granted Stac the right to combine the hardware products with software
programs licensed under the software cross license. In addition, IBM granted to
users of Stac's licensed products an immunity from suit for use of combinations
of the licensed hardware products with software programs.
In exchange for the license from IBM, and in exchange for payment of a
one-time license fee by IBM, Stac granted IBM a nonexclusive license under
certain Stac patents for making, using and selling, and for practicing any
methods involved in making or using, hardware products. The license, however,
restricts IBM from incorporating the Stac patents in the manufacture of hardware
products for third parties that are based upon third-party designs for lossless
data compression. Stac also granted IBM the right to combine the hardware
products with software programs licensed under the software cross license. In
addition, Stac granted users of IBM's licensed products an immunity from suit
for use of combinations of the licensed hardware products with software
programs.
Under the terms of the software and hardware patent cross license
agreements between IBM and Stac, Hi/fn is eligible to receive equivalent license
rights from IBM, provided that the licenses may not be further extended to a
Hi/fn subsidiary. Stac has requested that IBM enter into such license agreements
with Hi/fn.
Agreement with Motorola. In December 1995, Stac entered into a cross
license and royalty agreement with Motorola. Under this agreement, Motorola
granted Stac and Stac's
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subsidiaries a nonexclusive license under two Motorola patents and one Motorola
patent application for making and having made products (both hardware and
software) for data communications and using, selling and leasing such products
under Stac's trade identity. Stac is also permitted, with certain exceptions, to
grant sublicenses to software and semiconductor device customers in accordance
with a standard agreement available to Stac. Except for the foregoing,
sublicensing is prohibited under the agreement.
In exchange for the license under Motorola's patents, and in exchange for
certain royalties, Stac granted Motorola and Motorola's subsidiaries (i) a
nonexclusive license under five Stac patents and a foreign patent application
for (A) making and having made data communications products other than stand
alone semiconductor devices or stand alone software that were to be sold to
entities other than Motorola or Stac or their subsidiaries and (B) using,
leasing and selling products under Stac's trade identity, and (ii) a
nonexclusive license under Stac's copyrights and patents (A) to use, copy and
distribute software for integration into Motorola's products that incorporate
LZS data compression and (B) to distribute LZS data compression software for
integration with Motorola's products that incorporate LZS data compression as
long as the modifications do not change the encoding format of the unmodified
data compression software.
Under the Motorola agreement, each of Stac and Motorola is required to pay
to the other an annual lump sum royalty based on projected sales, the amount of
which varied depending on the annual sales volume and the net sales price. All
royalties are subject to an overall maximum amount and terminate after seven
years. The term of the agreement continues until all of the licensed patents
have expired. Stac has assigned, and Hi/fn has assumed, all of Stac's rights and
obligations under the Motorola agreement.
Agreement with Microsoft. In February 1996, Stac entered into a license
agreement with Microsoft whereby Microsoft granted Stac a nonexclusive license
to use Microsoft's implementation of the MPPC compression format (i) to create
compression software that performed data compression in accordance with the MPPC
compression format, (ii) to permit third parties to integrate Microsoft's or
Stac's MPPC software, (iii) to permit third parties to exploit products into
which MPPC software is integrated, and (iv) to perform data compression in
Stac's MPPC Software in accordance with the MPPC compression format. As a
condition of the license, Stac must distribute un-optimized Microsoft
compression software on the same terms and conditions, including price, as those
for Stac's LZS software. The term of the agreement continues until all of the
licensed patents have expired. Stac has assigned, and Hi/fn has assumed, all of
Stac's rights and obligations under the Microsoft agreement.
EXPORT RESTRICTIONS ON ENCRYPTION ALGORITHMS
A key element of Hi/fn's packet processor architecture is the encryption
algorithms embedded in its semiconductor and software products. These products
are subject to export control restrictions administered by the U.S. Department
of Commerce, which permit Hi/fn's network equipment customers to export products
incorporating encryption technology only with the appropriate export license. In
addition, these U.S. export laws prohibit the export of encryption products to a
number of countries deemed hostile by the U.S. government. U.S. export
regulations regarding the export of encryption technology require either a
transactional export license or the granting of Department of Commerce commodity
jurisdiction. As a result of this regulatory regime, foreign competitors facing
less stringent controls on their products may be able to compete more
effectively than Hi/fn's network equipment customers in the global market. There
can be no assurance
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<PAGE> 47
that the U.S. government will approve any pending or future export license
requests. Further, there can be no assurance that the list of products and
countries for which export approval is required, or the regulatory policies with
respect thereto, will not be revised from time to time, or that laws limiting
the domestic use of encryption will not be enacted. The sale of Hi/fn's packet
processors could be harmed by the failure of Hi/fn's network equipment customers
to obtain the required licenses or by the costs of compliance. See "-- Sales,
Marketing & Technical Support."
COMPETITION
The networking and storage equipment markets into which Hi/fn sells its
products are intensely competitive and are subject to frequent product
introductions with improved price-performance characteristics, rapid
technological change, unit price erosion and the continued emergence of new
industry standards. The semiconductor industry is also intensely competitive and
is characterized by rapid technological change, product obsolescence and unit
price erosion. Hi/fn expects competition to increase in the future from existing
competitors and from companies that may enter Hi/fn's existing or future
markets, including certain customers, with similar or substitute solutions that
may be less costly or provide better performance or features than Hi/fn's
products. To be successful in the future, Hi/fn must continue to respond
promptly and effectively to changing customer performance, feature and pricing
requirements, technological change and competitors' innovations. There can be no
assurance that Hi/fn will be able to compete successfully against current and
future competitors or that competitive pressures faced by Hi/fn will not
materially adversely affect Hi/fn's business, financial condition and results of
operations.
Hi/fn's products compete with products from companies such as Analog
Devices, Inc., Information Resource Engineering Inc., IBM, Rainbow Technologies,
Inc., and VLSI Technology, Inc. In 1994, Stac entered into two license
agreements with IBM where Stac granted IBM the right to use, but not sublicense,
Hi/fn's patented compression technology in IBM hardware and software products.
Stac also entered into a license agreement with Microsoft in 1994 whereby Stac
granted Microsoft the right to use, but not sublicense, Hi/fn's compression
technology in their software products. Stac's license agreement with Microsoft,
however, prohibits Microsoft from creating hardware implementations of Hi/fn's
patents. Hi/fn also competes against software solutions that use general purpose
microprocessors to run encryption algorithms and Hi/fn's software compression
libraries. Moreover, Hi/fn's encryption/compression and public key processors
are subject to export control restrictions administered by the U.S. Department
of Commerce, which permit Hi/fn's network equipment customers to export products
incorporating encryption technology only with the appropriate export license. As
a result of these restrictions, sales by foreign competitors facing less
stringent controls on their encryption products could harm the sale of Hi/fn's
encryption/compression and public key processors to network equipment customers
in the global market. In addition, Hi/fn expects significant future competition
from major domestic and international semiconductor suppliers. Several
established electronics and semiconductor suppliers have recently entered or
indicated an intent to enter the network equipment market. Hi/fn may also face
competition from suppliers of products based on new or emerging technologies.
Furthermore, many of Hi/fn's existing and potential customers internally develop
ASICs, general purpose microprocessors and other devices which attempt to
perform all or a portion of the functions performed by Hi/fn's products.
Many of Hi/fn's current and potential competitors have longer operating
histories, greater name recognition, access to larger customer bases and
significantly greater
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<PAGE> 48
financial, technical, marketing and other resources than Hi/fn. As a result,
they may be able to adapt more quickly to new or emerging technologies and
changes in customer requirements or to devote greater resources to the promotion
and sale of their products than Hi/fn. In particular, companies such as Intel
Corporation, Lucent Technologies Inc., Motorola, National Semiconductor
Corporation and Texas Instruments Incorporated have proprietary semiconductor
manufacturing ability, preferred vendor status with many of Hi/fn's customers,
extensive marketing power and name recognition, greater financial resources than
Hi/fn and other significant advantages over Hi/fn. In addition, current and
potential competitors may determine, for strategic reasons to consolidate, to
lower the price of their products substantially or to bundle their products with
other products. Current and potential competitors have established or may
establish financial or strategic relationships among themselves or with existing
or potential customers, resellers or other third parties. Accordingly, it is
possible that new competitors or alliances among competitors could emerge and
rapidly acquire significant market share. There can be no assurance that Hi/fn
will be able to compete successfully against current and future competitors.
Increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which could materially adversely affect Hi/fn's
business, financial condition and results of operations.
Hi/fn believes that important competitive factors in its markets are
price-performance characteristics, rapid technological change, the continued
emergence of new industry standards, length of development cycle, design wins
with major network and storage equipment vendors, support for new network and
storage standards, features and functionality, adaptability of products to
specific applications, reliability, technical service and support and protection
of products by effective utilization of intellectual property laws. The failure
of Hi/fn to successfully develop products that compete successfully with those
of other suppliers in the market would harm Hi/fn's business, financial
condition and results of operations. In addition, Hi/fn must compete for the
services of qualified distributors and sales representatives. To the extent that
Hi/fn's competitors offer such distributors or sales representatives more
favorable terms on a higher volume of business, such distributors or sales
representatives may decline to carry, or discontinue carrying, Hi/fn's products.
Hi/fn's business, financial condition and results of operations could be harmed
by any failure to maintain and expand its distribution network. See "Risk
Factors -- Our Markets Are Highly Competitive."
RESEARCH AND DEVELOPMENT
Hi/fn's success will depend to a substantial degree upon its ability to
develop and introduce in a timely fashion new products and enhancements to its
existing products that meet changing customer requirements and emerging industry
standards. Hi/fn has made and plans to continue to make substantial investments
in research and development. Extensive product development input is obtained
from customers and through Hi/fn's participation in industry organizations and
standards setting bodies such as the IETF.
As of December 31, 1998, Hi/fn's research and development staff consisted
of 28 employees. Hi/fn's research and development expenditures totaled $1.4
million for the quarters ended December 31, 1998 and 1997, respectively. Such
expenses were $5.4 million in the fiscal year ended September 30, 1998 and $3.0
million in the fiscal year ended September 30, 1997, representing 25% and 21% of
revenues for such periods, respectively. Research and development expenses
primarily consist of salaries and related costs of employees engaged in ongoing
research, design and development activities, costs of
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<PAGE> 49
fabricating chip mask sets and subcontracting costs. Hi/fn performs its research
and product development activities at its facilities in Los Gatos, California
and Carlsbad, California. Hi/fn is seeking to hire additional skilled
development engineers.
In April 1998, Hi/fn acquired a software implementation of the IPSec
protocol from CyLAN Technologies, Inc. As part of the acquisition, Hi/fn gained
expertise in the development of software implementations of a wide range of
networking protocol functions, including IPSec and TCP/IP.
Hi/fn's future performance depends on a number of factors, including its
ability to identify emerging technological trends in its target markets, develop
and maintain competitive products, enhance its products by adding innovative
features that differentiate its products from those of its competitors, bring
products to market on a timely basis at competitive prices, properly identify
target markets and respond effectively to new technological changes or new
product announcements by others. In evaluating new product decisions, Hi/fn must
anticipate well in advance the future demand for product features and
performance characteristics, as well as available supporting technologies,
manufacturing capacity, industry standards and competitive product offerings. No
assurance can be given that Hi/fn's design and introduction schedules for any
additions and enhancements to its existing and future products will be able to
be sold at prices that are favorable to Hi/fn.
Hi/fn must also continue to make significant investments in research and
development in order to continue enhancing the performance and functionality of
its products to keep pace with competitive products and customer demands for
improved performance, features and functionality. The technical innovations
required for Hi/fn to remain competitive are inherently complex and require long
development cycles. Such innovations must be completed before developments in
networking technologies or standards render them obsolete and must be
sufficiently compelling to induce network and storage equipment vendors to favor
them over alternative technologies. Moreover, Hi/fn must generally incur
substantial research and development costs before the technical feasibility and
commercial viability of a product line can be ascertained.
There can be no assurance that revenues from future products or product
enhancements will be sufficient to recover the development costs associated with
such products or enhancements or that Hi/fn will be able to secure the financial
resources necessary to fund future development. The failure to successfully
develop new products on a timely basis could have a material adverse affect on
Hi/fn's business, financial condition and results of operations. See "Risk
Factors -- We Face Risks Associated With Evolving Industry Standards And Rapid
Technological Change."
SALES, MARKETING & TECHNICAL SUPPORT
Hi/fn markets its products through a direct sales and marketing
organization, headquartered in Los Gatos, California, with a sales office in
Boston, and through independent contract sales representatives in the United
States, Europe, Japan and other areas. Hi/fn has also recently hired account
managers to focus on individual customer relationships. Hi/fn does not have any
foreign operations and sales of its products to foreign companies, other than
product shipments to contract manufacturers of domestic customers, have not been
material. Sales representatives are selected for their understanding of the
marketplace and their ability to provide effective field sales support for
Hi/fn's products. Hi/fn's relationships with some of its sales representatives
have been
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<PAGE> 50
established within the last year, and Hi/fn is unable to predict the extent to
which some of these representatives will be successful in marketing and selling
Hi/fn's products.
Sales to U.S. customers account for the substantial majority of Hi/fn's
revenues. Due to the export controls imposed on encryption products by the U.S.
government, Hi/fn's shipments to international customers are limited to
compression processors and comprehension software. Hi/fn is actively working
with its network equipment customers and the National Security Agency to comply
with U.S. export controls to facilitate the export of Hi/fn's customer's
products which incorporate Hi/fn's encryption products. There can be no
assurance that Hi/fn will be successful in these efforts and that competitors
outside of the U.S. will not develop encryption products to meet the needs of
Hi/fn's customers, thereby reducing the opportunity for Hi/fn to sell its
products. See "Risk Factors -- Our Products Are Subject To Export Restrictions."
Hi/fn has a number of marketing programs designed to inform network and
storage equipment vendors about the capabilities and benefits of Hi/fn's
products. Hi/fn's marketing efforts include participation in industry trade
shows, technical conferences, preparation of competitive analyses, sales
training, publication of technical and educational articles in industry
journals, maintenance of Hi/fn's website, advertising and direct mail
distribution of Hi/fn literature.
Technical support to customers is provided through field and factory
applications engineers and, if necessary, product designers. Local field support
is provided in person or by telephone. Hi/fn believes that providing customers
with comprehensive product service and support is critical to maintaining a
competitive position in the market and is critical to shortening the time
required to design in Hi/fn's products. Hi/fn works with its customers to
monitor the performance of its product designs and to provide support at each
stage of customer product development.
MANUFACTURING
Currently, Hi/fn subcontracts all of its semiconductor manufacturing on a
turnkey basis, with Hi/fn's suppliers delivering fully assembled and tested
products based on Hi/fn's proprietary designs. The use of the fabless model
allows Hi/fn to focus substantially all of its resources on determining customer
requirements and on the design, development and support of its products. This
model allows Hi/fn to have significantly reduced capital requirements.
Hi/fn subcontracts its semiconductor manufacturing to Atmel Corporation,
Motorola and Toshiba Corporation. The selection of these manufacturers was based
on the breadth of available technology, quality, manufacturing capacity and
support for design tools used by Hi/fn. None of Hi/fn's products is currently
manufactured by more than one supplier. However, Hi/fn expects that in the event
one of Hi/fn's suppliers notifies Hi/fn that it intends to cease manufacturing a
product, Hi/fn will have an adequate opportunity to order sufficient quantities
of the effected products so that shipments to customers will not be adversely
affected while Hi/fn qualifies a new manufacturer.
At any given time, Hi/fn uses mainstream processes for the manufacture of
its products, avoiding dependence on the latest process technology available.
This approach reduces Hi/fn's technical risks and avoids the risks related to
production capacity constraints typically associated with leading edge
semiconductor processes. This approach allows Hi/fn to focus on providing
differentiated functionality, the primary value-add in Hi/fn's products. Hi/fn's
current main products are manufactured using a .5 micron
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<PAGE> 51
CMOS process. Products under development are being designed for .35 and .25
micron CMOS processes. Hi/fn believes that transitioning its products to
increasingly smaller semiconductor dimensions will be important for Hi/fn to
remain competitive. No assurance can be given that future process migration will
be achieved without difficulty.
Hi/fn intends to continue for the foreseeable future to rely on its
subcontract manufacturers for substantially all of its manufacturing, assembly
and test requirements. All of Hi/fn's subcontract manufacturers produce products
for other companies. Hi/fn does not have long-term manufacturing agreements with
any of its subcontract manufacturers. Hi/fn's subcontract manufacturers are not
obligated to supply products to Hi/fn for any specific period, in any specific
quantity or at any specific price, except as may be provided in a particular
purchase order that has been accepted by one of its subcontract manufacturers.
Hi/fn must place orders approximately 12 to 14 weeks in advance of expected
delivery. As a result, Hi/fn has only a limited ability to react to fluctuations
in demand for its products, which could cause Hi/fn to have an excess or a
shortage of inventory of a particular product. Failure of worldwide
semiconductor manufacturing capacity to rise along with a rise in demand could
result in Hi/fn's subcontract manufacturers to allocate available capacity to
customers that are larger or have long-term supply contracts in place. The
inability of Hi/fn to obtain adequate foundry capacity at acceptable prices, or
any delay or interruption in supply, could reduce Hi/fn's product revenue or
increase Hi/fn's cost of revenue and could harm Hi/fn's business, financial
condition and results of operations. See "Risk Factors -- We Depend Upon
Independent Manufacturers And Limited Sources Of Supply."
EMPLOYEES
As of December 31, 1998, Hi/fn employed a total of 60 full-time employees
and two part-time contractors. Of the total number of employees, 28 were
employed in research and development, 19 in sales and marketing, six in
operations and seven in finance and administration. Hi/fn's employees are not
represented by any collective bargaining agreement and Hi/fn has never
experienced a work stoppage. Hi/fn believes its employee relations are good.
Hi/fn's future success is heavily dependent upon its ability to hire and
retain qualified technical, marketing, sales and management personnel. The
competition for such personnel is intense, particularly for engineering
personnel with related security, networking and integrated circuit design
expertise, and applications support personnel with networking product design
expertise. See "Risk Factors -- We Depend Upon Key Personnel."
FACILITIES
Hi/fn's corporate and technical headquarters are currently located in Los
Gatos, California. Hi/fn leases approximately 27,000 square feet of space in Los
Gatos, California under a seven-year lease which expires in August 2005. Hi/fn
also leases two other facilities, a satellite design center in Carlsbad,
California and a small field sales office in Westborough, Massachusetts. These
facilities occupy an aggregate of approximately 7,000 square feet.
