<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 1999
REGISTRATION NO. 333-78029
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GADZOOX NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3670 77-0308899
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
5850 HELLYER AVENUE
SAN JOSE, CALIFORNIA 95138
(408) 360-4950
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
BILL SICKLER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GADZOOX NETWORKS, INC.
5850 HELLYER AVENUE
SAN JOSE, CALIFORNIA 95138
(408) 360-4950
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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JUDITH M. O'BRIEN WILLIAM D. SHERMAN
BRUCE M. MCNAMARA STEPHEN J. SCHRADER
THOMAS I. SAVAGE JUSTIN L. BASTIAN
WILSON SONSINI GOODRICH & ROSATI ROCHELLE A. KRAUSE
PROFESSIONAL CORPORATION MORRISON & FOERSTER LLP
650 PAGE MILL ROAD 755 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050 PALO ALTO, CALIFORNIA 94304-1018
(650) 493-9300 (650) 813-5600
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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, 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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE REGISTRATION FEE(3)
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Common Stock ($.005 par value)... 4,600,000 $11.00 $50,600,000 $14,067
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(1) Includes 600,000 shares of common stock which the Underwriters have the
option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose determining the registration fee pursuant
to Rule 457(a) promulgated under the Securities Act of 1933, as amended.
(3) $13,900 of this fee has been paid previously.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
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, AS AMENDED 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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<PAGE> 2
THE INFORMATION IN THIS 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 PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JUNE 14, 1999
4,000,000 Shares
gadzoox LOGO
GADZOOX NETWORKS, INC.
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is expected to be
between $9.00 and $11.00 per share. We have applied to list our common stock on
The Nasdaq Stock Market's National Market under the symbol "ZOOX."
The underwriters have an option to purchase a maximum of 600,000 additional
shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 7.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS GADZOOX
-------------- -------------- --------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
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Delivery of the shares of common stock will be made on or about
, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
HAMBRECHT & QUIST
MORGAN KEEGAN & COMPANY, INC.
The date of this prospectus is , 1999.
<PAGE> 3
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TABLE OF CONTENTS
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Page
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PROSPECTUS SUMMARY............... 3
RISK FACTORS..................... 7
SPECIAL NOTE REGARDING
FORWARD-LOOKING
STATEMENTS..................... 19
USE OF PROCEEDS.................. 19
DIVIDEND POLICY.................. 19
CAPITALIZATION................... 20
DILUTION......................... 22
SELECTED FINANCIAL DATA.......... 23
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...... 24
BUSINESS......................... 36
</TABLE>
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Page
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MANAGEMENT....................... 54
CERTAIN TRANSACTIONS............. 65
PRINCIPAL STOCKHOLDERS........... 69
DESCRIPTION OF CAPITAL STOCK..... 72
SHARES ELIGIBLE FOR
FUTURE SALE.................... 75
UNDERWRITING..................... 77
NOTICE TO CANADIAN RESIDENTS..... 79
LEGAL MATTERS.................... 80
CHANGE IN INDEPENDENT
ACCOUNTANTS.................... 80
EXPERTS.......................... 80
ADDITIONAL INFORMATION........... 80
INDEX TO FINANCIAL STATEMENTS.... F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THE
OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
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<PAGE> 4
PROSPECTUS SUMMARY
The following summary highlights information we present more fully
elsewhere in this prospectus. This prospectus contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of factors described under the heading "Risk Factors" and elsewhere in this
prospectus. Except where we state otherwise, all information in this prospectus
(1) reflects the conversion of all outstanding shares of our preferred stock
into 13,907,399 shares of common stock effective automatically upon the closing
of this offering, (2) reflects the conversion of $7,925,400 of our convertible
note into 1,036,000 shares of common stock upon the closing of this offering,
and (3) assumes no exercise of the underwriters' over-allotment option.
GADZOOX NETWORKS, INC.
We are a leading provider of products that connect computer systems to data
storage devices. Our products are designed to enable computers to access larger
amounts of data, faster and more reliably than previously possible. We believe
that this capability will become more and more critical since the amount of data
that businesses require in order to operate is increasing at a rapid rate.
According to International Data Corporation (September 1998), multiuser disk
storage grew significantly from approximately 10,000 trillion bytes in 1994 to
approximately 116,000 trillion bytes in 1998, and will reach approximately
1,400,000 trillion bytes in 2002. This growth is driven by the growth in
data-intensive environments and applications such as the Internet, e-commerce,
data warehousing, data mining and enterprise resource planning.
Historically data storage devices could only be connected to a single
computer system. Our products enable data storage devices to be connected to
multiple computer systems. Our products enable the creation of networks of
storage devices which have become known as "storage area networks" or SANs. We
helped pioneer the development of storage area networks by taking the concepts
used to connect computers to one another in local area networks and applying
them to the connection of computers and data storage devices. Our products
complement local area network and wide area network products and are based on
fibre channel technology. Fibre channel technology is a set of specifications
which were designed to enable computing devices to exchange larger amounts of
data more reliably and at higher speeds than possible using existing
technologies. Fibre channel technology has been endorsed and adopted by leading
computer and data storage companies such as Compaq Computer Corporation, EMC
Corporation, Hewlett-Packard Company, IBM Corporation, Seagate Technology, and
Sun Microsystems.
We have led the storage area network market in the introduction of a number
of storage area network products including our high-speed fibre channel hub, our
fibre channel managed hub, our fibre channel switch to support data backup
without a server, our modular switch, and our storage area network management
software application. Hubs and switches are devices that direct the flow of data
from one computing device to another. We sell our products primarily through
leading original equipment manufacturers including Hewlett-Packard Company,
Compaq Computer Corporation, Avid Technology Corporation and Data General
Corporation. Additionally, we believe that we have built one of the largest
networks of distributors and resellers to serve the storage area network market.
According to International Data Corporation (January 1999), our installed base
of fibre channel networking ports represents the largest share of the total
combined hub and switch ports shipped in 1997 and 1998.
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<PAGE> 5
Our storage area network products are designed to provide the following
solutions to the limitations of traditional computer-storage connectivity
methods:
- Capacity Scalability, the ability to connect millions of data storage
devices to more effectively support the growth of data;
- Increased Performance, the ability to transmit data faster between
computers and storage devices to provide rapid access to data;
- Manageability, the ability to monitor and control the function of storage
area network devices from remote locations to reduce the cost and
complexity of transmitting data and troubleshooting failures;
- Data Availability and Disaster Tolerance, the ability to provide multiple
copies of data and alternate routes for accessing data to help ensure
continuous access in the event of system failures or site disasters;
- Interoperability, the ability to simplify the installation of storage
area network products and enhance the protection of existing user
investments;
- Modular Scalability, the ability to upgrade capabilities with a building
block approach to extend data storage capacity and enhance data
availability;
- Increased Network Stability, the ability to provide dependable
connections to help ensure reliable access to data; and
- Advanced Data Management, the ability to provide a platform for the
development of new methods that further increase data availability and
reliability.
We believe that storage area networks enabled by our products can form the
foundation for more effective management of the growth in data. Just as local
area networks formed a platform for the development of client-server computing,
we believe that storage area networks have the potential to enable the
development of a distributed data management architecture. We plan to leverage
our technological expertise, our market leadership and strong partnerships to
drive the development of this architecture and create new opportunities for our
business.
Our principal executive offices are located at 5850 Hellyer Avenue, San
Jose, California 95138, and our telephone number is (408) 360-4950. Our fiscal
year ends on March 31 of each year.
The Gadzoox logo and Gadzoox(R) are registered trademarks of our company.
Bitstrip(TM), Gibraltar(TM), Denali(TM), Reflex(TM), PerfectPort(TM),
Capellix(TM), IntraCom(TM), Nomad(TM) and Ventana(TM) are trademarks of our
company. This prospectus contains other trademarks and trade names of our
company and other entities. Our website on the Internet is located at
http://www.gadzoox.com. Information contained on our website does not constitute
part of this prospectus.
4
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THE OFFERING
Common stock offered.......... 4,000,000 shares
Common stock to be outstanding
after this offering......... 25,078,393 shares(1)
Use of proceeds............... General corporate purposes, including capital
expenditures, working capital and potential
acquisitions
Nasdaq National Market
symbol........................ ZOOX
- -------------------------
(1) Based on the number of shares of our common stock outstanding as of March
31, 1999. This number excludes 6,951,306 shares which may be issued upon
exercise of outstanding options and warrants or which may be issued under
our various stock compensation plans or upon conversion of a portion of our
convertible note. For additional information regarding these shares, see
Footnote 1 to the "Capitalization Table."