LEGAL PROCEEDINGS
Hi/fn is not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the executive
officers and directors of Hi/fn as of December 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Raymond J. Farnham................... 51 President, Chief Executive Officer,
Director and Chairman
William R. Walker.................... 57 Vice President of Finance, Chief Financial
Officer and Secretary
Stephen A. Farnow, Ph.D. ............ 49 Vice President of Operations
Robert C. Harrah..................... 53 Vice President of Sales
Robert A. Monsour.................... 43 Vice President of Marketing
Douglas L. Whiting, Ph.D. ........... 42 Chief Technology Officer and Director
Taher Elgamal, Ph.D.(2).............. 43 Director
Robert W. Johnson(1)................. 49 Director
Albert E. Sisto(1)(2)................ 49 Director
</TABLE>
- -------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Raymond J. Farnham has served as Chairman of the Board of Directors and
President and Chief Executive Officer of Hi/fn since October 1998. From 1996
through 1998, he served as Executive Vice President of Integrated Device
Technology, Inc., a supplier of microprocessor, logic and memory integrated
circuits to communication and computer customers worldwide. Mr. Farnham was
President and Chief Executive Officer of OPTi, a fabless semiconductor company
from 1994 through 1995. From 1972 through 1993, he had numerous management
responsibilities at National Semiconductor Corp., with his final position being
President of the Communication and Computing Group from 1991 through 1993. He
received a B.S. in Electrical Engineering from Pennsylvania State University.
William R. Walker has served as Vice President and Chief Financial Officer
of Hi/fn since November 1997. He was Hi/fn's Acting Chief Executive Officer and
Acting President from July 1998 through October 1998. From 1996 to 1997, Mr.
Walker was Vice President, Chief Financial Officer and Secretary at MMC
Networks, Inc., a networking company. From 1984 to 1996, Mr. Walker held the
position of Senior Vice President and Chief Financial Officer at Zilog, Inc., a
semiconductor supplier. Mr. Walker has a B.S. in Economics from University of
Wisconsin and an M.B.A. from University of Maryland, and he is a certified
public accountant.
Stephen A. Farnow, Ph.D. has served as Vice President of Operations at
Hi/fn since 1996. From 1990 through 1996, he worked as an independent consultant
in the area of general management with an emphasis on setting up or
re-engineering operations functions. From 1986 through 1990, he was Vice
President of Operations at Weitek Corp., a semiconductor supplier. He received a
B.S. in Physics from UCLA and a Ph.D. from Stanford University.
Robert C. Harrah has served as Vice President of Sales of Hi/fn since
December 1998. From 1995 to 1998, Mr. Harrah served as Vice President of
Worldwide Sales for the
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Peripheral Technology Solutions Group at Adaptec, Inc. From 1988 to 1995, Mr.
Harrah held marketing management and sales management positions at Symbios Inc.
Mr. Harrah received a B.S. degree from College of Notre Dame in Belmont,
California and an M.B.A. from Golden Gate University in San Francisco,
California.
Robert A. Monsour has served as Vice President of Marketing of Hi/fn since
August 1997. He also served as Vice President of Sales from August 1997 through
April 1998. From 1996 to 1997, he worked as an independent consultant in the
area of high-technology marketing. From 1993 to 1996, Mr. Monsour, a co-founder
of Stac, held the position of Vice President of Business Development at Stac. He
was also Vice President of Product Development from 1990 to 1993, and from 1988
to 1990 he served as Vice President of Marketing at Stac. Mr. Monsour has a
B.A.S. and M.A.S. in Computer Systems from Florida Atlantic University and holds
an M.B.A. from UCLA.
Douglas L. Whiting, Ph.D. has served as Chief Technology Officer of Hi/fn
since October 1997 and as a director of Hi/fn since November 1996. He also
served as Vice President of Technology of Stac from 1985 to 1998 and has served
as a director of Stac since 1983. Mr. Whiting will not stand for re-election as
a director at Stac's 1999 annual meeting of stockholders. He was President of
Stac from 1984 to 1986. Dr. Whiting received a Ph.D. in Computer Science from
the California Institute of Technology.
Taher Elgamal, Ph.D. has served as a director of Hi/fn since December 1998.
He has also served as president of Kroll-O'Gara since January 1999. Dr. Elgamal
is the founder and Chairman of Securify, a private company providing assessments
of companies' Internet security efforts and a subsidiary of Kroll-O'Gara. He
served as Chairman and Chief Executive Officer of Securify from March 1998 to
January 1999. From 1995 to 1998, Dr. Elgamal held the position of Chief
Scientist of Netscape Communications Corp., a provider of Internet software and
services, where he pioneered Internet security technologies such as SSL, the
standard for web security. From 1991 to 1993, he served as Director of
Engineering at RSA Data Security, Inc., a provider of encryption technology and
a subsidiary of Security Dynamics Technologies, Inc., where he produced the RSA
cryptographic toolkits, the industry standards for developers of
security-enabled applications and systems. Dr. Elgamal received a Ph.D. from
Stanford University.
Robert W. Johnson has been a private investor since July 1988. From 1983 to
July 1988, he was first a principal and subsequently a general partner of
Southern California Ventures, a private venture capital firm. He is a director
of Proxima Corporation and ViaSat, Inc., both publicly held technology
companies. Mr. Johnson holds undergraduate and graduate degrees from Stanford
University and Harvard University.
Albert E. Sisto has served as a director of Hi/fn since December 1998.
Since November, 1997, he has been Chief Operating Officer of RSA Data Security,
Inc., a provider of encryption technology and a subsidiary of Security Dynamics
Technologies, Inc. From September 1994 to October 1997, Mr. Sisto was Chairman,
President and CEO of Documagix, a software developer of document imaging
software. Mr. Sisto is a director of Jetfax, Inc., Insignia Solutions plc and
Tekgraf, Inc., all publicly traded technology companies, and also is a director
of nCipher Corporation Ltd. and Trintech Group Ltd. Mr. Sisto holds a B.E.
degree from the Stevens Institute of Technology.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Hi/Fn's Common Stock as of December 31, 1998, and as
adjusted to reflect the sale of the Common Stock being offered hereby, by (i)
each stockholder who, to Hi/fn's knowledge, owns beneficially more than 5% of
Hi/Fn's Common Stock, (ii) each of Hi/fn's executive officers and directors,
(iii) all of Hi/fn's executive officers and directors as a group and (iv) the
Selling Stockholder. Except as otherwise noted in the footnotes, the beneficial
owners named in the table have sole voting and investing power with respect to
all shares of Common Stock shown as beneficially owned by them, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING NUMBER AFTER OFFERING
------------------------- OF SHARES -------------------------
NAMES OF BENEFICIAL OWNERS NUMBER PERCENT(1) OFFERED NUMBER PERCENT(1)
- -------------------------- ---------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Microsoft Corporation(2).. 623,177 9.5% 400,000 223,177 2.7%
Robert W. Johnson(3).... 445,823 6.8 -- 445,823 5.5
Idanta Partners(4)...... 440,287 6.7 -- 440,287 5.4
Gary W. Clow(5)......... 382,712 5.8 -- 382,712 4.7
Douglas L. Whiting(6)... 350,398 5.3 -- 350,398 4.3
Arthur J. Collmeyer(7)... 225,000 3.4 -- 225,000 2.8
Robert A. Monsour....... 130,029 2.0 -- 130,029 1.6
William R. Walker....... 25,000 * -- 25,000 *
Stephen A. Farnow(8).... 40,308 * -- 40,308 *
Raymond J. Farnham(9)... 0 * -- 0 *
Robert C. Harrah........ 0 * -- 0 *
Taher Elgamal........... 0 * -- 0 *
Albert E. Sisto......... 0 * -- 0 *
All executive officers and
directors as a group (10
persons)(8)........... 1,216,558 18.5% -- 1,216,558 14.9%
</TABLE>
- -------------------------
* Less than 1%.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G, if any, filed with the
Securities and Exchange Commission ("SEC") with regard to our Common Sock.
Percentage of beneficial ownership is based on 6,556,781 shares outstanding
as of December 31, 1998, and 8,156,781 shares of Common Stock outstanding
after this offering. Shares of Common Stock subject to options currently
exercisable or exercisable within 60 days of December 31, 1998 are deemed
outstanding for computing the percentage of the beneficial owner holding
such securities, but are not deemed outstanding for computing the percentage
of any other beneficial owner. Except as otherwise indicated, the address of
each of the beneficial owners in this table is as follows: c/o hi/fn, inc.,
750 University Avenue, Los Gatos, California 95032.
(2) The address for Microsoft Corporation is One Microsoft Way, Redmond,
Washington 98052-6399.
(3) Includes 445,823 shares held by Robert W. Johnson Revocable Trust, of which
Mr. Johnson is trustee.
(4) The address for Idanta Partners is 4660 La Jolla Village Drive, Suite 850,
San Diego, CA 92122.
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(5) Includes 25,369 shares held by the Christina Clow Trust, of which Mr. Clow
serves as trustee, and 25,345 shares held by Andrew Clow Trust, of which Mr.
Clow is a trustee. Mr. Clow disclaims beneficial ownership of these shares.
The address for Mr. Clow is c/o Stac, Inc., 12636 High Bluff Drive, San
Diego, CA 92130
(6) Includes 350,398 shares held by Whiting Family Trust, of which Mr. Whiting
serves as trustee.
(7) Mr. Collmeyer served as President and Chief Executive Officer of Hi/fn until
July 2, 1998. His beneficial ownership includes 56,250 shares held by Mr.
Collmeyer's children. Mr. Collmeyer disclaims beneficial ownership of these
shares. The address for Mr. Collmeyer is 350 Bean Avenue, Los Gatos,
California, 95030.
(8) Includes options exercisable for 1,558 shares of Common Stock.
(9) On October 28, 1998, Mr. Farnham was granted an option to purchase 375,000
shares of Hi/fn's Common Stock. None of such options are exercisable within
60 days of December 31, 1998.
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DESCRIPTION OF CAPITAL STOCK
Hi/fn is authorized to issue 110,000,000 shares of its capital stock,
consisting of 100,000,000 shares of Common Stock, $.001 par value, and
10,000,000 shares of Preferred Stock, $.001 par value. As of December 31, 1998,
there were 6,556,781 shares of Common Stock outstanding held of record by
approximately 404 stockholders. No shares of Preferred Stock are outstanding and
Hi/fn has no current plans to issue shares of Preferred Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Except as
otherwise provided by law, the holders of Common Stock vote together with the
holders of Preferred Stock as one class. Subject to preferences that may be
applicable to any then outstanding shares of Preferred Stock, holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefore. See "Dividend
Policy." Subject to the rights of creditors and holders of Preferred Stock which
may be outstanding from time to time, holders of Common Stock are entitled, in
the event of Hi/fn's liquidation, dissolution or winding up, to share in the
distribution of all remaining assets. The Common Stock is not subject to any
preemptive rights and is not convertible into any other security. There are also
no redemption or sinking fund provisions applicable to the Common Stock.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of Preferred Stock, from time to
time, in one or more series and to fix the rights, preferences, designations and
powers thereof, including dividend rights, conversion rights, voting rights,
terms of redemption, liquidation preferences, sinking fund terms and the number
of shares constituting any series or the designation of such series, without any
further vote or action by stockholders.
CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE ANTI-TAKEOVER LAW
Certain provisions of Hi/fn's Certificate of Incorporation and Bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control of Hi/fn. The Certificate of Incorporation and Bylaws provide, among
other things, for a classified Board of Directors and eliminates the right of
stockholders to take action by written consent. The issuance of Preferred Stock
authorized in the Certificate of Incorporation could have the effect of delaying
or preventing a change in control of Hi/fn. Such Preferred Stock could be used
to implement, without stockholder approval, a stockholders' rights plan that
could be triggered by certain change in control transactions, which could delay
or prevent a change in control of Hi/fn or could impede a merger, consolidation,
takeover or other business combination involving Hi/fn. In addition, Hi/fn's
Bylaws provide, among other things, that special meetings of the stockholders
may be called only by the Board of Directors, the Chairman of the Board, the
Chief Executive Officer of Hi/fn or by a person or group of persons representing
at least 10% of the outstanding capital stock of Hi/fn. The Bylaws also include
advance notice procedures with regard to the nomination, other than by the Board
of Directors, of candidates for director elections.
53
<PAGE> 57
Hi/fn is also subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the statute prohibits
a publicly held Delaware corporation from entering into a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or transaction
resulting in a financial benefit to an interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of Hi/fn's
voting capital stock. The provisions of Hi/fn's Certificate of Incorporation and
Bylaws and Delaware law are intended to encourage potential acquirers to
negotiate with Hi/fn and to allow the Board of Directors the opportunity to
consider alternative proposals in the interest of maximizing stockholder value.
Such provisions, however, may also have the effect of discouraging acquisition
proposals or delaying or preventing a change in control of Hi/fn, which may have
an adverse effect on Hi/fn's stock price.
54
<PAGE> 58
RECENT SPIN-OFF AND RELATIONSHIP WITH STAC
Creation of Hi/fn. Hi/fn was incorporated as a wholly owned subsidiary of
Stac on August 14, 1996 to operate Stac's semiconductor business. On November
21, 1996, Stac transferred its semiconductor business to Hi/fn under the
Assignment Agreement in exchange for 6,000,000 shares of Series A Preferred
Stock and 100 shares of Common Stock of Hi/fn. The 6,000,000 shares of Series A
Preferred Stock were converted into 6,000,000 shares of Common Stock of Hi/fn
prior to the spin-off of Hi/fn from Stac on December 16, 1998. The assets
transferred to Hi/fn included $1.0 million of available cash, the accounts
receivable and inventory of the semiconductor business, Stac's rights under
certain sales and license agreements, and the fixed assets, trademarks, patents
and proprietary technology specified on schedules attached to the Assignment
Agreement. Hi/fn also assumed the accounts payable relating to the semiconductor
business, and current and unpaid payroll and related benefits expenses related
to former Stac employees who became Hi/fn employees.
Concurrent with the transfer of the semiconductor business, Hi/fn and Stac
also entered into a Cross License Agreement under which Hi/fn granted Stac a
limited, worldwide, perpetual, non-exclusive, non-transferable, royalty-free
license to the patents previously transferred by Stac to Hi/fn under the
Assignment Agreement. The parties further agreed that for a ten year period (i)
Stac would transfer ownership to Hi/fn of any derivative works created by Stac
from the licensed technology and (ii) Hi/fn would transfer ownership to Stac of
all future commercial releases of software implementations of the licensed
technology developed by Hi/fn.
Stac's Spin-Off of Hi/fn. On December 16, 1998, Stac distributed all of
Hi/fn's Common Stock held by Stac to Stac stockholders. The spin-off was
designed to separate the semiconductor business of Hi/fn from the software
business of Stac, and to offer each company the financial flexibility to raise
capital on a more cost-effective basis and create targeted incentives for each
company's management and employees. Prior to the spin-off, Stac received a
letter ruling from the IRS confirming that, among other things, the distribution
of Hi/fn's Common Stock to Stac stockholders would not result in recognition of
taxable income or gain to Stac or its stockholders under Section 355 of the Code
(except to the extent of cash received in lieu of fractional shares).
If the distribution were not to constitute a tax-free spin-off, then Stac
would be treated as recognizing a taxable gain equal to the difference between
(i) the fair market value of Hi/fn's Common Stock that was distributed to Stac
stockholders on December 16, 1998 and (ii) Stac's adjusted basis of such Common
Stock. In addition, under the consolidated tax return rules of the Code, each
member of Stac's consolidated group (including Hi/fn) would be severally liable
for such tax liability. Furthermore, in connection with the spin-off we entered
into a Tax Allocation and Indemnity Agreement with Stac whereby each of us
agreed that if either party took actions after the spin-off that caused Section
355(e) of the Code to apply to Hi/fn's Common Stock, then whichever party first
caused Section 355(e) of the Code to apply to Hi/fn's Common Stock would be
obligated to bear all taxes of Stac resulting from such action. Under recently
enacted Section 355(e) of the Code, if the spin-off were considered to be part
of a plan or series of related transactions (a "Plan") in which, after the
spin-off, a 50% or greater interest in Hi/fn or Stac was acquired by one or more
persons, the IRS would claim that the spin-off was taxable at the corporate
level. Although neither Hi/fn nor Stac believes the spin-off is part of a Plan
to effect a 50% change in ownership of either Hi/fn or Stac, the IRS has issued
no guidance on the definition of a Plan and for the first two years following
the
55
<PAGE> 59
spin-off, any cumulative 50% change of ownership within the two-year period will
be rebuttably presumed to be the result of a Plan.
Hi/fn's Relationship With Stac After the Spin-Off. As of December 16, 1998,
Stac ceased to own any shares of Hi/fn. In order to provide for an orderly
transition to becoming an independent company, Hi/fn and Stac entered into the
following agreements prior to the spin-off: (i) Distribution Agreement, which
provided for, among other things, the distribution of the Hi/fn Common Stock
held by Stac to Stac stockholders and certain indemnification obligations of
each company to the other; (ii) Employee Benefits Allocation Agreement, which
provided for an allocation of liabilities for employee benefits between Hi/fn
and Stac and set forth formulas for adjustments to Stac options; (iii) Tax
Allocation and Indemnity Agreement whereby Hi/fn and Stac agreed to allocate tax
liabilities that related to periods prior to December 16, 1998; and (iv)
Transitional Services Agreement under which Stac agreed to provide certain
services to Hi/fn on a transitional basis. Hi/fn has since transitioned from all
of Stac's administrative systems other than its financial accounting system.
56
<PAGE> 60
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc. and SoundView Technology Group, Inc. (the
"Representatives"), have severally agreed with Hi/fn and the Selling
Stockholder, subject to the terms and conditions of an underwriting agreement,
to purchase the number of shares of Common Stock set forth opposite their
respective names below. The underwriters are committed to purchase and pay for
all such shares, if any are purchased.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
BancBoston Robertson Stephens Inc......................
SoundView Technology Group, Inc........................
---------
Total........................................ 2,000,000
---------
</TABLE>
The Representatives have advised Hi/fn and the Selling Stockholder that the
underwriters propose to offer the shares of Common Stock to the public at the
public offering price set forth on the cover page of this prospectus and to
certain dealers at such price less a concession of not more than $ per
share, of which $ may be reallowed to other dealers. After the completion of
this offering, the public offering price, concession and reallowance to dealers
may be reduced by the Representatives. No such reduction shall change the amount
of proceeds to be received by Hi/fn and the Selling Stockholder as set forth on
the cover page of this prospectus.
Over-Allotment Option. Hi/fn has granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 300,000 additional shares of Common Stock at the same price per
share as Hi/fn and the Selling Stockholder will receive for the 2,000,000 shares
that the underwriters have agreed to purchase. To the extent that the
underwriters exercise such option, each of the underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
2,000,000 shares offered hereby. If purchased, such additional shares will be
sold by the underwriters on the same terms as those on which the 2,000,000
shares are being sold.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters, Hi/fn and the Selling Stockholder against certain civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
underwriting agreement.
Lock-up Agreements. Under the terms of lock-up agreements, each officer and
director and the holders of 1,595,888 shares of Common Stock (including the
Selling Stockholder) have agreed with the Representatives, for a period of 120
days after the date of this prospectus, that, subject to certain exceptions,
they will not contract to sell or otherwise dispose of any shares of Common
Stock, any options to purchase shares of Common Stock or any securities
convertible into, or exchangeable for, shares of Common Stock, owned directly by
such holders or with respect to which they have the power of disposition,
without the prior written consent of BancBoston Robertson Stephens Inc. However,
BancBoston Robertson Stephens Inc. may, in its sole discretion, and at any time
or from time to time, without notice, release all or any portion of the
securities subject to lock-up agreements. All of the shares of Common Stock
subject to the lock-up agreements will be eligible for sale in the public market
upon the expiration of the lock-up agreements, subject to the volume limitations
and other conditions of Rule 144.
57
<PAGE> 61
Future Sales. In addition, Hi/fn has agreed that until 120 days after the
date of this prospectus, Hi/fn will not, without prior written consent of
BancBoston Robertson Stephens Inc., subject to certain exceptions, offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock, any options
to purchase any share of Common Stock or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock other than Hi/fn's
sale of shares in this offering, the issuance of shares of Common Stock upon the
exercise of outstanding options and the grant of options to purchase shares of
Common Stock under existing employee stock option or stock purchase plans.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Stabilization. The Representatives have advised Hi/fn that, under
Regulation M of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), certain persons participating in the offering may engage in transactions,
including stabilizing bids, syndicate covering transactions or the imposition of
penalty bids which may have the effect of stabilizing or maintaining the market
price of the Common Stock at a level above that which might otherwise prevail in
the open market. A "stabilizing bid" is a bid for or the purchase of the Common
Stock on behalf of the underwriters for the purpose of fixing or maintaining the
price of the Common Stock. A "syndicate covering transaction" is the bid for or
the purchase of the Common Stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with the offering. A
"penalty bid" is an arrangement permitting the Representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with the offering if the Common Stock originally sold by such
underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such underwriter or syndicate member. The Representatives have advised Hi/fn
that such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
Passive Market Making. In connection with this offering, certain
underwriter and selling group members (if any) who are qualified market makers
on the Nasdaq National Market may engage in passive market making transactions
in the Common Stock on the Nasdaq National Market in accordance with Rule 103 of
Regulation M under the Exchange Act, during the business day prior to the
pricing of the offering, before the commencement of offers or sales of the
Common Stock. Passive market makers must comply with applicable volume and price
limitations and must be identified as such. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid for
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase limits
are exceeded.
LEGAL MATTERS
The validity of the Common Stock offered by this prospectus will be passed
upon for Hi/fn by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California. Certain legal matters relating to this offering will be
passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto,
California.
58
<PAGE> 62
EXPERTS
The financial statements of hi/fn, inc. as of September 30, 1998 and 1997
and for each of the three years in the period ended September 30, 1998,
appearing in this prospectus and Registration Statement, have been audited by
PricewaterhouseCoopers LLP, independent accountants, as set forth in their
report thereon appearing elsewhere in this prospectus, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
59
<PAGE> 63
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's website at http://www.sec.gov. You may also read and copy
any document we file with the SEC at its Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You can also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of its Public Reference
Room.
The SEC allows us to "incorporate by reference" into the prospectus the
information we have filed with them. The information incorporated by reference
is an important part of this prospectus and the information that we file
subsequently with the SEC will automatically update this prospectus. The
information incorporated by reference is considered to be part of this
prospectus. We incorporate by reference the documents listed below and any
filings we make with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the
Exchange Act after the initial filing of the registration statement that
contains this prospectus and prior to the time that we sell all the securities
offered by this prospectus:
- Hi/fn's Registration Statement on Form 10 filed with the SEC on August 7,
1998, as amended (excluding pages F-1 through F-15 thereof); and
- Hi/fn's Quarterly Report on Form 10-Q for the quarter ended December 31,
1998.
You may request a copy of these filings, at no cost, by writing or
telephoning Hi/fn at the following address:
hi/fn, inc.
Attention: Secretary
750 University Avenue
Los Gatos, California 95032
(408) 399-3500
60
<PAGE> 64
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of hi/fn, inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of changes in stockholders' equity present
fairly, in all material respects, the financial position of hi/fn, inc., a
subsidiary of Stac, Inc., at September 30, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule appearing on page
F-16 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related financial statements. These
financial statements and financial statement schedule are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
October 23, 1998, except for Note 1,
which is as of December 16, 1998
F-1
<PAGE> 65
HI/FN, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------- DECEMBER 31,
1997 1998 1998
------ ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 480 $ 4,084 $ 8,484
Marketable securities....................... -- 5,973 --
Accounts receivable, net.................... 1,823 3,125 2,398
Due from parent............................. 1,507 -- --
Inventories................................. 409 165 409
Deferred income taxes....................... 385 720 720
Prepaid expenses and other current assets... 192 315 751
------ ------- -------
Total current assets................ 4,796 14,382 12,762
Property and equipment, net................. 959 1,615 1,425
Deferred income taxes....................... 95 229 229
Other assets................................ 48 385 357
------ ------- -------
$5,898 $16,611 $14,773
====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 660 $ 1,610 $ 708
Due to parent............................... -- 6,508 --
Notes payable............................... -- -- 5,000
Accrued expenses and other current
liabilities.............................. 616 1,541 1,555
------ ------- -------
Total current liabilities........... 1,276 9,659 7,263
------ ------- -------
Commitments and contingencies (Note 8 and Note
11)
Stockholders' equity:
Preferred stock, .001 par value; 10,000,000
shares authorized; 6,000,000 shares
issued and outstanding at September 30,
1997 and 1998 and no shares issued and
outstanding at December 31, 1998......... 6 6 --
Common stock, .001 par value; 100,000,000
shares authorized; 280,799, 483,014 and
6,556,781 shares issued and outstanding
at September 30, 1997 and 1998, and
December 31, 1998, respectively.......... -- -- 7
Paid-in capital............................. 2,783 2,995 3,069
Note receivable from stockholder............ -- (100) (100)
Retained earnings........................... 1,833 4,051 4,534
------ ------- -------
Total stockholders' equity.......... 4,622 6,952 7,510
------ ------- -------
$5,898 $16,611 $14,773
====== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 66
HI/FN, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
----------------------------- ----------------
1996 1997 1998 1997 1998
------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue....................... $12,894 $14,226 $21,533 $6,265 $6,139
Cost of revenue............... 5,095 4,762 6,525 2,102 1,818
------- ------- ------- ------ ------
Gross margin.................. 7,799 9,464 15,008 4,163 4,321
------- ------- ------- ------ ------
Operating expenses:
Research and development...... 1,641 2,985 5,403 1,326 1,445
Sales and marketing........... 1,677 2,224 3,370 792 1,227
General and administrative.... 889 1,203 2,407 494 866
------- ------- ------- ------ ------
Total operating expenses...... 4,207 6,412 11,180 2,612 3,538
------- ------- ------- ------ ------
Operating income.............. 3,592 3,052 3,828 1,551 783
Interest income............... -- 16 17 5 128
Interest expense.............. -- -- -- -- 105
------- ------- ------- ------ ------
Income before income taxes.... 3,592 3,068 3,845 1,556 806
Provision for income taxes.... 1,441 1,235 1,627 625 323
------- ------- ------- ------ ------
Net income.................... $ 2,151 $ 1,833 $ 2,218 $ 931 $ 483
======= ======= ======= ====== ======
Net income per share, basic... $ 0.36 $ 0.30 $ 0.35 $ 0.15 $ 0.07
======= ======= ======= ====== ======
Net income per share,
diluted..................... $ 0.36 $ 0.30 $ 0.33 $ 0.14 $ 0.07
======= ======= ======= ====== ======
Weighted average shares
outstanding, basic.......... 6,000 6,100 6,308 6,228 6,449
======= ======= ======= ====== ======
Weighted average shares
outstanding, diluted........ 6,000 6,174 6,800 6,707 7,274
======= ======= ======= ====== ======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 67
HI/FN, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------- ---------------------
1996 1997 1998 1997 1998
------- ------ ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 2,151 $1,833 $ 2,218 $ 931 $ 483
Adjustments required to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization............. 68 303 726 100 163
Benefit from deferred income taxes........ (190) (129) (469) -- --
Loss on disposal of property and
equipment............................... -- -- -- -- 220
Gain on sale of marketable securities..... -- -- -- -- (27)
Changes in assets and liabilities:
Accounts receivable....................... 546 (642) (1,302) 357 727
Inventories............................... (554) 299 244 (556) (244)
Prepaid expenses and other current
assets.................................. (5) (186) (123) (160) (436)
Other assets.............................. 1 (44) (614) (166) 28
Accounts payable.......................... 409 60 950 1,070 (902)
Due to parent for general and
administrative allocations.............. 889 420 576 -- --
Accrued expenses and other current
liabilities............................. 446 86 925 170 14
------- ------ ------- ------- -------
Net cash provided by operating
activities......................... 3,761 2,000 3,131 1,746 26
------- ------ ------- ------- -------
Cash flows from investing activities:
(Purchases) sales of marketable
securities................................ -- -- (5,973) -- 6,000
Purchases of property and equipment......... (223) (901) (1,105) (126) (193)
------- ------ ------- ------- -------
Net cash used by investing
activities......................... (223) (901) (7,078) (126) 5,807
------- ------ ------- ------- -------
Cash flows from financing activities:
Issuance of common stock.................... -- 169 112 80 75
Proceeds of loan from parent................ -- -- 5,000 -- --
Proceeds from notes payable................. -- -- -- -- 5,000
Net transfer of funds from (to) parent...... (1,542) (788) 2,439 (1,435) (6,508)
Dividends to parent......................... (1,996) -- -- -- --
------- ------ ------- ------- -------
Net cash provided (used) by financing
activities......................... (3,538) (619) 7,551 (1,355) (1,433)
------- ------ ------- ------- -------
Net increase in cash and cash equivalents..... -- 480 3,604 265 4,400
Cash and cash equivalents at beginning of
period...................................... -- -- 480 480 4,084
------- ------ ------- ------- -------
Cash and cash equivalents at end of period.... $ -- $ 480 $ 4,084 $ 745 $ 8,484
======= ====== ======= ======= =======
Supplemental non-cash financing activities:
Issuance of preferred stock for net assets
contributed................................. $ -- $2,620 $ -- $ -- $ --
======= ====== ======= ======= =======
Settlement of interdivisional accounts........ $ (155) $ -- $ -- $ -- $ --
======= ====== ======= ======= =======
Issuance of common stock for note............. $ -- $ -- $ 100 $ 100 $ --
======= ====== ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 68
HI/FN, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
--------------- --------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------ ------ ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995....... -- -- -- -- -- -- --
Dividends to parent................. -- -- -- -- -- (2,151) (2,151)
Net income.......................... -- -- -- -- -- 2,151 2,151
----- --- ------ --- ------ ------- -------
Balance at September 30, 1996....... -- -- -- -- -- -- --
Issuance of preferred stock......... -- -- 6,000 6 2,614 -- 2,620
Issuance of common stock............ 75 -- -- -- 45 -- 45
Issuance of common stock upon
exercise of options............... 206 -- -- -- 124 -- 124
Net income.......................... -- -- -- -- -- 1,833 1,833
----- --- ------ --- ------ ------- -------
Balance at September 30, 1997....... 281 -- 6,000 6 2,783 1,833 4,622
Issuance of common stock upon
exercise of options............... 202 -- -- -- 212 -- 212
Note receivable from stockholder.... -- -- -- -- (100) -- (100)
Net income.......................... -- -- -- -- -- 2,218 2,218
----- --- ------ --- ------ ------- -------
Balance at September 30, 1998....... 483 -- 6,000 6 2,895 4,051 6,952
Issuance of common stock upon
exercise of options............... 74 1 -- -- 74 -- 75
Conversion of preferred to common
stock............................. 6,000 6 (6,000) (6) -- -- --
Net income.......................... -- -- -- -- -- 483 483
----- --- ------ --- ------ ------- -------
Balance at December 31, 1998
(unaudited)....................... 6,557 $ 7 -- $-- $2,969 $ 4,534 $ 7,510
===== === ====== === ====== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 69
HI/FN, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying financial statements present the carved-out balance sheet,
statements of operations, of cash flows, and of changes in stockholders' equity
for hi/fn, inc. ("Hi/fn" or "the Company"), a majority-owned semiconductor
products subsidiary of Stac, Inc. ("Stac" or "the Parent") before December 16,
1998. Prior to December 16, 1998, Stac converted the 6,000,000 shares of Series
A Preferred Stock of Hi/fn into 6,000,000 shares of Common Stock of Hi/fn. On
December 16, 1998, Stac distributed all outstanding shares of Hi/fn held by Stac
to Stac stockholders.
For the fiscal year ended September 30, 1996, Hi/fn conducted business as a
division of Stac. For the fiscal years ended September 30, 1997 and 1998, Hi/fn
conducted business as a majority-owned subsidiary of Stac. Financial statements
have not been previously prepared for Hi/fn. These financial statements have
been prepared from the historical accounting records of Stac.
The balance sheet reflects the net assets contributed by Stac in
establishing the Hi/fn subsidiary. The transfer was recorded at the historical
net book value of the transferred assets and liabilities of $2,620,000. In
exchange for the net assets contributed to Hi/fn, Stac received 6,000,000 shares
of Series A Preferred Stock and 100 shares of common stock (Note 6). For
purposes of preparing these financial statements it was assumed that the net
income generated from Hi/fn's operations was remitted in dividends back to Stac
for all periods prior to fiscal 1997. Additionally, for periods prior to
September 1998, Hi/fn participated with Stac in centralized cash management. In
general, the cash funding requirements of Hi/fn were met by, and all cash
generated by the business was transferred to, Stac. Cash balances at September
30, 1997 represent cash amounts in Hi/fn accounts that had yet to be liquidated
by payment obligations, or transferred to Stac. Cash balances at September 30,
1998 reflect a short-term loan of $5,000,000 by Stac to Hi/fn as well as the
settlement of intercompany accounts. Related party receivables and payables are
a result of these cash management practices, as well as allocations of general
and administrative costs as discussed below.
Amounts shown on the statement of operations are based on specific
identification of the costs directly associated with Hi/fn's business for all
components except for general and administrative costs and income tax expense.
For all periods prior to fiscal 1997, allocations of general and administrative
costs are based on management's estimates of the underlying level of effort
required to manage and support Hi/fn's activity. For periods including and
subsequent to fiscal 1997, general and administrative allocations are based on
specific identification of costs directly associated with Hi/fn's business, in
addition to allocations of (i) costs for administrative functions and services
performed on behalf of the Company by staff groups within Stac (ii) a portion of
Stac's management expense and (iii) certain general corporate expenses of Stac.
These allocated expenses primarily represent the costs of services required by
Hi/fn for accounting, management information systems, human resources,
warehouse, executive and professional fees. For the years ended September 30,
1997 and 1998, general and administrative allocations totaled $420,000 and
$576,000, respectively. As more fully described in Notes 2 and 5, current and
deferred income taxes and related tax expense have been allocated to Hi/fn as if
it were a separate taxpayer for all periods presented.
F-6
<PAGE> 70
HI/FN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
All of the allocations and estimates in the financial statements are based
on reasonable assumptions made by the management of Stac and Hi/fn under the
circumstances; however, these allocations and estimates are not necessarily
indicative of the costs and expenses that would have resulted if Hi/fn had been
operated as a separate entity.
NOTE 2 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OVERVIEW
Hi/fn designs, develops and markets high-performance, multi-protocol packet
processors -- semiconductor devices designed to enable secure, high-bandwidth
network connectivity and efficient storage of business information. The
Company's packet processor products perform the computation-intensive tasks of
compression, encryption/compression and public key cryptography, providing its
customers with high-performance, interoperable implementations of a wide variety
of industry-standard networking and storage protocols. The Company's products
are used in networking and storage equipment such as routers, remote access
concentrators, firewalls and back-up storage devices.
FINANCIAL STATEMENT PREPARATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from the sale of semiconductors and board products is recognized
upon shipment, net of an allowance for estimated returns. Revenue from periodic
software license and maintenance agreements is generally recognized ratably over
the respective license periods.
MARKETABLE SECURITIES
The Company's marketable securities are comprised of funds on deposit with
a liquid asset manager that have been invested principally in commercial paper.
The carrying amount of these investments approximates fair value due to the
short maturities or demand nature of the investments. At September 30, 1998, all
marketable securities are classified as available-for-sale and carried at fair
value. Unrealized gains or losses at September 30, 1998 are not material.
F-7
<PAGE> 71
HI/FN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market. Inventories are comprised solely of finished goods,
which are manufactured by third party foundries for resale by the Company.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Additions to property and
equipment, including significant betterments and renewals, are capitalized.
Maintenance and repair costs are charged to expense as incurred. Depreciation is
computed using the straight-line method over estimated useful lives of three to
five years and totaled $68,000, $303,000 and $449,000 in fiscal 1996, 1997, and
1998, respectively. Leasehold improvements are amortized over the shorter of the
asset life or lease term.
LONG-LIVED ASSETS
The Company investigates potential impairments of long-lived assets on an
exception basis, when events or changes in circumstances have made recovery of
an asset's carrying value unlikely. An impairment loss is recognized when the
sum of the expected future net cash flows is less than the carrying amount of
the asset. No such impairment losses have been recorded by the Company.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are charged to expense as
incurred; however, development costs for software to be licensed or sold that
are incurred from the time technological feasibility is established until the
product is ready for general release to customers are capitalized and reported
at the lower of cost or net realizable value. Through September 30, 1998, no
significant amounts were expended subsequent to reaching technological
feasibility.
STOCK-BASED COMPENSATION
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income and earnings per share as if the fair value-based
method had been applied in measuring compensation expense.
INCOME TAXES
The taxable income of the Company is included in the consolidated tax
return of the Parent. Income taxes are computed on a stand-alone basis as if the
Company were a separate taxpayer for all periods presented. Income taxes
currently payable are deemed to have been remitted by Stac on behalf of the
Company in the period that the liability arose. Amounts due to Stac for income
tax payments are included in the related party components of the balance sheet.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected more likely than not to be realized.
F-8
<PAGE> 72
HI/FN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated by dividing net income by
the weighted average number of common shares outstanding for the period, without
consideration of the dilutive impact of potential common shares ("dilutive
securities") that were outstanding during the period. Diluted EPS is computed by
dividing net income by the weighted average number of common shares outstanding
for the period, increased by dilutive securities that were outstanding during
the period. Shares subject to repurchase by the Company are considered
contingently issuable based on continued employment and are therefore treated as
potential common shares for the purposes of this calculation. Since the
Company's Series A Preferred Stock (Note 6) represents a primary equity
security, it is included in the calculation of basic earnings per share. Net
income remains the same for the calculations of basic EPS and diluted EPS. A
reconciliation of the numerators and denominators of the basic and diluted EPS
calculations for the years ended September 30, 1997 and 1998, respectively, is
presented below. Earnings per share for the year ended September 30, 1996 has
been presented on a comparable basis to the capital structure that came into
existence in fiscal 1997 in a manner similar to that as used for stock splits.