5
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------
1995 1996 1997 1998 1999
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STATEMENTS OF OPERATIONS DATA:
Net revenues................................ $ -- $ 104 $ 823 $ 9,811 $24,821
Loss from operations........................ (316) (881) (3,856) (10,013) (15,706)
Net loss.................................... (310) (856) (2,089) (9,640) (15,932)
Basic net loss per share.................... $ (0.59) $ (2.41) $ (3.33)
Weighted average shares used in computing
basic loss per share (1)................. 3,551 3,995 4,789
Pro forma basic net loss per share
(unaudited).............................. $ (0.91)
Weighted average shares used in computing
pro forma basic net loss per share
(unaudited) (1)(2)....................... 17,594
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<CAPTION>
MARCH 31, 1999
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
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BALANCE SHEET DATA:
Cash and cash equivalents.......................... $12,202 $12,202 $48,527
Working capital.................................... 15,912 15,912 52,237
Total assets....................................... 28,598 28,598 64,923
Long-term obligations.............................. 15,057 15,057 7,132
Total stockholders' equity......................... 5,659 5,659 49,909
</TABLE>
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(1) See Note 2 of Notes to the Financial Statements for an explanation of the
determination of the number of shares used in computing basic net loss and
pro forma basic net loss per share data.
(2) Based on the number of shares of common stock outstanding (on a pro forma
basis to give effect to the conversion of all outstanding shares of our
preferred stock into 13,907,399 shares of common stock effective
automatically upon the closing of this offering). Excludes 6,951,306 shares
which may be issued upon exercise of outstanding options and warrants or
which may be issued under our various stock compensation plans, or upon
conversion of a portion of our convertible note. For additional information
regarding these shares, see Footnote 1 to the "Capitalization Table."
(3) Reflects the conversion of all outstanding shares of our preferred stock
into 13,907,399 shares of common stock effective automatically upon the
closing of this offering.
(4) The pro forma as adjusted reflects (1) the sale of 4,000,000 shares of
common stock in this offering at an assumed initial public offering price of
$10.00 per share and the application of the net proceeds (after deducting
underwriting discounts and commissions and estimated offering expenses), (2)
the conversion of all outstanding shares of our preferred stock into
13,907,399 shares of common stock effective automatically upon the closing
of this offering, and (3) the conversion of $7,925,400 of our convertible
note into 1,036,000 shares of common stock upon the closing of this
offering.
6
<PAGE> 8
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Risks and
uncertainties, in addition to those we describe below, that are not presently
known to us or that we currently believe are immaterial may also impair our
business operations. If any of the following risks occurs, our business,
operating results and financial condition could be seriously harmed. In
addition, the trading price of our common stock could decline due to the
occurrence of any of these risks, and you may lose all or part of your
investment. See "Special Note Regarding Forward-Looking Statements."
WE HAVE INCURRED SIGNIFICANT LOSSES IN EVERY FISCAL YEAR SINCE OUR INCEPTION AND
MAY NEVER BECOME PROFITABLE.
We have incurred significant losses since inception and expect to continue
to incur losses on both a quarterly and annual basis for the foreseeable future.
As of March 31, 1999, our accumulated deficit was $29.1 million, and for the
fiscal year ended March 31, 1999, our net loss was $15.9 million. Although our
net revenues have grown in recent quarters, we may not be able to sustain this
growth, and we may not realize sufficient net revenues to achieve profitability.
We also expect to incur significant product development, sales and marketing and
administrative expenses and, as a result, we will need to generate increased net
revenues to achieve profitability. Further, even if we achieve profitability,
given the competition in, and the evolving nature of the storage area market, we
may not be able to sustain or increase profitability on a quarterly or annual
basis.
DUE TO OUR LIMITED OPERATING HISTORY, WE MAY HAVE DIFFICULTY IN ACCURATELY
PREDICTING REVENUES FOR FUTURE PERIODS AND APPROPRIATELY BUDGETING FOR EXPENSES,
AND BECAUSE MOST OF OUR EXPENSES ARE FIXED IN THE SHORT-TERM, WE MAY NOT BE ABLE
TO DECREASE OUR EXPENSES IN A TIMELY MANNER TO OFFSET ANY UNEXPECTED SHORTFALL
IN REVENUES.
We have generated net revenues for less than five years and, thus, we have
only a short history from which to predict future net revenues. This limited
operating experience, combined with the rapidly evolving nature of the storage
area network market in which we sell our products, reduces our ability to
accurately forecast our quarterly and annual revenue. Further, we plan our
operating expenses based primarily on these revenue projections. Because most of
our expenses are fixed in the short-term or incurred in advance of anticipated
revenue, we may not be able to decrease our expenses in a timely manner to
offset any unexpected shortfall in revenue. For example, in July 1998, Digital
Equipment Corporation cancelled orders for our Bitstrip product, which resulted
in a corresponding decrease in net revenues. If a similar situation were to
occur in the future, we may incur additional unexpected losses which could
seriously harm our business. For further financial information relating to our
business, see "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
7
<PAGE> 9
WE HAVE A HISTORY OF QUARTERLY AND ANNUAL FLUCTUATIONS IN OUR NET REVENUES AND
OPERATING RESULTS, AND EXPECT THESE FLUCTUATIONS TO CONTINUE, WHICH MAY RESULT
IN VOLATILITY IN OUR STOCK PRICE.