YEAR ENDED SEPTEMBER 30, 1997 (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE
AMOUNTS)
<TABLE>
<CAPTION>
PER-SHARE
NET INCOME SHARES AMOUNT
---------- --------- ---------
<S> <C> <C> <C>
Net income.......................... $1,833
Basic EPS........................... 6,100,000 $0.30
Dilutive securities................. 74,000
---------
Diluted EPS......................... 6,174,000 $0.30
=========
</TABLE>
YEAR ENDED SEPTEMBER 30, 1998 (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE
AMOUNTS)
<TABLE>
<CAPTION>
PER-SHARE
NET INCOME SHARES AMOUNT
---------- --------- ---------
<S> <C> <C> <C>
Net income.......................... $2,218
Basic EPS........................... 6,308,000 $0.35
Dilutive securities................. 492,000
---------
Diluted EPS......................... 6,800,000 $0.33
=========
</TABLE>
NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (FAS) No. 130, "Reporting Comprehensive Income,"
and Financial Accounting Standard (FAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which will be required to be adopted by
the Company in fiscal 1999. Adoption of these statements is not expected to have
a significant impact on the Company's financial position, results of operations
or cash flows.
F-9
<PAGE> 73
HI/FN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- CYLAN ACQUISITION
In April 1998, the Company acquired the outstanding stock of CyLAN
Technologies, Inc., a software development company, for $340,000 in cash in a
transaction accounted for under the purchase method. The purchase agreement
calls for the Company to make royalty payments on sales made over a three-year
period that incorporate the acquired technology. Minimum royalties over this
term amount to $450,000, subject to the continued employment at Hi/fn of a
former CyLAN shareholder. In conjunction with the acquisition, the Company
recorded the purchase price of $340,000 as capitalized software, which is being
amortized on a straight-line basis over a three year period. Pro forma data has
not been presented as such results would not differ materially from the
historical results presented.
NOTE 4 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1997 1998
------ ------
<S> <C> <C>
Accounts receivable:
Trade receivables.................................. $1,873 $3,325
Less allowance for doubtful accounts............... (50) (200)
------ ------
$1,823 $3,125
====== ======
</TABLE>
Substantially all of the Company's customers are OEM's, which results in
concentrated credit risk with respect to the Company's trade receivables. At
September 30, 1997, and 1998, one customer accounted for 78% and 52%
respectively, of the accounts receivable balance. Management believes that its
credit policies substantially mitigate such concentrated credit risk. Bad debt
expenses were not significant in fiscal 1996, 1997 and 1998.
F-10
<PAGE> 74
HI/FN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
----------------
1997 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Property and equipment:
Computer equipment................................. $1,093 $1,445
Furniture and fixtures............................. 172 419
Leasehold improvements............................. 81 346
Office equipment................................... 43 287
------ ------
1,389 2,497
Less accumulated depreciation...................... (430) (882)
------ ------
$ 959 $1,615
====== ======
Accrued expenses and other current liabilities:
Deferred revenue................................... $ 323 $ 697
Compensation and employee benefits................. 288 489
Accrued royalties.................................. -- 175
Other.............................................. 5 180
------ ------
$ 616 $1,541
====== ======
</TABLE>
NOTE 5 -- INCOME TAXES
The results of the Company's operations were included in Stac's
consolidated tax returns. The allocation of tax items is discussed in Note 2.
The provision (benefit) for income taxes is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Current tax expense:
Federal................................... $1,386 $1,159 $1,676
State..................................... 245 205 420
------ ------ ------
$1,631 $1,364 $2,096
====== ====== ======
Deferred tax (benefit):
Federal................................... $ (162) $ (109) $ (411)
State..................................... (28) (20) (58)
------ ------ ------
(190) (129) (469)
------ ------ ------
$1,441 $1,235 $1,627
====== ====== ======
</TABLE>
F-11
<PAGE> 75
HI/FN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The principal components of deferred income tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1997 1998
----- -----
<S> <C> <C>
Revenue recognition..................................... $260 $339
Inventory valuation accounts............................ 82 166
Depreciation and amortization........................... 95 148
Accrued severance....................................... -- 122
Bad debts allowance..................................... 20 84
Other................................................... 23 90
---- ----
$480 $949
==== ====
</TABLE>
A reconciliation of the amount computed by applying the statutory federal
income tax rate to income before income taxes to the provision for income taxes
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Amount computed at statutory Federal rate
of 34%.................................... $1,221 $1,043 $1,307
State income taxes, net of Federal
benefit................................... 216 184 235
Expenses not deductible for tax purposes.... 4 8 85
------ ------ ------
$1,441 $1,235 $1,627
====== ====== ======
</TABLE>
NOTE 6 -- PREFERRED STOCK
The Company issued 6,000,000 shares of voting, participating, convertible
Series A Preferred Stock ("Series A Preferred Stock") and 100 shares of Common
Stock to Stac in exchange for the net assets contributed. The transfer was
recorded at the historical net book value of the transferred assets and
liabilities of $2,620,000. Each share of Series A Preferred Stock was converted
by Stac into one share of Common Stock in connection with the spin-off. See Note
1.
NOTE 7 -- STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
1996 EQUITY INCENTIVE PLAN
During fiscal 1997, Hi/fn adopted the 1996 Equity Incentive Plan (the "1996
Plan") whereby 1,949,900 shares of Hi/fn common stock have been reserved for
issuance pursuant to nonqualified and incentive stock options and restricted
stock awards. The 1996 Plan is administered by the Board of Directors of Hi/fn
or its designees and provides generally that nonqualified stock options and
restricted stock may be awarded at a price not less than 85% of the fair market
value of the stock at the date of the award. Incentive stock options must be
awarded at a price not less than 100% of the fair market value of the stock at
the date of the award, or 110% of fair market value for awards to more than 10%
stockholders. Options granted under the 1996 Plan may have a term of up to 10
years. Options typically vest at a rate of 25% of the total grant per year over
a four-year period.
F-12
<PAGE> 76
HI/FN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
However, the Company may, at its discretion, implement a different vesting
schedule with respect to any new stock option grant. As a result of early
exercise features as provided for by the 1996 Plan, options granted are
immediately exercisable subject to the Company's repurchase rights which expire
as options vest.
Information for stock option activities is summarized below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Balance at September 30, 1996............... -- --
Options granted........................... 1,112,000 $0.69
Options exercised......................... (205,699) $0.60
Options canceled.......................... (29,438) $0.60
---------
Balance at September 30, 1997............... 876,863 $0.81
Options granted........................... 388,000 $2.29
Options exercised......................... (202,315) $1.05
Options canceled.......................... (187,361) $0.60
---------
Balance at September 30, 1998............... 875,187 $1.46
=========
</TABLE>
The following is a summary of stock options outstanding:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------
WEIGHTED-
AVERAGE WEIGHTED-
REMAINING AVERAGE
CONTRACTUAL EXERCISE
NUMBER LIFE (YEARS) PRICE
------- ------------ ---------
<S> <C> <C> <C>
AT SEPTEMBER 30, 1997
Price Range
$0.60.............................. 702,863 9.36 $0.60
$1.20.............................. 70,000 9.86 $1.20
$2.00.............................. 104,000 9.93 $2.00
-------
876,863 9.47 $0.81
=======
AT SEPTEMBER 30, 1998
Price Range
$0.60.............................. 398,187 8.38 $0.60
$1.20-$2.00........................ 235,500 8.98 $1.88
$2.25-$3.00........................ 241,500 9.51 $2.47
-------
875,187 8.85 $1.46
=======
</TABLE>
F-13
<PAGE> 77
HI/FN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of stock options that are vested and
exercisable, and are accordingly not subject to the Company's repurchase rights:
<TABLE>
<CAPTION>
OPTIONS VESTED AND
EXERCISABLE
--------------------
WEIGHTED-
AVERAGE
EXERCISE
NUMBER PRICE
------- ---------
<S> <C> <C>
AT SEPTEMBER 30, 1997
Price Range
$0.60............................................. 20,900 $0.60
=======
AT SEPTEMBER 30, 1998
Price Range
$0.60-$2.00....................................... 129,833 $0.89
=======
</TABLE>
PRO FORMA DISCLOSURE
The Company applies the intrinsic value method in accounting for its stock
based compensation. No compensation expense has been recognized for stock option
grants, which are fixed in nature, as the options have been granted at fair
value as determined by the Company's Board of Directors. Had compensation cost
for the Company's stock based compensation awards issued during fiscal 1997 and
1998 been determined based on the fair value at the grant date, the Company's
net income and net income per share would have been reduced to the pro forma
amounts indicated below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
------------- -------------
<S> <C> <C>
Net income:
As reported................................ $1,833 $2,218
====== ======
Pro forma.................................. $1,683 $1,981
====== ======
Net income per share, basic:
As reported................................ $ 0.30 $ 0.35
====== ======
Pro forma.................................. $ 0.28 $ 0.32
====== ======
Net income per share, diluted:
As reported................................ $ 0.30 $ 0.33
====== ======
Pro forma.................................. $ 0.27 $ 0.30
====== ======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the year ended September 30, 1997: dividend
yield of 0.0%, risk free interest rate of 6.46%, expected volatility of 250%,
and expected life of 1.5 years; and for the year ended September 30, 1998:
dividend yield of 0.0%, risk free interest rate of 5.48%, expected volatility of
64%, and expected life of 0.58 years.
F-14
<PAGE> 78
HI/FN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- COMMITMENTS
The Company occupies its facilities under several non-cancelable operating
leases that expire at various dates through August 2005, and which contain
renewal options. Future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
1999........................................... $1,026
2000........................................... 844
2001........................................... 799
2002........................................... 838
Thereafter..................................... 2,588
------
$6,095
======
</TABLE>
Rent expense under operating leases was approximately $50,000, $113,000,
and $467,000 in fiscal 1996, 1997, and 1998, respectively. Certain facility
leases provide for scheduled rent increases. The total lease commitment for such
leases is being charged ratably to operations.
NOTE 9 -- SIGNIFICANT CUSTOMERS
A significant portion of the Company's revenues has been derived from sales
to major OEM's. Two customers accounted for 43% and 14% of fiscal 1996 revenues,
respectively. One customer accounted for 70% of fiscal 1997 revenues. One
customer accounted for 61% of fiscal 1998 revenues.
NOTE 10 -- RELATED PARTY TRANSACTIONS
On September 30, 1998 Stac loaned the Company $5,000,000. The note matures
on September 30, 1999 and carries an interest rate of an index rate plus 0.5%.
The loan is secured by a first priority security interest in all of the
Company's assets, including the Company's intellectual property. The index rate
is defined as the prime rate for Silicon Valley Bank, and was 8.5% on September
30, 1998.
NOTE 11 -- CONTINGENCIES
Various claims arising in the course of business, seeking monetary damages
and other relief, are pending. The amount of the liability, if any, from such
claims cannot be determined with certainty. However, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
NOTE 12 -- SUBSEQUENT EVENTS (UNAUDITED)
During the three-month period ended December 31, 1998, the Company entered
into a $5.0 million loan agreement with its former parent company, Stac. The
loan will become due and payable on September 30, 1999 and may be prepaid in
whole or in part without penalty. The loan bears interest at the prime rate set
by Silicon Valley Bank plus 0.5% per annum, payable quarterly, and is secured by
a first priority security interest in all of the Company's assets, including the
Company's intellectual property.
F-15
<PAGE> 79
HI/FN, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO ADDITIONS
BEGINNING COSTS AND CHARGED TO BALANCE AT
OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
---------- ---------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Deducted from accounts receivable
Allowance for doubtful accounts:
Year ended September 30, 1996(a)........ 193 -- (34) -- 159
Year ended September 30, 1997........... 159 (109) -- -- 50
Year ended September 30, 1998........... 50 150 -- -- 200
Deducted from inventory
Reserve for inventory obsolescence:
Year ended September 30, 1996(a)........ 123 -- 265 -- 388
Year ended September 30, 1997........... 388 (183) -- -- 205
Year ended September 30, 1998........... 205 190 -- -- 395
</TABLE>
- -------------------------
(a) Activity represents changes in period end allocations of consolidated
balances.
F-16
<PAGE> 80
GLOSSARY OF TERMS
ALDC (Adaptive Lossless Data Compression) -- A compression method invented
by IBM, for which patents are owned by Hi/fn.
ASIC (Application Specific Integrated Circuit) -- A logic circuit designed
for a specific usage and implemented in an integrated circuit.
Broadband Access Products -- Network equipment that provides access to a
network infrastructure using high-bandwidth network interfaces, for example
cable modems and digital subscriber line products.
Bus -- The set of wires used to interconnect the signals from one
semiconductor device to one or more other devices, either on the same circuit
board or through a connector to another circuit board.
Cable Modem -- A device used typically in a home for connecting a computer
system to the Internet via the cable television network. Such devices typically
offer significantly higher data transmission rates than available from analog
modems.
Compression -- The process of eliminating redundant information from a set
of data, while maintaining complete data integrity such that the compressed data
can be decompressed and returned to its original form.
Data Authentication -- A method of processing data prior to transmission
over a communication link such that on receipt of the data, the recipient can
detect whether or not the data was altered during transmission.
DES (Data Encryption Standard) -- A standard promulgated by the Federal
Information Processing Society (FIPS) that defines a method for processing data
such that it becomes indecipherable to anyone other than the person who holds
the digital data stream, or key, with which it was encrypted. The maximum key
length supported by DES is 56 bits.
Diffie-Hellman -- The Diffie-Hellman cryptosystem is the oldest public key
system still in use. It was published in 1976. The algorithm allows two
individuals to agree on a shared secret key, over an insecure medium without any
prior secrets.
Digital Subscriber Line (DSL) -- A service offered by telecommunications
service providers that provides digital transmission for voice and data,
typically between a home/office and a corporate network, where the data
transmission rates available are significantly greater than those available from
analog modems.
DLT (Digital Linear Tape) -- A type of tape drive manufactured by Quantum
Corporation that provides storage of digital data on magnetic tape. The data is
stored on linear tracks on the tape.
DSA (Digital Signature Algorithm) -- A federal standard developed by the
National Institute of Standards and Technology. Digital signatures are used to
detect unauthorized modifications to data and to authenticate the identity of
the user who generates the signature. In addition, the recipient of signed data
can use a digital signature in proving to a third party that the signature was
in fact generated by the signer of the data. This is known as nonrepudiation
since the signer of data cannot, at a later time, repudiate the signature.
G-1
<PAGE> 81
Encryption -- The process of making data indecipherable to any entity other
than the holder of the key with which it was enciphered.
Firewall -- A technology used for preventing unwanted inbound or outbound
data at the boundary of a computer network based on a set of rules programmed by
the firewall administrator.
IETF (Internet Engineering Task Force) -- A volunteer organization that
develops architectures practices and protocols for the continued development of
the Internet and its related technologies.
IPSec (IP Security) -- A network security protocol developed by the IETF,
which provides for confidentiality and integrity of data transmitted over a
computer network using the Internet Protocol.
IP (Internet Protocol) -- The fundamental communication protocol used by
computers attached to the global information network known as the Internet. IP
can also be referred to as the layer 3 protocol, or network layer protocol of
the Internet.
ISDN (Integrated Services Digital Network) -- A service offered by
telecommunications service providers that provides digital transmission for
voice and data, typically between a home/office and a corporate network.
LAN (Local Area Network) -- Typically a network consisting of a set of
computers at a common location (office, building, campus, etc.) interconnected
using a common type of wiring and a common networking protocol.
Lossless Data Compression -- A method of processing digital information to
remove redundant data, thereby reducing it in size for subsequent transmission
or storage. Such a method must also have a corresponding method of processing
the "reduced" data in such a way as to return it to its original, uncompressed
state without any loss of information.
LZS (Lempel-Ziv-Stac) -- A compression method, invented and patented by
Stac.
Mbytes/sec (Megabytes per second) -- A rate of data transfer from one
system to another.
Megabyte -- Typically, one million bytes, but sometimes the quantity 1024
times 1024.
MD5 (Message Digest 5) -- A data processing algorithm invented by Ron
Rivest and designed to compute, with great probability, a unique "fingerprint"
for a particular set of data. This type of algorithm is often used in networking
protocols to ensure that transmitted data is not tampered with in transit. This
is done by computing a "fingerprint" for a set of data, sending the data along
with the "fingerprint," after which the receiver can recalculate and verify the
received.
MPPC (Microsoft Point-to-Point Compression) -- A compression method
invented by Microsoft, for which patents are owned by Hi/fn.
Network Interface Card -- A printed circuit card or semiconductor that
provides for the connection of a computer system or other device to a local area
network.
PPP (Point-to-Point Protocol) -- An IETF-developed protocol operating at
what is known as the data link layer, or layer 2, and used for the establishment
of a connection from one computer to another over a wide area network.
G-2
<PAGE> 82
PPTP (Point-to-Point Tunneling Protocol) -- A Microsoft-developed protocol,
based on certain aspects of PPP, that was designed to provide confidentiality of
the data transmitted between two computers over a wide area network.
RC4/RC5 (Rivest Cipher 4 and Rivest Cipher 5) -- Developed by Ron Rivest,
these are symmetric key encryption algorithms, meaning that the same key is used
to encrypt a set of data as is used to decrypt it.
Remote Access Concentrator -- A networking device, which aggregates, or
concentrates, multiple bi-directional communication links into a single, larger
link. These devices are typically used to provide dial-up access to a corporate
network or to the Internet.
Router -- A networking device that is responsible for processing incoming
and outgoing data packets, typically Internet Protocol packets, and determining
where to "route" the data packet on its journey to its final destination.
RSA (Rivest Shamir Adelman) -- The initials of the three inventors of the
RSA public key encryption system and co-founders of RSA Data Security.
Small Computer Systems Interface -- An interface typically used for
connecting storage devices such as tape drives and disk drives to computer
systems.
SHA1 (Secure Hash Algorithm) -- A data processing algorithm designed to
compute, with great probability, a unique "fingerprint" for a particular set of
data. This type of algorithm is often used in networking protocols to ensure
that transmitted data is not tampered with in transit. This is done by computing
a "fingerprint" for a set of data, sending the data along with the
"fingerprint", after which the receiver can recalculate and verify the received.
Tape Drive -- An electro-mechanical computer peripheral with integrated
electronics that enables the storage of computer data on removable magnetic
media.
TCP (Transmission Control Protocol) -- Along with IP, the next most
fundamental network protocol used for communication of data over the Internet.
Internet applications such as web browsers are known as TCP applications.
Travan -- A tape drive standard, which uses tape media that is one
quarter-inch in width.
Triple-DES (Triple Data Encryption Standard) -- Based on the DES encryption
algorithm, Triple-DES involves processing a set of data three times using DES. A
method for processing data such that it becomes indecipherable to anyone other
than the person who holds the digital data stream, or key, with which it was
encrypted. The maximum key length supported by Triple-DES is 168 bits.
VPN (Virtual Private Network) -- A network of interconnected computers, all
sharing the same network infrastructure, where the privacy of the communication
between any two computers on the network is maintained through the use of
network security, or encryption, protocols.
WAN (Wide Area Network) -- A network of interconnected computers or LANs
where they are interconnected using a network infrastructure provided by a
service provider such as an telecommunications company or an Internet Service
Provider.