Our quarterly and annual net revenues and operating results have varied
significantly in the past and are likely to vary significantly in the future due
to a number of factors, many of which are outside of our control. The primary
factors that may cause our quarterly net revenues and operating results to
fluctuate include the following:
- fluctuations in demand for our products and services;
- the timing of customer orders and product implementations, particularly
large orders from our customers;
- our ability to develop, introduce, ship and support new products and
product enhancements;
- the rate of adoption of storage area networks as an alternative to
existing data storage and management systems;
- announcements and new product introductions by our competitors and
deferrals of customer orders in anticipation of new products, services or
product enhancements introduced by us or our competitors;
- decreases in the prices at which we can sell our products;
- our ability to obtain sufficient supplies of components, including sole
or limited source components, at expected prices; and
- the mix of our hub and switch products sold and the mix of distribution
channels through which they are sold.
Accordingly, you should not rely on the results of any past periods as an
indication of our future performance. It is likely that in some future periods,
our operating results may be below expectations of public market analysts or
investors. If this occurs, our stock price may drop.
THE STORAGE AREA NETWORK MARKET IN WHICH WE COMPETE IS NEW AND UNPREDICTABLE,
AND IF THIS MARKET DOES NOT DEVELOP AND EXPAND AS WE ANTICIPATE, OUR BUSINESS
WILL SUFFER.
The market for storage area networks and related hub and switch products
has only recently begun to develop and is rapidly evolving. Because this market
is new, it is difficult to predict its potential size or future growth rate. Our
products are used exclusively in storage area networks. Accordingly, widespread
adoption of storage area networks as an integral part of data-intensive
enterprise computing environments is critical to our future success. Potential
end-user customers who have invested substantial resources in their existing
data storage and management systems may be reluctant or slow to adopt a new
approach, like storage area networks. Our success in generating net revenues in
this emerging market will depend on, among other things, our ability to:
- educate potential original equipment manufacturer customers, distribution
channel partners and end users about the benefits of storage area
networks and hub and switch technology;
- maintain and enhance our relationships with leading original equipment
manufacturer customers and channel partners; and
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<PAGE> 10
- predict and base our products on standards which ultimately become
industry standards.
In addition, storage area networks are often implemented in connection with
deployment of new storage systems and servers. Accordingly, our future success
is also substantially dependent on the market for new storage systems and
servers.
WE HAVE LIMITED PRODUCT OFFERINGS AND OUR BUSINESS MAY SUFFER IF DEMAND FOR ANY
OF THESE PRODUCTS DECLINES OR FAILS TO DEVELOP AS WE EXPECT.
We derive a substantial portion of our net revenues from a limited number
of products. Specifically, in fiscal 1999, we derived approximately 75% of our
net revenues from our Gibraltar hub products and approximately 16% of our net
revenues from our Bitstrip hub product. We expect that net revenues from our hub
products will continue to account for a substantial portion of our total net
revenues for the foreseeable future. As a result, for the foreseeable future, we
will continue to be subject to the risk of a dramatic decrease in net revenues
if demand for these products declines. Therefore, continued and widespread
market acceptance of these products is critical to our future success.
Factors that may affect the market acceptance of our products, some of
which are beyond our control, include the following:
- growth and changing requirements of the storage area network and hub and
switch product market;
- performance, quality, price and total cost of ownership of our products;
- availability, price, quality and performance of competing products and
technologies; and
- successful development of our relationships with existing and potential
original equipment manufacturer customers and distribution channel
partners.
OUR BUSINESS WILL SUFFER IF WE FAIL TO DEVELOP AND SUCCESSFULLY INTRODUCE NEW
AND ENHANCED PRODUCTS THAT MEET THE CHANGING NEEDS OF OUR CUSTOMERS.