G-3
<PAGE> 83
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 Hi/fn in connection with the
sale of Common Stock being registered. All amounts are estimates except the
Registration Fee, the NASD Filing Fee and the Nasdaq Listing of Additional
Shares Fee.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID BY
HI/FN
------------
<S> <C>
SEC Registration Fee..................................... $ 17,827
NASD Filing Fee.......................................... 6,912
Nasdaq Listing of Additional Shares Fee.................. 17,500
Printing and Engraving................................... 75,000
Legal Fees and Expenses.................................. 200,000
Accounting Fees and Expenses............................. 100,000
Blue Sky Fees and Expenses............................... 5,000
Transfer and Custody Agent Fees.......................... 5,000
Miscellaneous............................................ 5,000
--------
Total.......................................... $432,239
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In December 1998, the Registrant entered into indemnification agreements
with its directors and certain of its officers providing for limitations on a
director's and officer's liability for judgments, settlements, penalties, fines
and expenses of defense (including attorneys' fees, bonds and costs of
investigation) arising out of or in any way related to acts or omissions as a
director or an officer, or in any other capacity in which services are rendered
to the Registrant. The Registrant believes its indemnification agreements will
assist it in attracting and retaining qualified individuals to serve as
directors and officers. The agreements provide that a director or officer is not
entitled to indemnification under such agreements (i) if the director or officer
is not relieved of liability under applicable law, (ii) for violations of
certain securities laws, or (iii) for certain claims initiated by the director
or officer. Due to the lack of applicable case law, it is not clear whether
indemnification is available in case of a breach of securities laws of the U.S.
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Third Amended and Restated Certificate of Incorporation includes a
provision that eliminates the personal liability of its directors for monetary
damages for breach or alleged breach of their duty of care. In addition, as
permitted by Section 145 of the Delaware General Corporation Law, the Bylaws, as
amended, of the Registrant provide that: the Registrant is required to indemnify
its directors and officers and persons serving in such capacities in other
business enterprises (including, for example, subsidiaries of the Registrant) at
the Registrant's request, to the fullest extent permitted by the Delaware
General Corporation Law, including in those circumstances in which
indemnification would otherwise be discretionary; (ii) the Registrant may, in
its discretion, indemnify employees and agents in those circumstances where
indemnification is not required by law; (iii) the
II-1
<PAGE> 84
Registrant is required to advance expenses, as incurred, to its directors and
officers in connection with defending a proceeding (except that it is not
required to advance expenses to a person against whom the Registrant brings a
claim for breach of the duty of loyalty, failure to act in good faith,
intentional misconduct, knowing violation of law or deriving an improper
personal benefit); (iv) the rights conferred in the Bylaws, as amended, are not
exclusive, and the Registrant is authorized to enter into indemnification
agreements with its directors, officers and employees; and (v) the Registrant
may not retroactively amend the Bylaw provisions in a way that is adverse to
such directors, officers and employees.
The indemnification provisions in the Bylaws, as amended, and the
agreements entered into between the Registrant and its directors and officers
may be sufficiently broad to permit indemnification of the Registrant's
directors and officers for liabilities arising under the Securities Act of 1933.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Registrant under the foregoing provisions, the Registrant has been informed that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is
therefore unenforceable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1* Form of Third Amended and Restated Certificate of
Incorporation of hi/fn, inc.
3.2* Amended and Restated Bylaws of hi/fn, inc.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Amended and Restated 1996 Equity Incentive Plan of hi/fn,
inc.
10.2* Assignment, Assumption and License Agreement dated as of
November 21, 1996 between Stac, Inc. and hi/fn, inc.
10.3* Cross License Agreement dated as of November 21, 1996
between Stac, Inc. and hi/fn, inc.
10.4* Form of Distribution Agreement.
10.5* Form of Employee Benefits and Other Matters Allocation
Agreement.
10.6* Form of Tax Allocation and Indemnity Agreement.
10.7* Form of Transitional Services Agreement.
10.8* Form of Indemnification Agreement.
10.9* Agreement dated as of April 1, 1994 between International
Business Machines Corporation and Stac, Inc. (Program
Patent License Agreement).
10.10* Agreement dated as of April 1, 1994 between International
Business Machines Corporation and Stac, Inc. (Cross
License Agreement).
10.11* License Agreement dated as of June 20, 1994 between
Microsoft Corporation and Stac, Inc.
10.12* License Agreement dated as of February 16, 1996 between
Microsoft Corporation and Stac, Inc.
10.13* License Agreement dated as of December 15, 1995 between
Motorola, Inc. and Stac, Inc.
</TABLE>
II-2
<PAGE> 85
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.14* Agreement dated as of November 13, 1997 between 750
University, LLC and hi/fn, inc.
10.15* 1998 Employee Stock Purchase Plan of hi/fn, inc.
10.16* Form of Director Change of Control Agreement.
10.17* Form of Employee Change of Control Agreement.
10.18* Promissory Note dated as of September 28, 1998 made by
hi/fn, inc. in favor of Stac, Inc.
10.19* Security Agreement dated as of September 28, 1998 between
Stac, Inc. and hi/fn, inc.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP, independent
accountants.
24.1 Power of Attorney (see page II-5).
</TABLE>
- -------------------------
* Incorporated by reference from Registrant's Registration Statement on Form 10
(File No. 0-24765) filed with the SEC on August 7, 1998, as amended.
(b) FINANCIAL STATEMENT SCHEDULES
The Registration Statement includes a financial statement schedule
beginning on page F-16.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(1) 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 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to 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.
(2) It will deliver, or cause to be delivered, with the prospectus, to
each person to whom the prospectus is sent or given, the latest annual
report, to security holders that is incorporated by reference in the
prospectus and furnished pursuant to and meeting the requirements of Rule
14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X is not set forth in the prospectus, to deliver, or cause to
be delivered to each person to whom the prospectus is sent or given, the
latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(3) 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
II-3
<PAGE> 86
of 1933 shall be deemed be part of this registration statement as of the
time it was declared effective.
(4) 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 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-4
<PAGE> 87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds 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 Los Gatos, State of California, on the 17th day of
February, 1999.
hi/fn, inc.
By: /s/ RAYMOND J. FARNHAM
-----------------------------------
Raymond J. Farnham,
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Raymond J. Farnham and William R. Walker
and each of them singly, as true and lawful attorneys-in-fact and agents with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities to sign the Form S-3 Registration Statement
filed herewith and any or all amendments to said Registration Statement
(including post-effective amendments and registration statements filed pursuant
to Rule 462 and otherwise), and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission granting unto said attorneys-in-fact and agents, and each of them,
the full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or his substitute,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ RAYMOND J. FARNHAM President and Chief February 17, 1999
- --------------------------------------------- Executive Officer
Raymond J. Farnham (Principal Executive
Officer), Director and
Chairman of the Board
/s/ WILLIAM R. WALKER Vice President of Finance February 17, 1999
- --------------------------------------------- and Chief Financial
William R. Walker Officer (Principal
Financial and Accounting
Officer) and Secretary
/s/ DOUGLAS L. WHITING Chief Technology Officer February 17, 1999
- --------------------------------------------- and Director
Douglas L. Whiting, Ph.D.
</TABLE>
II-5
<PAGE> 88
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ TAHER ELGAMAL Director February 17, 1999
- ---------------------------------------------
Taher Elgamal, Ph.D.
/s/ ROBERT W. JOHNSON Director February 17, 1999
- ---------------------------------------------
Robert W. Johnson
/s/ ALBERT E. SISTO Director February 17, 1999
- ---------------------------------------------
Albert E. Sisto
</TABLE>
II-6
<PAGE> 89
EXHIBIT 23.2
CONSENT OF PRICEWATERHOUSECOOPERS LLP,
INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the prospectus constituting part of this
Registration Statement of our report dated October 23, 1998 relating to the
financial statements of hi/fn, inc., which appears in such prospectus. We also
consent to the reference to us under the heading "Experts" in such prospectus.
PRICEWATERHOUSECOOPERS, LLP
San Jose, California
February 17, 1999
<PAGE> 1
EXHIBIT 1.1
2,000,000 Shares(1)
HI/FN, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
_____________, 1999
BANCBOSTON ROBERTSON STEPHENS INC.
SOUNDVIEW TECHNOLOGY GROUP, INC.
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
hi/fn, inc., a Delaware corporation (the "Company"), and
certain stockholders of the Company named in Schedule B hereto (hereafter called
the "Selling Stockholders") address you as the Representatives of each of the
persons, firms and corporations listed in Schedule A hereto (herein collectively
called the "Underwriters") and hereby confirm their respective agreements with
the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
1,600,000 shares of its authorized and unissued Common Stock, $.001 par value
per share, to the several Underwriters. The Selling Stockholders, acting
severally and not jointly, propose to sell an aggregate of 400,000 shares of the
Company's authorized and outstanding Common Stock, $.001 par value per share, to
the several Underwriters. The 1,600,000 shares of Common Stock, $.001 par value
per share, of the Company to be sold by the Company are hereinafter called the
"Company Shares" and the 400,000 shares of Common Stock, $.001 par value per
share, to be sold by the Selling Stockholders are hereinafter called the
"Selling Stockholder Shares." The Company Shares and the Selling Stockholder
Shares are hereinafter collectively referred to as the "Firm Shares." The
Company also proposes to grant, severally and not jointly, to the Underwriters
an option to purchase up to 300,000 additional shares of the Company's Common
Stock, $.001 par value per share (the "Option Shares"), as provided in Section 7
hereof. As used in this Agreement, the term "Shares" shall include the Firm
Shares and the Option Shares. All shares of Common Stock, $.001 par value per
share, of the Company to be outstanding after giving effect to the sales
contemplated hereby, including the Shares, are hereinafter referred to as
"Common Stock."
2. Representations, Warranties and Agreements of the Company and the
Selling Stockholders.
I. The Company represents and warrants to and agrees with each
Underwriter and each Selling Stockholder that:
(a) A registration statement on Form S-3 (Registration No.
333-_____) with respect to the Shares, including a prospectus subject to
completion, has been prepared by the Company in conformity with the requirements
of the Securities Act of 1933, as amended (the "Act"), and the applicable rules
and regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has
- ------------------------------------
(1) Plus an option to purchase up to 300,000 additional shares from the
Company to cover over-allotments.
<PAGE> 2
been filed with the Commission; such amendments to such registration statement,
such amended prospectuses subject to completion and such abbreviated
registration statements pursuant to Rule 462(b) of the Rules and Regulations as
may have been required prior to the date hereof have been similarly prepared and
filed with the Commission; and the Company will file such additional amendments
to such registration statement, such amended prospectuses subject to completion
and such abbreviated registration statements as may hereafter be required.
Copies of such registration statement and amendments, of each related prospectus
subject to completion (the "Preliminary Prospectuses"), including all documents
incorporated by reference therein, and of any abbreviated registration statement
pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you.
The Company and the transactions contemplated by this Agreement meet the
requirements for using Form S-3 under the Act.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the registration
statement pursuant to Rule 430A(a) or, if BancBoston Robertson Stephens Inc., on
behalf of the several Underwriters, shall agree to the utilization of Rule 434
of the Rules and Regulations, the information required to be included in any
term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if BancBoston
Robertson Stephens Inc., on behalf of the several Underwriters, shall agree to
the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or (c),
as applicable, of the Rules and Regulations. The term "Registration Statement"
as used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); provided,
however, that if in reliance on Rule 434 of the Rules and Regulations and with
the consent of BancBoston Robertson Stephens Inc., on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective purchasers
of the Shares (including the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 434(d) of the Rules
and Regulations). Notwithstanding the foregoing, if any revised prospectus shall
be provided to the Underwriters by the Company for use in connection with the
offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
If in reliance on Rule 434 of the Rules and Regulations and with the consent of
BancBoston Robertson Stephens Inc., on behalf of the several Underwriters, the
Company shall have provided to the Underwriters a term sheet pursuant to Rule
434(b) or (c), as applicable, prior to the time that a confirmation is sent or
given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term
sheet, together, will not be materially different from the prospectus in the
Registration Statement. Any reference to the Registration Statement or the
Prospectus shall be deemed to refer to and include the documents incorporated by
reference therein, as of the date of the Registration Statement or the
Prospectus, as the case may be, and any reference to any amendment or supplement
to the Registration Statement or the Prospectus shall be deemed to refer to and
include any documents filed after such date under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), which, upon
<PAGE> 3
filing, are incorporated by reference therein. As used in this Agreement, the
term "Incorporated Documents" means the documents which at the time are
incorporated by reference in the Registration Statement, the Prospectus or any
amendment or supplement thereto.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased, (i)
the Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that none of the representations and
warranties contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement or Prospectus, or any
amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
The Incorporated Documents heretofore filed, when they were
filed (or, if any amendment with respect to any such document was filed, when
such amendment was filed), conformed in all material respects with the
requirements of the Exchange Act and the rules and regulations of the Commission
thereunder; any further Incorporated Documents so filed will, when they are
filed, conform in all material respects with the requirements of the Exchange
Act and the rules and regulations of the Commission thereunder; no such document
when it was filed (or, if an amendment with respect to any such document was
filed, when such amendment was filed), contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading; and no such further
amendment will contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading.
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation with full power and authority
(corporate and other) to own, lease and operate its properties and conduct its
business as described in the Prospectus; the Company owns all of the outstanding
capital stock of its subsidiaries free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; each of the Company and its
subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise; no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification; each of the Company and its
subsidiaries is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from state,
federal and other regulatory authorities which are material to the conduct of
its business, all of which are valid and in full force and effect; neither the
Company nor any of its subsidiaries is in violation of its respective charter or
bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material bond,
debenture, note or other evidence of indebtedness, or in any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company or any of its subsidiaries is
a party or by which it or any of its subsidiaries or their respective properties
may be bound; and neither the Company nor any of its subsidiaries is in material
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any of its
<PAGE> 4
subsidiaries or over their respective properties of which it has knowledge. The
Company does not own or control, directly or indirectly, any corporation,
association or other entity other than CyLAN Technologies, Inc. ("CyLAN").
(d) The Company has full legal right, power and authority
to enter into this Agreement and perform the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by the Company
and is a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or their
respective properties may be bound, (ii) the charter or bylaws of the Company or
any of its subsidiaries, or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties. No consent, approval,
authorization or order of or qualification with any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective properties is
required for the execution and delivery of this Agreement and the consummation
by the Company or any of its subsidiaries of the transactions herein
contemplated, except such as may be required under the Act, the Exchange Act or
under state or other securities or Blue Sky laws, all of which requirements have
been satisfied in all material respects.
(e) There is not any pending or, to the best of the
Company's knowledge, threatened action, suit, claim or proceeding against the
Company, any of its subsidiaries or any of their respective officers or any of
their respective properties, assets or rights before any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective officers or
properties or otherwise which (i) might result in any material adverse change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise or might materially and adversely affect their properties, assets or
rights, (ii) might prevent consummation of the transactions contemplated hereby
or (iii) is required to be disclosed in the Registration Statement or Prospectus
and is not so disclosed; and there are no agreements, contracts, leases or
documents of the Company or any of its subsidiaries of a character required to
be described or referred to in the Registration Statement or Prospectus or any
Incorporated Document or to be filed as an exhibit to the Registration Statement
or any Incorporated Document by the Act or the Rules and Regulations or by the
Exchange Act or the rules and regulations of the Commission thereunder which
have not been accurately described in all material respects in the Registration
Statement or Prospectus or any Incorporated Document or filed as exhibits to the
Registration Statement or any Incorporated Document.
(f) All outstanding shares of capital stock of the Company
(including the Selling Stockholder Shares) have been duly authorized and validly
issued and are fully paid and nonassessable, have been issued in compliance with
all federal and state securities laws, were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities, and the authorized and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization" and conforms
in all material respects to the statements relating thereto contained in the
Registration Statement and the Prospectus and any Incorporated Document (and
such statements correctly state the substance of the instruments defining the
capitalization of the Company); the Firm Shares and the Option Shares to be
purchased from the Company hereunder have been duly authorized for issuance and
sale to the Underwriters pursuant to this Agreement and, when issued and
delivered by the Company against payment therefor in accordance with the terms
of this Agreement, will be duly and validly issued and fully paid and
nonassessable, and will be sold free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; and no preemptive right,
co-sale right, registration right, right of first refusal or other similar right
of stockholders exists with respect to any of the Firm Shares or Option Shares
to be purchased from the Company hereunder or the issuance and sale thereof
other than those that have been expressly waived prior to the date hereof and
those that will automatically expire upon and will not apply to the consummation
of the transactions contemplated on the Closing Date. No further approval or
authorization of any stockholder, the Board of Directors of the Company or
others is required for the issuance and
<PAGE> 5
sale or transfer of the Shares except as may be required under the Act, the
Exchange Act or under state or other securities or Blue Sky laws. All issued and
outstanding shares of capital stock of each subsidiary of the Company have been
duly authorized and validly issued and are fully paid and nonassessable, and
were not issued in violation of or subject to any preemptive right, or other
rights to subscribe for or purchase shares and are owned by the Company free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest. Except as disclosed in the Prospectus and the financial statements of
the Company, and the related notes thereto, included or incorporated by
reference in the Prospectus, neither the Company nor any subsidiary has
outstanding any options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth or incorporated by reference in the Prospectus accurately and fairly
presents the information required to be shown with respect to such plans,
arrangements, options and rights.
(g) PricewaterhouseCoopers LLP, which has examined the
consolidated financial statements of the Company, together with the related
schedules and notes, as of September 30, 1997 and 1998 and for each of the
fiscal years in the three (3) fiscal years ended September 30, 1998 filed with
the Commission as a part of or incorporated by reference into the Registration
Statement, which are included or incorporated by reference in the Prospectus,
are independent accountants within the meaning of the Act and the Rules and
Regulations; the audited consolidated financial statements of the Company,
together with the related schedules and notes, and the unaudited consolidated
financial information, forming part of the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company and its subsidiaries at the respective dates and for the
respective periods to which they apply; and all audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, filed with the Commission as
part of or incorporated by reference into the Registration Statement, have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as may be otherwise
stated therein. The selected and summary financial and statistical data included
or incorporated by reference in the Registration Statement present fairly the
information shown therein and have been compiled on a basis consistent with the
audited financial statements presented therein. No other financial statements or
schedules are required to be included or incorporated by reference in the
Registration Statement.
(h) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (i) any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, (ii) any transaction that is material
to the Company and its subsidiaries considered as one enterprise, except
transactions entered into in the ordinary course of business, (iii) any
obligation, direct or contingent, that is material to the Company and its
subsidiaries considered as one enterprise, incurred by the Company or its
subsidiaries, except obligations incurred in the ordinary course of business,
(iv) any change in the capital stock or outstanding indebtedness of the Company
or any of its subsidiaries that is material to the Company and its subsidiaries
considered as one enterprise, (v) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company or any of its
subsidiaries, or (vi) any loss or damage (whether or not insured) to the
property of the Company or any of its subsidiaries which has been sustained or
will have been sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise.