Our future success depends upon our ability to address the rapidly changing
storage area network market including changes in relevant industry standards and
the changing needs of our customers by developing and introducing high-quality,
technologically-progressive, cost-effective products, product enhancements and
services on a timely basis. For example, we recently announced the launch of our
Capellix switch and plan to announce other switching products. We expect to
begin commercial shipment of the Capellix switch product in the third calendar
quarter of 1999. Our future net revenues growth will be dependent on the success
of these and other new products, and we may not be able to develop and introduce
these or other new products successfully in the timeframe we expect. Further, we
cannot be certain of the demand for, and market acceptance of, these and other
new products. In addition, we must manage successfully the introduction of new
or enhanced products to minimize disruption in our customers' ordering patterns,
avoid excessive levels of older product inventories and ensure that adequate
supplies of new products can be delivered to meet our customers' demands. Our
net revenues may be reduced if we fail to develop product enhancements, if we
fail to introduce new products or if any new products or product enhancements
that we develop and introduce are not broadly accepted.
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WE WOULD BE UNABLE TO MANUFACTURE OR SELL OUR PRODUCTS IF OUR SOLE PRODUCT
MANUFACTURER IS UNABLE TO MEET OUR MANUFACTURING NEEDS.
Sanmina Corporation, a third-party manufacturer for numerous companies,
manufactures all of our products at its Santa Clara, California facility.
Sanmina Corporation is not obligated to supply products to us for any specific
period, or in any specific quantity, except as may be provided in a particular
purchase order which has been accepted by Sanmina Corporation. If Sanmina
Corporation experiences delays, disruptions, capacity constraints or quality
control problems in its manufacturing operations, then product shipments to our
customers could be delayed, which would negatively impact our net revenues and
our competitive position and reputation.
Further, our business would be harmed if we fail to effectively manage the
manufacture of our products. We generally place orders with Sanmina Corporation
at least two months prior to scheduled delivery of products to our customers.
Accordingly, if we inaccurately forecast demand for our products, we may be
unable to obtain adequate manufacturing capacity from Sanmina Corporation or
adequate quantities of components to meet our customers' delivery requirements
or we may accumulate excess inventories. In addition, we anticipate that we may
relocate our manufacturing operations to Sanmina Corporation's manufacturing
facility in Guntersville, Alabama during the second half of fiscal 2000. We
could experience difficulties and disruptions in the manufacture of our products
while we transition to this new facility. Manufacturing disruption could prevent
us from achieving timely delivery of products and could result in lost net
revenues.
Additionally, we must coordinate our efforts with those of our suppliers
and Sanmina Corporation to rapidly achieve volume production. Although we have
not experienced supply problems with Sanmina Corporation, we have experienced
delays in product deliveries from one of our former contract manufacturers.
Moreover, we may in the future need to find a new contract manufacturer that can
manufacture our products in higher volume and at lower costs. We may not find a
contract manufacturer that meets our needs. Additionally, qualifying a new
contract manufacturer and commencing volume production is expensive and time
consuming. If we are required or choose to change contract manufacturers, we may
lose net revenues and our customer relationships may suffer.
BECAUSE WE DEPEND ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR KEY
COMPONENTS, WE ARE SUSCEPTIBLE TO SUPPLY SHORTAGES THAT COULD ADVERSELY AFFECT
OUR OPERATING RESULTS.
We depend upon a single source for each type of our application-specific
integrated circuits, or ASICs, and limited sources of supply for several key
components, including power supplies, chassis and optical transceivers. We have
in the past experienced and may in the future experience shortages of, or
difficulties in acquiring, these components. If we are unable to buy these
components, we will not be able to manufacture our products on a timely basis.
BECAUSE WE ORDER COMPONENTS AND MATERIALS BASED ON ROLLING FORECASTS, WE MAY
OVERESTIMATE OR UNDERESTIMATE OUR COMPONENT AND MATERIAL REQUIREMENTS, WHICH
COULD INCREASE OUR COSTS OR PREVENT US FROM MEETING CUSTOMER DEMAND.
We use rolling forecasts based on anticipated product orders to determine
our component requirements. Lead times for materials and components that we
order vary significantly and depend on factors such as specific supplier
requirements, contract terms and current market demand for such components. As a
result, our component requirement forecasts may not be accurate. If we
overestimate our component requirements, we may
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<PAGE> 12
have excess inventory, which would increase our costs. If we underestimate our
component requirements, we may have inadequate inventory, which could interrupt
our manufacturing and delay delivery of our products to our customers. Any of
these occurrences would negatively impact our business and operating results.
BECAUSE WE DEPEND ON A FEW KEY ORIGINAL EQUIPMENT MANUFACTURER CUSTOMERS, THE
LOSS OF ANY OF THESE CUSTOMERS COULD SIGNIFICANTLY REDUCE OUR NET REVENUES.