(i) Except as set forth in the Registration Statement and
Prospectus and any Incorporated Document, (i) each of the Company and its
subsidiaries has good and marketable title to all properties and assets
described in the Registration Statement and Prospectus and any Incorporated
Document as owned by it, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest, other than such as would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise, (ii) the agreements to which the Company or any of
its subsidiaries is a party described in the Registration Statement and
Prospectus and any Incorporated Document are valid agreements, enforceable by
the Company and its subsidiaries (as applicable), except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles and, to the best of the Company's
knowledge, the other contracting party or parties thereto are not in material
breach or material
<PAGE> 6
default under any of such agreements, and (iii) each of the Company and its
subsidiaries has valid and enforceable leases for all properties described in
the Registration Statement and Prospectus and any Incorporated Document as
leased by it, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles. Except as set forth in the Registration Statement and Prospectus and
any Incorporated Document, the Company owns or leases all such properties as are
necessary to its operations as now conducted or as proposed to be conducted.
(j) The Company and its subsidiaries have timely filed all
necessary federal, state and foreign income and franchise tax returns and have
paid all taxes shown thereon as due, and there is no tax deficiency that has
been or, to the best of the Company's knowledge, might be asserted against the
Company or any of its subsidiaries that might have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise; and all tax liabilities are adequately provided for on the books of
the Company and its subsidiaries.
(k) The Company and its subsidiaries maintain insurance
with insurers of recognized financial responsibility of the types and in the
amounts generally deemed adequate for their respective businesses and consistent
with insurance coverage maintained by similar companies in similar businesses,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company or its subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect; neither the Company nor any
such subsidiary has been refused any insurance coverage sought or applied for;
and neither the Company nor any such subsidiary has any reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise.
(l) To the best of the Company's knowledge, no labor
disturbance by the employees of the Company or any of its subsidiaries exists or
is imminent; and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers, subassemblers,
value added resellers, subcontractors, original equipment manufacturers,
authorized dealers or international distributors that might be expected to
result in a material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise. No collective bargaining agreement
exists with any of the Company's employees and, to the best of the Company's
knowledge, no such agreement is imminent.
(m) Each of the Company and its subsidiaries owns or
possesses adequate rights to use all patents, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names and copyrights which
are necessary to conduct its businesses as described in the Registration
Statement and Prospectus and any Incorporated Document; the expiration of any
patents, patent rights, trade secrets, trademarks, service marks, trade names or
copyrights would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise; the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of the Company by others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights; and the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of others
with respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, might
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise.
(n) The Common Stock is registered pursuant to Section
12(b) or 12(g) of the Exchange Act and is listed on the Nasdaq National Market,
and the Company has taken no action designed to, or likely to have the effect
of, terminating the registration of the Common Stock under the Exchange Act or
delisting the Common Stock from The Nasdaq National Market, nor has the Company
received any notification that the
<PAGE> 7
Commission or the National Association of Securities Dealers, Inc. ("NASD") is
contemplating terminating such registration or listing.
(o) There are no issues related to the Company's, or any of
its subsidiaries', preparedness for the Year 2000 that (i) are of a character
required to be described or referred to in the Registration Statement or
Prospectus or any Incorporated Document by the Act or the Rules and Regulations
or by the Exchange Act or the rules and regulations of the Commission thereunder
which have not been accurately described in the Registration Statement or
Prospectus or any Incorporated Document or (ii) might reasonably be expected to
result in any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise or that might materially affect their
properties, assets or rights. All internal computer systems and each Constituent
Component (as defined below) of those systems and all computer-related products
and each Constituent Component (as defined below) of those products of the
Company and each of its subsidiaries comply with the Year 2000 Qualification
Requirements except where the failure to be so in compliance would not
reasonably be expected to result in a material adverse change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise or that might
materially affect their properties, assets or rights. "Year 2000 Qualification
Requirements" means that the internal computer systems and each Constituent
Component (as defined below) of those systems and all computer-related products
and each Constituent Component (as defined below) of those products of the
Company and each of its subsidiaries (i) have been reviewed to confirm that they
store, process (including sorting and performing mathematical operations,
calculations and computations), input and output data containing date and
information correctly regardless of whether the date contains dates and times
before, on or after January 1, 2000, (ii) have been designated to ensure date
and time entry recognition, calculations that accommodate same century and
multi-century formulas and date values, leap year recognition and calculations,
and date data interface values that reflect the century, (iii) accurately manage
and manipulate data involving dates and times, including single century formulas
and multi-century formulas, and will not cause an abnormal ending scenario
within the application or generate incorrect values or invalid results involving
such dates, (iv) accurately process any date rollover, and (v) accept and
respond to two-digit year date input in a manner that resolves any ambiguities
as to the century. "Constituent Component" means all software (including
operating systems, programs, packages and utilities), firmware, hardware,
networking components, and peripherals provided as part of the configuration.
(p) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the 1940 Act and such rules and regulations.
(q) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option Shares
are to be purchased, as the case may be, and (ii) completion of the distribution
of the Shares, any offering material in connection with the offering and sale of
the Shares other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act.
(r) Neither the Company nor any of its subsidiaries has at
any time during the last five (5) years (i) made any unlawful contribution to
any candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(s) The Company has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(t) Each officer and director of the Company, each Selling
Stockholder and each beneficial owner of 5% or more of the shares of Common
Stock (other than Idanta Partners) has agreed in writing that such person will
not, for a period of 120 days from the date that the Registration Statement is
declared effective by the Commission (the "Lock-up Period"), offer to sell,
contract to sell, or otherwise sell, dispose of, loan, pledge or grant any
rights with
<PAGE> 8
respect to (collectively, a "Disposition") any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock or any securities
convertible into or exchangeable for shares of Common Stock (collectively,
"Securities") now owned or hereafter acquired directly by such person or with
respect to which such person has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, (ii) as a distribution
to partners or stockholders of such person, provided that the distributees
thereof agree in writing to be bound by the terms of this restriction, or (iii)
with the prior written consent of BancBoston Robertson Stephens Inc. The
foregoing restriction has been expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction which is designed
to or reasonably expected to lead to or result in a Disposition of Securities
during the Lock-up Period, even if such Securities would be disposed of by
someone other than such holder. Such prohibited hedging or other transactions
would include, without limitation, any short sale (whether or not against the
box) or any purchase, sale or grant of any right (including, without limitation,
any put or call option) with respect to any Securities or with respect to any
security (other than a broad-based market basket or index) that includes,
relates to or derives any significant part of its value from Securities.
Furthermore, such person has also agreed and consented to the entry of stop
transfer instructions with the Company's transfer agent against the transfer of
the Securities held by such person except in compliance with this restriction.
The Company has provided to counsel for the Underwriters a complete and accurate
list of all securityholders of the Company and the number and type of securities
held by each securityholder as of the date such information is presented in the
Prospectus. The Company has provided to counsel for the Underwriters true,
accurate and complete copies of all of the agreements pursuant to which its
officers, directors and stockholders have agreed to such or similar restrictions
(the "Lock-up Agreements") presently in effect or effected hereby. The Company
hereby represents and warrants that it will not release any of its officers,
directors or other stockholders from any Lock-up Agreements currently existing
or hereafter effected without the prior written consent of BancBoston Robertson
Stephens Inc.
(u) Except as set forth in the Registration Statement and
Prospectus and any Incorporated Document, (i) the Company is, to its knowledge,
in compliance with all rules, laws and regulations relating to the use,
treatment, storage and disposal of toxic substances and protection of health or
the environment ("Environmental Laws") which are applicable to its business,
(ii) the Company has received no notice from any governmental authority or third
party of an asserted claim under Environmental Laws, which claim is required to
be disclosed in the Registration Statement and the Prospectus and any
Incorporated Document, (iii) the Company will, to its knowledge, not be required
to make future material capital expenditures to comply with Environmental Laws
and (iv) no property which is owned, leased or occupied by the Company has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et
seq.), or otherwise designated as a contaminated site under applicable state or
local law.
(v) The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization, and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(w) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus and any
Incorporated Document.
(x) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government of Cuba
or with any person or affiliate located in Cuba.
(y) The description in the Prospectus under the caption
"Recent Spin-Off and Relationship With Stac" and the descriptions in the
registration statement on Form 10 filed by the Company with the Commission on
December 8, 1998, as amended and supplemented, under the captions "Summary,"
"The Distribution," "Relationship Between Hi/fn and Stac After the
Distribution," "The Company," "Certain Relationships and Related Transactions"
and "Hi/fn Certificate of Incorporation and Bylaws" are accurate in all
<PAGE> 9
material respects and fairly present the information required to be presented by
the Act, the Rules and Regulations, the Exchange Act and the rules and
regulations of the Commission thereunder.
II. Each Selling Stockholder, severally and not jointly, represents
and warrants to and agrees with each Underwriter and the Company that:
(a) Such Selling Stockholder now has, and on the Closing
Date will have, valid marketable title to the Shares to be sold by such Selling
Stockholder, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest other than pursuant to this Agreement; and upon
delivery of such Shares hereunder and payment of the purchase price as herein
contemplated, each of the Underwriters will obtain valid marketable title to the
Shares purchased by it from such Selling Stockholder, free and clear of any
pledge, lien, security interest pertaining to such Selling Stockholder or such
Selling Stockholder's property, encumbrance, claim or equitable interest,
including any liability for estate or inheritance taxes, or any liability to or
claims of any creditor, devisee, legatee or beneficiary of such Selling
Stockholder.
(b) Such Selling Stockholder has duly authorized (if
applicable), executed and delivered, in the form heretofore furnished to the
Representatives, an irrevocable Power of Attorney (the "Power of Attorney")
appointing _____________________ and _____________________ as attorneys-in-fact
(collectively, the "Attorneys" and individually, an "Attorney") and a Letter of
Transmittal and Custody Agreement (the "Custody Agreement") with
______________________________, as custodian (the "Custodian"); each of the
Power of Attorney and the Custody Agreement constitutes a valid and binding
agreement on the part of such Selling Stockholder, enforceable in accordance
with its terms, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; and each of such Selling Stockholder's Attorneys, acting alone, is
authorized to execute and deliver this Agreement and the certificate referred to
in Section 6(i) hereof on behalf of such Selling Stockholder, to determine the
purchase price to be paid by the several Underwriters to such Selling
Stockholder as provided in Section 3 hereof, to authorize the delivery of the
Selling Stockholder Shares under this Agreement and to duly endorse (in blank or
otherwise) the certificate or certificates representing such Shares or a stock
power or powers with respect thereto, to accept payment therefor, and otherwise
to act on behalf of such Selling Stockholder in connection with this Agreement.
(c) All consents, approvals, authorizations and orders
required for the execution and delivery by such Selling Stockholder of the Power
of Attorney and the Custody Agreement, the execution and delivery by or on
behalf of such Selling Stockholder of this Agreement and the sale and delivery
of the Selling Stockholder Shares under this Agreement (other than, at the time
of the execution hereof (if the Registration Statement has not yet been declared
effective by the Commission), the issuance of the order of the Commission
declaring the Registration Statement effective and such consents, approvals,
authorizations or orders as may be necessary under state or other securities or
Blue Sky laws) have been obtained and are in full force and effect; such Selling
Stockholder, if other than a natural person, has been duly organized and is
validly existing in good standing under the laws of the jurisdiction of its
organization as the type of entity that it purports to be; and such Selling
Stockholder has full legal right, power and authority to enter into and perform
its obligations under this Agreement and such Power of Attorney and Custody
Agreement, and to sell, assign, transfer and deliver the Shares to be sold by
such Selling Stockholder under this Agreement.
(d) Such Selling Stockholder will not, during the Lock-up
Period, effect the Disposition of any Securities now owned or hereafter acquired
directly by such Selling Stockholder or with respect to which such Selling
Stockholder has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to partners or
stockholders of such Selling Stockholder, provided that the distributees thereof
agree in writing to be bound by the terms of this restriction, or (iii) with the
prior written consent of BancBoston Robertson Stephens Inc. The foregoing
restriction is expressly agreed to preclude the holder of the Securities from
engaging in any hedging or other transaction which is designed to or reasonably
expected to lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other than the
Selling Stockholder. Such prohibited hedging or other transactions would
including, without limitation, any short sale (whether or not against the box)
or any purchase, sale or grant of any right (including, without limitation, any
put or call option) with respect to any Securities or with respect to any
security (other than a broad-based market
<PAGE> 10
basket or index) that includes, relates to or derives any significant part of
its value from Securities. Such Selling Stockholder also agrees and consents to
the entry of stop transfer instructions with the Company's transfer agent
against the transfer of the securities held by such Selling Stockholder except
in compliance with this restriction.
(e) Certificates in negotiable form for all Shares to be
sold by such Selling Stockholder under this Agreement, together with a stock
power or powers duly endorsed in blank by such Selling Stockholder, have been
placed in custody with the Custodian for the purpose of effecting delivery
hereunder.
(f) This Agreement has been duly authorized by each Selling
Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and the
performance of this Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of any of the terms and
provisions of or constitute a default under any bond, debenture, note or other
evidence of indebtedness, or under any lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement or instrument to
which such Selling Stockholder is a party or by which such Selling Stockholder,
or any Selling Stockholder Shares hereunder, may be bound or, to the best of
such Selling Stockholders' knowledge, result in any violation of any law, order,
rule, regulation, writ, injunction, judgment or decree of any court, government
or governmental agency or body, domestic or foreign, having jurisdiction over
such Selling Stockholder or over the properties of such Selling Stockholder, or,
if such Selling Stockholder is other than a natural person, result in any
violation of any provisions of the charter, bylaws or other organizational
documents of such Selling Stockholder.
(g) Such Selling Stockholder has not taken and will not
take, directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Stockholder has not distributed and will
not distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(i) All information furnished by or on behalf of such
Selling Stockholder relating to such Selling Stockholder and the Selling
Stockholder Shares that is contained in the representations and warranties of
such Selling Stockholder in such Selling Stockholder's Power of Attorney or set
forth in the Registration Statement or the Prospectus is, and at the time the
Registration Statement became or becomes, as the case may be, effective and at
all times subsequent thereto up to and on the Closing Date, was or will be,
true, correct and complete, and does not, and at the time the Registration
Statement became or becomes, as the case may be, effective and at all times
subsequent thereto up to and on the Closing Date (hereinafter defined) will not,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make such information not
misleading.
(j) Such Selling Stockholder will review the Prospectus and
will comply with all agreements and satisfy all conditions on its part to be
complied with or satisfied pursuant to this Agreement on or prior to the Closing
Date and will advise one of its Attorneys and BancBoston Robertson Stephens Inc.
prior to the Closing Date if any statement to be made on behalf of such Selling
Stockholder in the certificate contemplated by Section 6(i) would be inaccurate
if made as of the Closing Date.
(k) Such Selling Stockholder does not have, or has waived
prior to the date hereof, any preemptive right, co-sale right or right of first
refusal or other similar right to purchase any of the Shares that are to be sold
by the Company or any of the other Selling Stockholders to the Underwriters
pursuant to this Agreement; such Selling Stockholder does not have, or has
waived prior to the date hereof, any registration right or other similar right
to participate in the offering made by the Prospectus, other than such rights of
participation as have been satisfied by the participation of such Selling
Stockholder in the transactions to which this Agreement relates in accordance
with the terms of this Agreement; and such Selling Stockholder does not own any
warrants,
<PAGE> 11
options or similar rights to acquire, and does not have any right or arrangement
to acquire, any capital stock, rights, warrants, options or other securities
from the Company, other than those described in the Registration Statement and
the Prospectus and any Incorporated Document.
(l) Such Selling Stockholder is not aware that any of the
representations and warranties of the Company set forth in Section 2.I. above is
untrue or inaccurate in any material respect.
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and the Selling Stockholders
agree, severally and not jointly, to sell to the Underwriters, and each
Underwriter agrees, severally and not jointly, to purchase from the Company and
the Selling Stockholders, respectively, at a purchase price of $_____ per share,
the respective number of Company Shares and Selling Stockholder Shares set forth
opposite the names of the Company and the Selling Stockholders in Schedule B
hereto. The obligation of each Underwriter to the Company and to each Selling
Stockholder shall be to purchase from the Company or such Selling Stockholder
that number of Company Shares or Selling Stockholder Shares, as the case may be,
which (as nearly as practicable, as determined by you) is in the same proportion
to the number of Company Shares or Selling Stockholder Shares, as the case may
be, set forth opposite the name of the Company or such Selling Stockholder in
Schedule B hereto as the number of Firm Shares which is set forth opposite the
name of such Underwriter in Schedule A hereto (subject to adjustment as provided
in Section 10) is to the total number of Firm Shares to be purchased by all the
Underwriters under this Agreement.
The certificates in negotiable form for the Selling
Stockholder Shares have been placed in custody (for delivery under this
Agreement) under the Custody Agreement. Each Selling Stockholder agrees that the
certificates for the Selling Stockholder Shares of such Selling Stockholder so
held in custody are subject to the interests of the Underwriters hereunder, that
the arrangements made by such Selling Stockholder for such custody, including
the Power of Attorney is to that extent irrevocable and that the obligations of
such Selling Stockholder hereunder shall not be terminated by the act of such
Selling Stockholder or by operation of law, whether by the death or incapacity
of such Selling Stockholder or the occurrence of any other event, except as
specifically provided herein or in the Custody Agreement. If any Selling
Stockholder should die or be incapacitated, or if any other such event should
occur, before the delivery of the certificates for the Selling Stockholder
Shares hereunder, the Selling Stockholder Shares to be sold by such Selling
Stockholder shall, except as specifically provided herein or in the Custody
Agreement, be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such death, incapacity or other event had not
occurred, regardless of whether the Custodian shall have received notice of such
death or other event.
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in next-day funds, payable to the order
of the Company with regard to the Shares being purchased from the Company, and
to the order of the Custodian for the respective accounts of the Selling
Stockholders with regard to the Shares being purchased from such Selling
Stockholders (and the Company and such Selling Stockholders agree not to deposit
and to cause the Custodian not to deposit any such check in the bank on which it
is drawn, and not to take any other action with the purpose or effect of
receiving immediately available funds, until the business day following the date
of its delivery to the Company or the Custodian, as the case may be, and, in the
event of any breach of the foregoing, the Company or the Selling Stockholders,
as the case may be, shall reimburse the Underwriters for the interest lost and
any other expenses borne by them by reason of such breach), at the offices of
Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, CA 94304-1050
(or at such other place as may be agreed upon among the Representatives and the
Company), at 7:00 A.M., San Francisco time (a) on the third (3rd) full business
day following the first day that Shares are traded, (b) if this Agreement is
executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th)
full business day following the day that this Agreement is executed and
delivered or (c) at such other time and date not later than seven (7) full
business days following the first day that Shares are traded as the
Representatives and the Company may determine (or at such time and date to which
payment and delivery shall have been postponed pursuant to Section 10 hereof),
such time and date of payment and delivery being herein called the " Closing
Date;" provided, however, that if the Company has not made available to the
Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later than two (2) full business days following delivery
of copies of the Prospectus to the Representatives. The certificates for the
Firm Shares to be so delivered will be made available to you at such office
<PAGE> 12
or such other location including, without limitation, in New York City, as you
may reasonably request for checking at least one (1) full business day prior to
the Closing Date and will be in such names and denominations as you may request,
such request to be made at least two (2) full business days prior to the Closing
Date. If the Representatives so elect, delivery of the Firm Shares may be made
by credit through full fast transfer to the accounts at The Depository Trust
Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the
several Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price of $_____ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters) and under
the second and seventh paragraphs under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitutes the only information
furnished by the Underwriters to the Company for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement or any Incorporated
Document, and you, on behalf of the respective Underwriters, represent and
warrant to the Company and the Selling Stockholders that the statements made
therein do not include any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
4. Further Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; the Company will use its best efforts
to cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of the Rules and Regulations, have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it will
prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the opinion of counsel for the
several Underwriters (" Underwriters' Counsel"), may be necessary or advisable
in connection with the distribution of the Shares by the Underwriters; it will
promptly prepare and file with the Commission, and promptly notify you of the
filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if, at
any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
any untrue statement of a material fact or
<PAGE> 13
omit to state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading; in case
any Underwriter is required to deliver a prospectus nine (9) months or more
after the effective date of the Registration Statement in connection with the
sale of the Shares, it will prepare promptly upon request, but at the expense of
such Underwriter, such amendment or amendments to the Registration Statement and
such prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act; and it will file no amendment
or supplement to the Registration Statement or Prospectus or the Incorporated
Documents, or, prior to the end of the period of time in which a prospectus
relating to the Shares is required to be delivered under the Act, file any
document which upon filing becomes an Incorporated Document, which shall not
previously have been submitted to you a reasonable time prior to the proposed
filing thereof or to which you shall reasonably object in writing, subject,
however, to compliance with the Act and the Rules and Regulations, the Exchange
Act and the rules and regulations of the Commission thereunder and the
provisions of this Agreement.