We depend on a few key original equipment manufacturer customers. In fiscal
1999, sales to Compaq Computer Corporation, Digital Equipment Corporation and
Hewlett-Packard Company each accounted for more than 10% of our net revenues,
and a total of approximately 84% of our net revenues came from these three
companies and two other customers. In fiscal 1998, approximately 69% of our net
revenues came from sales to Hewlett-Packard Company and Digital Equipment
Corporation. Although we intend to expand our original equipment manufacturer
customer base, we anticipate that our operating results will continue to depend
on sales to a relatively small number of customers. None of our current
customers have any minimum purchase obligations, and they may stop placing
orders with us at any time, regardless of any forecast they may have previously
provided. The loss of any of our key customers, or a significant reduction in
sales to those customers, could significantly reduce our net revenues. For
example, in July 1998, Digital Equipment Corporation cancelled orders for our
Bitstrip product, and in December 1998, Hewlett-Packard Company unexpectedly
reduced orders for our Gibraltar 10-port product. Digital Equipment
Corporation's order cancellation resulted in a reduction of anticipated revenues
by approximately 12% for the fiscal year ended March 31, 1999.
OUR RELIANCE ON ORIGINAL EQUIPMENT MANUFACTURER CUSTOMERS AND DISTRIBUTION
CHANNEL PARTNERS AND THE LENGTHY PROCESS REQUIRED TO ADD THESE PARTNERS MAY
IMPEDE THE GROWTH OF OUR NET REVENUES.
We rely on original equipment manufacturer customers and distribution
channel partners to distribute and sell our products. As a result, our success
depends substantially on (1) our ability to initiate, manage and expand our
relationships with significant original equipment manufacturer customers, (2)
our ability to attract distribution channel partners that will sell our products
and (3) the sales efforts of these original equipment manufacturer customers and
distribution channel partners.
Our original equipment manufacturer customers typically conduct significant
evaluation, testing, implementation and acceptance procedures before they begin
to market and sell new technologies, including our products. Based on our
experience with our larger original equipment manufacturer customers, this
evaluation process is lengthy and has historically been as long as nine months.
This process is also complex and may require significant sales, marketing and
management efforts on our part. The complexity of this process increases if we
must qualify our products with multiple customers at the same time. In addition,
once our products have been qualified, the length of the sales cycle of each of
our original equipment manufacturer customers may vary depending upon whether
our products are being bundled with another product or are being sold as an
option or add-on. Sales to distribution channel partners may also require
lengthy sales and marketing cycles. As a result, we may expend significant
resources in developing partner relationships before recognizing any revenue.
We may not be able to manage and expand our relationships with original
equipment manufacturer customers and distribution channel partners successfully
and they may not
11
<PAGE> 13
market our products successfully. Moreover, our agreements with original
equipment manufacturer customers and distribution channel partners have no
minimum purchase commitments. Our failure to manage and expand our relationships
with original equipment manufacturer customers and distribution channel partners
or their failure to market our products could substantially reduce our net
revenues and seriously harm our business.
OUR OPERATING RESULTS MAY SUFFER BECAUSE OF COMPETITION IN THE STORAGE AREA
NETWORK MARKET, AS WELL AS ADDITIONAL COMPETITION FROM DATA NETWORKING COMPANIES
AND ENTERPRISE SOFTWARE DEVELOPERS.
The market for our storage area network hub and switch products is
competitive, and is likely to become even more competitive. In the storage area
network market, our current competitors include Ancor Communications, Inc.,
Brocade Communications Systems, Inc., Emulex Corporation and Vixel Corporation.
In addition to these companies we expect new storage area network competitors to
emerge. In the future, we may also compete against data networking companies
which may develop storage area network products. Furthermore, although we
currently offer products that complement the software products offered by Legato
Systems, Inc. and Veritas Software Corporation, they and other enterprise
software developers may in the future compete with us. We also compete with
providers of data storage solutions that employ traditional storage
technologies, including small computer system interface-based technology such as
Adaptec, Inc., LSI Logic Corporation and QLogic Corporation.
Increased competition could result in pricing pressures, reduced sales,
reduced margins, reduced profits, reduced market share or the failure of our
products to achieve or maintain market acceptance. Some of our competitors and
potential competitors have longer operating histories, greater name recognition,
access to larger customer bases, more established distribution channels or
substantially greater resources than we have. As a result, they may be able to
respond more quickly than we can to new or changing opportunities, technologies,
standards or customer requirements. Moreover, we have only recently begun to
offer storage area network switch products. Therefore, we may not be able to
compete successfully in the storage area network switch product market.