(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or of the
initiation or threat of any proceeding for that purpose; and it will promptly
use its best efforts to prevent the issuance of any stop order or to obtain its
withdrawal at the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that the
Company shall not be required in connection therewith or as a condition thereof
to qualify as a foreign corporation or to execute a general consent to service
of process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available,
and, in the case of the Prospectus and any term sheet or abbreviated term sheet
under Rule 434, in no event later than the first (1st) full business day
following the first day that Shares are traded, copies of the Registration
Statement (three of which will be signed and which will include all exhibits),
each Preliminary Prospectus, the Prospectus and any amendments or supplements to
such documents, including any prospectus prepared to permit compliance with
Section 10(a)(3) of the Act, and the Incorporated Documents (three of which will
include all exhibits,) all in such quantities as you may from time to time
reasonably request. Notwithstanding the foregoing, if BancBoston Robertson
Stephens Inc., on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the Company shall provide
to you copies of a Preliminary Prospectus updated in all respects through the
date specified by you in such quantities as you may from time to time reasonably
request.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration Statement,
an earnings statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of the Act and covering
a twelve (12) month period beginning after the effective date of the
Registration Statement.
(f) During a period of five (5) years after the date
hereof, the Company will furnish to its stockholders as soon as practicable
after the end of each respective period, annual reports (including financial
statements audited by independent certified public accountants) and unaudited
quarterly reports of operations for each of the first three quarters of the
fiscal year, and will furnish to you and the other several Underwriters
hereunder, upon request (i) concurrently with furnishing such reports to its
stockholders, statements of operations of the Company for each of the first
three (3) quarters in the form furnished to the Company's stockholders, (ii)
concurrently with furnishing to its stockholders, a balance sheet of the Company
as of the end of such fiscal year, together with statements of operations, of
stockholders' equity, and of cash flows of the Company for such fiscal year,
accompanied by a copy of the certificate or report thereon of independent
certified public accountants, (iii) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders, (iv) as soon as they are
available, copies of all reports and financial statements furnished to or filed
with the Commission, any
<PAGE> 14
securities exchange or the NASD, (v) every material press release and every
material news item or article in respect of the Company or its affairs which was
generally released to stockholders or prepared by the Company or any of its
subsidiaries, and (vi) any additional information of a public nature concerning
the Company or its subsidiaries, or its business which you may reasonably
request. During such five (5) year period, if the Company shall have active
subsidiaries, the foregoing financial statements shall be on a consolidated
basis to the extent that the accounts of the Company and its subsidiaries are
consolidated, and shall be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from the sale
of the Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of the
Company or any Selling Stockholder to perform any agreement on their respective
parts to be performed hereunder or to fulfill any condition of the Underwriters'
obligations hereunder, or if the Company shall terminate this Agreement pursuant
to Section 11(a) hereof, or if the Underwriters shall terminate this Agreement
pursuant to Section 11(b)(i), the Company will reimburse the several
Underwriters for all out-of-pocket expenses (including fees and disbursements of
Underwriters' Counsel) incurred by the Underwriters in investigating or
preparing to market or marketing the Shares.
(j) If at any time during the ninety (90) day period after
the Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(k) During the Lock-up Period, the Company will not,
without the prior written consent of BancBoston Robertson Stephens Inc., effect
the Disposition of, directly or indirectly, any Securities other than the sale
of the Firm Shares and the Option Shares to be sold by the Company hereunder and
the Company's issuance of options or Common Stock under the Company's presently
authorized Amended and Restated 1996 Equity Incentive Plan (the "Option Plan")
and 1998 Employee Stock Purchase Plan (the "ESPP" and, together with the
Option Plan, the "Plans").
(l) During a period of ninety (90) days from the effective
date of the Registration Statement, the Company will not file a registration
statement registering shares under the Plans or other employee benefit plan.
5. Expenses.
(a) The Company and the Selling Stockholders agree with
each Underwriter that:
(i) The Company and the Selling Stockholders will pay
and bear all costs and expenses in connection with the preparation, printing and
filing of the Registration Statement (including financial statements, schedules
and exhibits), Preliminary Prospectuses and the Prospectus and the Incorporated
Documents and any amendments or supplements thereto; the printing of this
Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, the
Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the
Underwriters' Questionnaire and Power of Attorney, and any instruments related
to any of the foregoing; the issuance and delivery of the Shares hereunder to
the several Underwriters, including transfer taxes, if any, the cost of all
certificates representing the Shares and transfer agents' and registrars' fees;
the fees and disbursements of counsel for the Company; all fees and other
charges of the Company's independent certified public accountants; the cost of
<PAGE> 15
furnishing to the several Underwriters copies of the Registration Statement
(including appropriate exhibits), Preliminary Prospectus and the Prospectus and
the Incorporated Documents, and any amendments or supplements to any of the
foregoing; NASD filing fees and the cost of qualifying the Shares under the laws
of such jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD filings and
Blue Sky qualifications); and all other expenses directly incurred by the
Company and the Selling Stockholders in connection with the performance of their
obligations hereunder. Any additional expenses incurred as a result of the sale
of the Shares by the Selling Stockholders will be borne collectively by the
Company and the Selling Stockholders. The provisions of this Section 5(a)(i) are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Selling Stockholders and the Company hereby agree to pay, but shall
not affect any agreement which the Selling Stockholders and the Company may
make, or may have made, for the sharing of any of such expenses and costs. Such
agreements shall not impair the obligations of the Company and the Selling
Stockholders hereunder to the several Underwriters.
(ii) In addition to its other obligations under Section
8(a) hereof, the Company agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding described in
Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for
all reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) listed from time to
time in The Wall Street Journal which represents the base rate on corporate
loans posted by a substantial majority of the nation's thirty (30) largest banks
(the "Prime Rate"). Any such interim reimbursement payments which are not made
to the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(iii) In addition to their other obligations under
Section 8(b) hereof, each Selling Stockholder agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(b) hereof relating to such Selling
Stockholder, it will reimburse the Underwriters on a monthly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of such Selling Stockholder's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriters shall promptly return such payment to the Selling
Stockholders, together with interest, compounded daily, determined on the basis
of the Prime Rate. Any such interim reimbursement payments which are not made to
the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(b) In addition to their other obligations under Section
8(c) hereof, the Underwriters severally and not jointly agree that, as an
interim measure during the pendency of any claim, action, investigation, inquiry
or other proceeding described in Section 8(c) hereof, they will reimburse the
Company and each Selling Stockholder on a monthly basis for all reasonable legal
or other expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and enforceability
of the Underwriters' obligation to reimburse the Company and each such Selling
Stockholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company and each such Selling Stockholder shall promptly return
such payment to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company and each such Selling Stockholder
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request.
<PAGE> 16
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
5(a)(ii), 5(a)(iii) and 5(b) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the basis on
which such amounts shall be apportioned among the reimbursing parties, shall be
settled by arbitration conducted pursuant to the Code of Arbitration Procedure
of the NASD. Any such arbitration must be commenced by service of a written
demand for arbitration or a written notice of intention to arbitrate, therein
electing the arbitration tribunal. In the event the party demanding arbitration
does not make such designation of an arbitration tribunal in such demand or
notice, then the party responding to said demand or notice is authorized to do
so. Any such arbitration will be limited to the operation of the interim
reimbursement provisions contained in Sections 5(a)(ii), 5(a)(iii) and 5(b)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses which is created by the provisions of
Sections 8(a), 8(b) and 8(c) hereof or the obligation to contribute to expenses
which is created by the provisions of Section 8(e) hereof.
6. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Stockholders
herein, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective
not later than 2:00 P.M., San Francisco time, on the date following the date of
this Agreement, or such later date as shall be consented to in writing by you;
and no stop order suspending the effectiveness thereof shall have been issued
and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company, any Selling Stockholder or any Underwriter, threatened
by the Commission, and any request of the Commission for additional information
(to be included in the Registration Statement or the Prospectus or any
Incorporated Document or otherwise) shall have been complied with to the
satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of the
Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and
such counsel shall have been furnished with such papers and information as they
may reasonably have requested to enable them to pass upon the matters referred
to in this Section.
(c) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date, or any later date on which Option
Shares are to be purchased, as the case may be, there shall not have been any
change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, the
following opinion of counsel for the Company, dated as of the Closing Date or
such later date on which Option Shares are to be purchased, addressed to the
Underwriters and with reproduced copies or signed counterparts thereof for each
of the Underwriters, to the effect that:
(i) The Company and each significant subsidiary (as
that term is defined in Regulation S-X of the Act) has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation;
(ii) The Company and each significant subsidiary has
the corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectus;
(iii) The Company and each significant subsidiary is
duly qualified to do business as a foreign corporation and is in good standing
in each jurisdiction, if any, in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or otherwise),
<PAGE> 17
earnings, operations or business of the Company and its subsidiaries considered
as one enterprise. To such counsel's knowledge, the Company does not own or
control, directly or indirectly, any corporation, association or other entity
other than CyLAN;
(iv) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein, the issued and outstanding
shares of capital stock of the Company (including the Selling Stockholder
Shares) have been duly and validly issued and are fully paid and nonassessable,
and, to such counsel's knowledge, will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right;
(v) All issued and outstanding shares of capital stock
of each significant subsidiary of the Company have been duly authorized and
validly issued and are fully paid and nonassessable, and, to such counsel's
knowledge, have not been issued in violation of or subject to any preemptive
right, co-sale right, registration right, right of first refusal or other
similar right and are owned by the Company free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest;
(vi) The Company Shares or the Option Shares, as the
case may be, to be issued by the Company pursuant to the terms of this Agreement
have been duly authorized and, upon issuance and delivery against payment
therefor in accordance with the terms hereof, will be duly and validly issued
and fully paid and nonassessable, and will not have been issued in violation of
or subject to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right.
(vii) The Company has the corporate power and
authority to enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by it hereunder;
(viii) This Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been duly executed
and delivered by the Company and, assuming due authorization, execution and
delivery by you, is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except insofar as indemnification provisions may be
limited by applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or affecting creditors' rights generally or by general equitable principles;
(ix) The Registration Statement has become effective
under the Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or threatened under the
Act;
(x) The Registration Statement and the Prospectus, and
each amendment or supplement thereto (other than the financial statements
(including supporting schedules) and financial data derived therefrom as to
which such counsel need express no opinion), as of the effective date of the
Registration Statement, complied as to form in all material respects with the
requirements of the Act and the applicable Rules and Regulations; and each of
the Incorporated Documents (other than the financial statements (including
supporting schedules) and the financial data derived therefrom as to which such
counsel need express no opinion) complied when filed pursuant to the Exchange
Act as to form in all material respects with the requirements of the Act and the
Rules and Regulations and the Exchange Act and the applicable rules and
regulations of the Commission thereunder;
(xi) The information in the Prospectus under the
caption "Description of Capital Stock," to the extent that it constitutes
matters of law or legal conclusions, has been reviewed by such counsel and is a
fair summary of such matters and conclusions; and the forms of certificates
evidencing the Common Stock and filed as exhibits to the Registration Statement
comply with Delaware law;
(xii) The description in the Registration Statement
and the Prospectus of the charter and bylaws of the Company and of statutes are
accurate and fairly present the information required to be presented by the Act
and the applicable Rules and Regulations;
<PAGE> 18
(xiii) The description in the Prospectus under the
caption "Recent Spin-Off and Relationship With Stac" and the descriptions in the
registration statement on Form 10 filed by the Company with the Commission on
December 8, 1998, as amended and supplemented, under the captions "Summary,"
"The Distribution," "Relationship Between Hi/fn and Stac After the
Distribution," "The Company," "Certain Relationships and Related Transactions"
and "Hi/fn Certificate of Incorporation and Bylaws," to the extent they
constitute matters of law or legal conclusions, have been reviewed by such
counsel and are fair and accurate summaries of such matters and conclusions.
(xiv) To such counsel's knowledge, there are no
agreements, contracts, leases or documents to which the Company is a party of a
character required to be described or referred to in the Registration Statement
or Prospectus or any Incorporated Document or to be filed as an exhibit to the
Registration Statement or any Incorporated Document which are not described or
referred to therein or filed as required;
(xv) The performance of this Agreement and the
consummation of the transactions herein contemplated (other than performance of
the Company's indemnification obligations hereunder, concerning which no opinion
need be expressed) will not (a) result in any violation of the Company's charter
or bylaws or (b) to such counsel's knowledge, result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
any bond, debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument known to such counsel to which the Company is a
party or by which its properties are bound, or any applicable statute, rule or
regulation known to such counsel or, to such counsel's knowledge, any order,
writ or decree of any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of their
properties or operations;
(xvi) No consent, approval, authorization or order of
or qualification with any court, government or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries, or over any of
their properties or operations is necessary in connection with the consummation
by the Company of the transactions herein contemplated, except such as have been
obtained under the Act or such as may be required under state or other
securities or Blue Sky laws in connection with the purchase and the distribution
of the Shares by the Underwriters;
(xvii) To such counsel's knowledge, there are no legal
or governmental proceedings pending or threatened against the Company or any of
its subsidiaries of a character required to be disclosed in the Registration
Statement or the Prospectus or any Incorporated Document by the Act or the Rules
and Regulations or by the Exchange Act or the applicable rules and regulations
of the Commission thereunder, other than those described therein;
(xviii) To such counsel's knowledge, neither the
Company nor any of its subsidiaries is presently (a) in material violation of
its respective charter or bylaws, or (b) in material breach of any applicable
statute, rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries, or over any of
their properties or operations;
(xix) To such counsel's knowledge, except as set forth
in the Registration Statement and Prospectus and any Incorporated Document, no
holders of Common Stock or other securities of the Company have registration
rights with respect to securities of the Company and, except as set forth in the
Registration Statement and Prospectus, all holders of securities of the Company
having rights known to such counsel to registration of such shares of Common
Stock or other securities, because of the filing of the Registration Statement
by the Company have, with respect to the offering contemplated thereby, waived
such rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement or have
included securities in the Registration Statement pursuant to the exercise of
and in full satisfaction of such rights;
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and
<PAGE> 19
Prospectus and related matters were discussed, and although they have not
verified the accuracy or completeness of the statements contained in the
Registration Statement or the Prospectus, nothing has come to the attention of
such counsel which leads them to believe that, at the time the Registration
Statement became effective and at all times subsequent thereto up to and on the
Closing Date and on any later date on which Option Shares are to be purchased,
the Registration Statement and any amendment or supplement thereto and any
Incorporated Document, when such documents became effective or were filed with
the Commission (other than the financial statements including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Registration Statement, the Prospectus and any amendment
or supplement thereto and any Incorporated Document (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. Such counsel shall also state that
the conditions for the use of Form S-3 set forth in the General Instructions
thereto have been satisfied.
Counsel rendering the foregoing opinion may rely as to
questions of law not involving the laws of the United States or the State of
California and the General Corporation Law of the State of Delaware upon
opinions of local counsel, and as to questions of fact upon representations or
certificates of officers of the Company, the Selling Stockholders or officers of
the Selling Stockholders (when the Selling Stockholder is not a natural person),
and of government officials, in which case their opinion is to state that they
are so relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representatives of the Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date the
following opinion of counsel for the Selling Stockholders, dated as of the
Closing, addressed to the Underwriters and with reproduced copies or signed
counterparts thereof for each of the Underwriters, to the effect that:
(i) Each Selling Stockholder which is not a natural
person has full right, power and authority to enter into and to perform its
obligations under the Power of Attorney and Custody Agreement to be executed and
delivered by it in connection with the transactions contemplated herein; the
Power of Attorney and Custody Agreement of each Selling Stockholder that is not
a natural person has been duly authorized by such Selling Stockholder; the Power
of Attorney and Custody Agreement of each Selling Stockholder has been duly
executed and delivered by or on behalf of such Selling Stockholder; and the
Power of Attorney and Custody Agreement of each Selling Stockholder constitutes
the valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles;
(ii) Each of the Selling Stockholders has full right,
power and authority to enter into and to perform its obligations under this
Agreement and to sell, transfer, assign and deliver the Shares to be sold by
such Selling Stockholder hereunder;
(iii) This Agreement has been duly authorized by each
Selling Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of each Selling Stockholder; and
(iv) Upon the delivery of and payment for the Shares
as contemplated in this Agreement, each of the Underwriters will receive valid
marketable title to the Shares purchased by it from such Selling Stockholder,
free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest. In rendering such opinion, such counsel may assume that the
Underwriters are without notice of any defect in the title of the Shares being
purchased from the Selling Stockholders.
(f) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, an
opinion of Brobeck, Phleger & Harrison LLP, in form and substance satisfactory
to you, with respect to the sufficiency of all such corporate proceedings and
other legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the
<PAGE> 20
Company shall have furnished to such counsel such documents as they may have
requested for the purpose of enabling them to pass upon such matters.