IF WE CANNOT INCREASE OUR SALES VOLUMES, REDUCE OUR COSTS OR INTRODUCE HIGHER
MARGIN PRODUCTS TO OFFSET ANTICIPATED REDUCTIONS IN THE AVERAGE UNIT PRICE OF
OUR PRODUCTS, OUR OPERATING RESULTS MAY SUFFER.
Although we have not experienced an overall decrease in the average selling
prices of our products, we anticipate that as products in the storage area
market become more commoditized, the average unit price of our products may
decrease in the future in response to changes in product mix, competitive
pricing pressures, new product introductions by us or our competitors or other
factors. If we are unable to offset the anticipated decrease in our average
selling prices by increasing our sales volumes, our net revenues will decline.
In addition, to maintain our gross margins, we must continue to reduce the
manufacturing cost of our products. Further, as average unit prices of our
current products decline, we must develop and introduce new products and product
enhancements with higher margins. If we cannot maintain our gross margins, our
business could be seriously harmed, particularly if the average selling price of
our products decreases significantly.
12
<PAGE> 14
OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS,
WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR NET REVENUES.
Networking products frequently contain undetected software or hardware
errors when first introduced or as new versions are released. Our products are
complex and we have from time to time found errors in existing products, and we
may from time to time find errors in our existing, new or enhanced products. In
addition, our products are combined with products from other vendors. As a
result, should problems occur, it may be difficult to identify the source of the
problem. The occurrence of hardware and software errors, whether caused by our
or another vendor's storage area network products, could adversely affect sales
of our products, cause us to incur significant warranty and repair costs, divert
the attention of our engineering personnel from our product development efforts
and cause significant customer relations problems.
IF WE DO NOT HIRE, RETAIN AND INTEGRATE HIGHLY SKILLED MANAGERIAL, ENGINEERING,
SALES, MARKETING, FINANCE AND OPERATIONS PERSONNEL, OUR BUSINESS MAY SUFFER.
Our success depends to a significant degree upon the continued
contributions of our key personnel in engineering, sales, marketing, finance and
operations, many of whom would be difficult to replace. We do not maintain key
person life insurance on most of our key personnel and do not have employment
contracts with any of our key personnel. The loss of the services of any of our
key personnel could have a negative impact on our business.
We also believe that our success depends to a significant extent on the
ability of our key personnel to operate effectively, both individually and as a
group. Many of our employees have only recently joined us. If we are unable to
integrate new employees in a timely and cost-effective manner, our operating
results may suffer.
We believe our future success will also depend in large part upon our
ability to attract and retain highly skilled managerial, engineering, sales,
marketing, finance and operations personnel. Competition for these people is
intense, especially in the San Francisco Bay area where our operations are
headquartered. In particular, we have experienced difficulty in hiring qualified
ASIC, software, system, test and customer support engineers and we may not be
successful in attracting and retaining individuals to fill these positions. If
we are unable to attract or retain qualified personnel in the future, or if we
experience delays in hiring required personnel, particularly qualified engineers
and sales personnel, our ability to develop, introduce and sell our products
could be harmed. In addition, companies in our industry whose employees accept
positions with competitors frequently claim that their competitors have engaged
in unfair hiring practices. We may be subject to such claims in the future as we
seek to hire qualified personnel. Any claim of this nature could result in
material litigation. We could incur substantial costs in defending ourselves
against these claims, regardless of their merits.
WE HAVE EXPERIENCED A PERIOD OF RAPID GROWTH, AND IF WE ARE NOT ABLE TO
SUCCESSFULLY MANAGE THIS AND FUTURE GROWTH, OUR BUSINESS MAY SUFFER.
We have recently experienced a period of rapid growth. At March 31, 1997,
we had a total of 38 employees, and at March 31, 1999, we had a total of 149
employees. We plan to continue to hire new employees to expand our operations
significantly to pursue existing and potential market opportunities. This growth
will place a significant demand on our management and our operational resources.
In order to manage growth effectively, we must implement and improve our
operational systems, procedures and controls on a timely
13
<PAGE> 15
basis. Our key personnel have limited experience managing this type of growth.
If we cannot manage growth effectively, our business could suffer.
BECAUSE OUR INTELLECTUAL PROPERTY IS CRITICAL TO THE SUCCESS OF OUR BUSINESS,
OUR OPERATING RESULTS WOULD SUFFER IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR
INTELLECTUAL PROPERTY.