(g) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
letter from PricewaterhouseCoopers LLP addressed to the Underwriters, dated the
Closing Date or such later date on which Option Shares are to be purchased, as
the case may be, confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations and based upon the procedures
described in such letter delivered to you concurrently with the execution of
this Agreement (herein called the "Original Letter"), but carried out to a date
not more than five (5) business days prior to the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be, (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, and (ii) setting
forth any revisions and additions to the statements and conclusions set forth in
the Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of such letter, or to reflect
the availability of more recent financial statements, data or information. The
letter shall not disclose any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is material
and adverse and that makes it, in your sole judgment, impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. The Original Letter from PricewaterhouseCoopers LLP shall be
addressed to or for the use of the Underwriters in form and substance
satisfactory to the Underwriters and shall (i) represent, to the extent true,
that they are independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published Rules and
Regulations, (ii) set forth their opinion with respect to their examination of
the consolidated balance sheet of the Company as of September 30, 1998 and
related consolidated statements of operations, stockholders' equity, and cash
flows for the twelve (12) months ended September 30, 1998, (iii) state that
PricewaterhouseCoopers LLP has performed the procedures set out in Statement on
Auditing Standards No. 71 ("SAS 71") for a review of interim financial
information and providing the report of PricewaterhouseCoopers LLP as described
in SAS 71 on the financial statements for the quarter ended December 31, 1998
(the "Quarterly Financial Statements"), (iv) state that in the course of such
review, nothing came to their attention that leads them to believe that any
material modifications need to be made to any of the Quarterly Financial
Statements in order for them to be in compliance with generally accepted
accounting principles consistently applied across the periods presented and (v)
address other matters agreed upon by PricewaterhouseCoopers LLP and you. In
addition, you shall have received from the Company written confirmation,
reasonably acceptable to you, that the Company has not received any notice or
been informed by its auditors that their review of the Company's system of
internal accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's consolidated
financial statements as of September 30, 1998, disclosed any weaknesses in
internal controls that they considered to be material weaknesses.
(h) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(i) The representations and warranties of the Company
in this Agreement are true and correct, as if made on and as of the Closing Date
or any later date on which Option Shares are to be purchased, as the case may
be, and the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective
and at all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto and the Incorporated Documents, when such Incorporated Documents became
effective or were filed with the Commission, contained all material information
required to be included therein by
<PAGE> 21
the Act and the Rules and Regulations or the Exchange Act and the applicable
rules and regulations of the Commission thereunder, as the case may be, and in
all material respects conformed to the requirements of the Act and the Rules and
Regulations or the Exchange Act and the applicable rules and regulations of the
Commission thereunder, as the case may be, the Registration Statement, and any
amendment or supplement thereto, did not and does not include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, the
Prospectus, and any amendment or supplement thereto, did not and does not
include any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and, since the effective date of the
Registration Statement, there has occurred no event required to be set forth in
an amended or supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (a) any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, (b) any transaction that is material
to the Company and its subsidiaries considered as one enterprise, except
transactions entered into in the ordinary course of business, (c) any
obligation, direct or contingent, that is material to the Company and its
subsidiaries considered as one enterprise, incurred by the Company or its
subsidiaries, except obligations incurred in the ordinary course of business,
(d) any change in the capital stock or outstanding indebtedness of the Company
or any of its subsidiaries that is material to the Company and its subsidiaries
considered as one enterprise, (e) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company or any of its
subsidiaries, or (f) any loss or damage (whether or not insured) to the property
of the Company or any of its subsidiaries which has been sustained or will have
been sustained which has a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise.
(i) You shall be satisfied that, and you shall have
received a certificate, dated the Closing Date, from the Attorneys for each
Selling Stockholder to the effect that, as of the Closing Date, they have not
been informed that:
(i) The representations and warranties made by such
Selling Stockholder herein are not true or correct in any material respect on
the Closing Date; or
(ii) Such Selling Stockholder has not complied with any
obligation or satisfied any condition which is required to be performed or
satisfied on the part of such Selling Stockholder at or prior to the Closing
Date.
(j) The Company shall have obtained and delivered to you an
agreement from each officer and director of the Company, each Selling
Stockholder and each beneficial owner of 5% or more of the shares of Common
Stock (other than Idanta Partners) in writing prior to the date hereof that such
person will not, during the Lock-up Period, effect the Disposition of any
Securities now owned or hereafter acquired directly by such person or with
respect to which such person has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, (ii) as a distribution
to partners or stockholders of such person, provided that the distributees
thereof agree in writing to be bound by the terms of this restriction, or (iii)
with the prior written consent of BancBoston Robertson Stephens Inc. The
foregoing restriction shall have been expressly agreed to preclude the holder of
the Securities from engaging in any hedging or other transaction which is
designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be disposed
of by someone other than the such holder. Such prohibited hedging or other
transactions would including, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person will have also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of the Securities held by such person except in compliance with
this restriction.
(k) The Company and the Selling Stockholders shall have
furnished to you such further certificates and documents as you shall reasonably
request (including certificates of officers of the Company,
<PAGE> 22
the Selling Stockholders or officers of the Selling Stockholders (when the
Selling Stockholder is not a natural person) as to the accuracy of the
representations and warranties of the Company and the Selling Stockholders
herein, as to the performance by the Company and the Selling Stockholders of
their respective obligations hereunder and as to the other conditions concurrent
and precedent to the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory to Underwriters' Counsel. The Company and the Selling Stockholders
will furnish you with such number of conformed copies of such opinions,
certificates, letters and documents as you shall reasonably request.
7. Option Shares.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants to the several Underwriters, for the purpose of
covering over-allotments in connection with the distribution and sale of the
Firm Shares only, a nontransferable option to purchase up to an aggregate of
300,000 Option Shares at the purchase price per share for the Firm Shares set
forth in Section 3 hereof. Such option may be exercised by the Representatives
on behalf of the several Underwriters on one (1) or more occasions in whole or
in part during the period of thirty (30) days after the date on which the Firm
Shares are initially offered to the public, by giving written notice to the
Company. The number of Option Shares to be purchased by each Underwriter upon
the exercise of such option shall be the same proportion of the total number of
Option Shares to be purchased by the several Underwriters pursuant to the
exercise of such option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
Shares purchased by the several Underwriters (set forth in Schedule A hereto),
adjusted by the Representatives in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to
be purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in next-day funds, payable to the order of the Company (and the
Company agrees not to deposit any such check in the bank on which it is drawn,
and not to take any other action with the purpose or effect of receiving
immediately available funds, until the business day following the date of its
delivery to the Company). In the event of any breach of the foregoing, the
Company shall reimburse the Underwriters for the interest lost and any other
expenses borne by them by reason of such breach. Such delivery and payment shall
take place at the offices of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill
Road, Palo Alto, CA 94304-1050, or at such other place as may be agreed upon
among the Representatives and the Company (i) on the Closing Date, if written
notice of the exercise of such option is received by the Company at least two
(2) full business days prior to the Closing Date, or (ii) on a date which shall
not be later than the third (3rd) full business day following the date the
Company receives written notice of the exercise of such option, if such notice
is received by the Company less than two (2) full business days prior to the
Closing Date.
The certificates for the Option Shares to be so delivered will
be made available to you at such office or such other location including,
without limitation, in New York City, as you may reasonably request for checking
at least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section
7(a) hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment and
delivery for such Option Shares) to the accuracy of and compliance with the
representations, warranties and agreements of the Company herein, to the
accuracy of the statements of the Company and officers of
<PAGE> 23
the Company made pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder, to the conditions set forth in Section 6
hereof, and to the condition that all proceedings taken at or prior to the
payment date in connection with the sale and transfer of such Option Shares
shall be satisfactory in form and substance to you and to Underwriters' Counsel,
and you shall have been furnished with all such documents, certificates and
opinions as you may request in order to evidence the accuracy and completeness
of any of the representations, warranties or statements, the performance of any
of the covenants or agreements of the Company or the satisfaction of any of the
conditions herein contained.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities (or actions in respect thereof)
arising out of or based upon (i) any breach of any representation, warranty,
agreement or covenant of the Company herein contained, (ii) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, including any Incorporated
Document, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and agrees to reimburse each Underwriter for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, such Preliminary Prospectus or the
Prospectus, or any such amendment or supplement thereto, in reliance upon, and
in conformity with, written information relating to any Underwriter furnished to
the Company by such Underwriter, directly or through you, specifically for use
in the preparation thereof and, provided further, that the indemnity agreement
provided in this Section 8(a) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Selling Stockholder, severally and not jointly,
agrees to indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject (including, without limitation, in its capacity as an Underwriter
or as a "qualified independent underwriter" within the meaning of Schedule E or
the Bylaws of the NASD) under the Act, the Exchange Act or otherwise,
specifically including, but not limited to, losses, claims, damages or
liabilities (or actions in respect thereof) arising out of or based upon (i) any
breach of any representation, warranty, agreement or covenant of such Selling
Stockholder herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, including any Incorporated Document, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(iii) any untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in the case of
<PAGE> 24
subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company or such Underwriter by such Selling
Stockholder, directly or through such Selling Stockholder's representatives,
specifically for use in the preparation thereof, and agrees to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement provided in
this Section 8(b) with respect to any Preliminary Prospectus shall not inure to
the benefit of any Underwriter from whom the person asserting any losses,
claims, damages, liabilities or actions based upon any untrue statement or
alleged untrue statement of a material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which such Selling Stockholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and each Selling Stockholder against any
losses, claims, damages or liabilities, joint or several, to which the Company
or such Selling Stockholder may become subject under the Act or otherwise,
specifically including, but not limited to, losses, claims, damages or
liabilities (or actions in respect thereof) arising out of or based upon (i) any
breach of any representation, warranty, agreement or covenant of such
Underwriter herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, including any Incorporated Document, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(iii) any untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 8(c) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter, directly or through
you, specifically for use in the preparation thereof, and agrees to reimburse
the Company and each such Selling Stockholder for any legal or other expenses
reasonably incurred by the Company and each such Selling Stockholder in
connection with investigating or defending any such loss, claim, damage,
liability or action.
The indemnity agreement in this Section 8(c) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Registration Statement and each director
of the Company, each Selling Stockholder and each person, if any, who controls
the Company or any Selling Stockholder within the meaning of the Act or the
Exchange Act. This indemnity agreement shall be in addition to any liabilities
which each Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 8, notify the indemnifying party in
writing of the commencement thereof but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 8. In case any such
action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it shall elect by
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party; provided,
however, that if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on
<PAGE> 25
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 8(a),
8(b) or 8(c) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
consent shall not be unreasonably withheld. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnification could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on all claims that are the subject
matter of such proceeding.
(e) In order to provide for just and equitable contribution
in any action in which a claim for indemnification is made pursuant to this
Section 8 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that, except as set forth
in Section 8(f) hereof, the Underwriters severally and not jointly are
responsible pro rata for the portion represented by the percentage that the
underwriting discount bears to the initial public offering price, and the
Company and the Selling Stockholders are responsible for the remaining portion,
provided, however, that (i) no Underwriter shall be required to contribute any
amount in excess of the amount by which the underwriting discount applicable to
the Shares purchased by such Underwriter exceeds the amount of damages which
such Underwriter has otherwise required to pay and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 8(e)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter, the Company or
any Selling Stockholder within the meaning of the Act or the Exchange Act and
each officer of the Company who signed the Registration Statement and each
director of the Company.
(f) The liability of each Selling Stockholder under the
representations, warranties and agreements contained herein and under the
indemnity agreements contained in the provisions of this Section 8 shall be
limited to an amount equal to the initial public offering price of the Selling
Stockholder Shares sold by such Selling Stockholder to the Underwriters minus
the amount of the underwriting discount paid thereon to the Underwriters by such
Selling Stockholder. The Company and such Selling Stockholders may agree, as
among themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
(g) The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by counsel during
the negotiations regarding the provisions hereof including, without limitation,
the provisions of this Section 8, and are fully informed regarding said
provisions. They further acknowledge that the provisions of this Section 8
fairly allocate the risks in light of the ability of the parties to investigate
the Company and its business in order to assure that adequate disclosure is made
in the Registration Statement and Prospectus as required by the Act and the
Exchange Act.
9. Representations, Warranties, Covenants and Agreements to Survive
Delivery. All representations, warranties, covenants and agreements of the
Company, the Selling Stockholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 8 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any
<PAGE> 26
Underwriter or any person controlling any Underwriter within the meaning of the
Act or the Exchange Act, or by or on behalf of the Company or any Selling
Stockholder, or any of their officers, directors or controlling persons within
the meaning of the Act or the Exchange Act, and shall survive the delivery of
the Shares to the several Underwriters hereunder or termination of this
Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the
aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm
Shares, the remaining Underwriters shall have the right, but shall not be
obligated, to take up and pay for (in such proportions as may be agreed upon
among them) the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase, the Closing Date
shall be postponed for twenty-four (24) hours to allow the several Underwriters
the privilege of substituting within twenty-four (24) hours (including
non-business hours) another underwriter or underwriters (which may include any
nondefaulting Underwriter) satisfactory to the Company. If no such underwriter
or underwriters shall have been substituted as aforesaid by such postponed
Closing Date, the Closing Date may, at the option of the Company, be postponed
for a further twenty-four (24) hours, if necessary, to allow the Company the
privilege of finding another underwriter or underwriters, satisfactory to you,
to purchase the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If it shall be arranged for the remaining
Underwriters or substituted underwriter or underwriters to take up the Firm
Shares of the defaulting Underwriter or Underwriters as provided in this Section
10, (i) the Company shall have the right to postpone the time of delivery for a
period of not more than seven (7) full business days, in order to effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Company
agrees promptly to file any amendments to the Registration Statement,
supplements to the Prospectus or other such documents which may thereby be made
necessary, and (ii) the respective number of Firm Shares to be purchased by the
remaining Underwriters and substituted underwriter or underwriters shall be
taken as the basis of their underwriting obligation. If the remaining
Underwriters shall not take up and pay for all such Firm Shares so agreed to be
purchased by the defaulting Underwriter or Underwriters or substitute another
underwriter or underwriters as aforesaid and the Company shall not find or shall
not elect to seek another underwriter or underwriters for such Firm Shares as
aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to
the preceding paragraph of this Section 10, neither the Company nor any Selling
Stockholder shall be liable to any Underwriter (except as provided in Sections 5
and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Stockholders and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or any Selling Stockholder (except to the
extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any
person substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the earlier of
(i) 6:30 A.M., San Francisco time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice
<PAGE> 27
as set forth in Section 12 before the time this Agreement becomes effective,
you, as Representatives of the several Underwriters, or the Company, may prevent
this Agreement from becoming effective without liability of any party to any
other party, except as provided in Sections 4(j), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters,
shall have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to any
later date on which Option Shares are to be purchased, as the case may be, (i)
if the Company or any Selling Stockholder shall have failed, refused or been
unable to perform any agreement on its part to be performed, or because any
other condition of the Underwriters' obligations hereunder required to be
fulfilled is not fulfilled, including, without limitation, any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse, or (ii) if additional material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
exchange or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets as in your reasonable judgment makes it
inadvisable or impracticable to proceed with the offering, sale and delivery of
the Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration by
the United States of a national emergency which, in the reasonable opinion of
the Representatives, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the event of
termination pursuant to subparagraph (i) above, the Company shall remain
obligated to pay costs and expenses pursuant to Sections 4(j), 5 and 8 hereof.
Any termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in Sections
5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided in this Section 11, you shall
promptly notify the Company by telephone, telecopy or telegram, in each case
confirmed by letter. If the Company shall elect to prevent this Agreement from
becoming effective, the Company shall promptly notify you by telephone, telecopy
or telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o BancBoston Robertson Stephens Inc., 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel; if sent to the Company, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to 750 University Ave., Los Gatos, CA
95302, telecopier number (408) 399-3501, Attention: Raymond J. Farnham, Chairman
and Chief Executive Officer; if sent to one or more of the Selling Stockholders,
such notice shall be sent mailed, delivered, telegraphed (and confirmed by
letter) or telecopied (and confirmed by letter) to
___________________________________, as Attorney-in-Fact for the Selling
Stockholders, at _________________________________________________________,
telecopier number ____________________.
13. Parties. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters and the Company and the Selling
Stockholders and their respective executors, administrators, successors and
assigns. Nothing expressed or mentioned in this Agreement is intended or shall
be construed to give any person or entity, other than the parties hereto and
their respective executors, administrators, successors and assigns, and the
controlling persons within the meaning of the Act or the Exchange Act, officers
and directors referred to in Section 8 hereof, any legal or equitable right,
remedy or claim in respect of this Agreement or any provisions herein contained,
this Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of the parties hereto and their
respective executors, administrators, successors and assigns and said
controlling persons and said officers and directors, and for the benefit of no
other person or entity. No purchaser of any of the Shares from any Underwriter
shall be construed a successor or assign by reason merely of such purchase.
<PAGE> 28
In all dealings with the Company and the Selling Stockholders
under this Agreement, you shall act on behalf of each of the several
Underwriters, and the Company and the Selling Stockholders shall be entitled to
act and rely upon any statement, request, notice or agreement made or given by
you jointly or by BancBoston Robertson Stephens Inc. on behalf of you.
14. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in several counterparts,
each of which will constitute an original.
[Remainder of Page Left Intentionally Blank]
<PAGE> 29
If the foregoing correctly sets forth the understanding among
the Company, the Selling Stockholders and the several Underwriters, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Selling Stockholders
and the several Underwriters.
Very truly yours,
HI/FN, INC.
By___________________________________
Raymond J. Farnham, Chairman
and Chief Executive Officer
SELLING STOCKHOLDERS
By__________________________, Attorney-in-
Fact for the Selling Stockholders named in
Schedule B hereto
Accepted as of the date first
above written:
BANCBOSTON ROBERTSON STEPHENS INC.
SOUNDVIEW TECHNOLOGY GROUP, INC.
On their behalf and on behalf of
each of the several Underwriters
named in Schedule A hereto.
By BANCBOSTON ROBERTSON STEPHENS INC.
By___________________________________
Authorized Signatory
<PAGE> 30
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
To Be
Underwriters Purchased
------------ -----------
<S> <C>
BancBoston Robertson Stephens Inc. ...................
SoundView Technology Group, Inc. .....................
Total ....................................... 2,000,000
</TABLE>
<PAGE> 31
SCHEDULE B
<TABLE>
<CAPTION>
Number of
Company
Shares To
Company Be Sold
- ------- -------------
<S> <C>
hi/fn, inc ........................................... 1,600,000
Total .............................................. 1,600,000
</TABLE>
<TABLE>
<CAPTION>
Number of
Selling
Stockholder
Shares
Name of Selling Stockholder To Be Sold
- --------------------------- --------------
<S> <C>
Microsoft Corporation ................................ 400,000
Total .............................................. 400,000
</TABLE>
<PAGE> 1
EXHIBIT 5.1
February 17, 1999
hi/fn, inc.
750 University Avenue
Los Gatos, CA 95032
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3 to be filed by you
with the Securities and Exchange Commission on or about February 17, 1999 (the
"Registration Statement") in connection with the registration under the
Securities Act of 1933, as amended, of 2,300,000 shares of your Common Stock
(the "Shares"). As your counsel, in connection with this transaction we have
examined the proceedings proposed to be taken by you in connection with the
issuance and sale of the Shares pursuant to the plan of distribution set forth
in the Registration Statement.
It is our opinion that, when issued and sold in the manner described in the
Registration Statement, the Shares will be legally and validly issued, fully
paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
EXHIBIT 23.2
CONSENT OF PRICEWATERHOUSECOOPERS LLP,
INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the prospectus constituting part of this
Registration Statement of our report dated October 23, 1998 relating to the
financial statements of hi/fn, inc., which appears in such prospectus. We also
consent to the reference to us under the heading "Experts" in such prospectus.
PRICEWATERHOUSECOOPERS, LLP
San Jose, California
February 17, 1999