Because our products rely on proprietary technology and will likely
continue to rely on technological advancements for market acceptance, we believe
that the protection of our intellectual property rights will be critical to the
success of our business. To protect our intellectual property rights, we rely on
a combination of patent, copyright, trademark and trade secret laws and
restrictions on disclosure. We also enter into confidentiality or license
agreements with our employees, consultants and corporate partners, and control
access to and distribution of our software, documentation and other proprietary
information.
Despite our efforts to protect our proprietary rights, unauthorized parties
may copy or otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult and the steps we have taken may
not prevent unauthorized use of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States. For a more complete discussion of the protection of our
intellectual property, see "Business -- Intellectual Property." If we are unable
to protect our intellectual property from infringement, other companies may be
able to use our intellectual property to offer competitive products at lower
prices. We may not be able to effectively compete against these companies.
WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY AND THE PROTECTION OF WHICH MAY
CAUSE US TO BECOME INVOLVED IN COSTLY AND LENGTHY LITIGATION WHICH COULD
SERIOUSLY HARM OUR BUSINESS.
Although we are not currently involved in any intellectual property
litigation, we may be a party to litigation in the future either to protect our
intellectual property or as a result of an alleged infringement of others'
intellectual property. These claims and any resulting litigation could subject
us to significant liability for damages and could cause our proprietary rights
to be invalidated. Litigation, regardless of the merits of the claim or outcome,
would likely be time-consuming and expensive to resolve and would divert
management time and attention. Any potential intellectual property litigation
could also force us to do one or more of the following:
- stop using the challenged intellectual property or selling our products
or services that incorporate it;
- obtain a license to use the challenged intellectual property or to sell
products or services that incorporate it, which license may not be
available on reasonable terms, or at all; and
- redesign those products or services that are based on or incorporate the
challenged intellectual property.
If we are forced to take any of the foregoing actions, we may be unable to
manufacture and sell our products, and our net revenues would be substantially
reduced.
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<PAGE> 16
IF WE, OUR KEY SUPPLIERS OR OUR CUSTOMERS FAIL TO BE READY FOR THE YEAR 2000
CALENDAR CHANGE, OUR BUSINESS MAY BE DISRUPTED AND OUR NET REVENUES MAY DECLINE.
The year 2000 issue refers to the potential for disruption to business
activities caused by system failures or miscalculations that are triggered by
advancement of date records past the year 1999. A failure due to year 2000
issues involves numerous risks including:
- potential product warranty or other claims from our customers;
- negative impact on market demand for storage area networks or related hub
and switch products until preparations for the calendar change by
existing and potential customers are complete;
- manufacturing, information, facility and development systems problems,
both those that are unique to us and those that affect geographical areas
where our business and employees reside.
Although we have completed testing our products' readiness for the year
2000 calendar change and believe that our products are ready for that event, we
may yet discover that our current products, any of our new products or any
product enhancements we develop in the future have problems because of the year
2000 calendar change. In this event, our business may be adversely affected and
our customer relationships may suffer. We have not completed our internal year
2000 risk assessment. We may find that our internal systems are not ready for
the year 2000 calendar change. In this event, our business may be adversely
affected and we may experience delays or disruptions in sales or deliveries of
our product. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
INDUSTRY STANDARDS AND GOVERNMENT REGULATIONS AFFECTING OUR BUSINESS EVOLVE
RAPIDLY, AND IF WE CANNOT DEVELOP PRODUCTS THAT ARE COMPATIBLE WITH THESE
EVOLVING STANDARDS, OUR BUSINESS WILL SUFFER.
Our products must comply with industry standards. For example, in the
United States, our products must comply with various regulations and standards
defined by the Federal Communications Commission. Internationally, our products
are also required to comply with standards established by authorities in various
countries. Any new products and product enhancements that we introduce in the
future must also meet industry standards at the time they are introduced.
Failure to comply with existing or evolving industry standards or to obtain
timely domestic or foreign regulatory approvals or certificates could materially
harm our business.
Our products comprise only a part of the entire storage area network. All
components of the storage area network must comply with the same standards in
order to operate efficiently together. We depend on companies that provide other
components of the storage area network to support the industry standards as they
evolve. Many of these companies are significantly larger and more influential in
effecting industry standards than we are. Some industry standards may not be
widely adopted or they may not be implemented uniformly, and competing standards
may emerge that may be preferred by original equipment manufacturer customers or
end users. If larger companies do not support the same industry standards that
we do, or if competing standards emerge, market acceptance of our products could
suffer.
15
<PAGE> 17
WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES WHICH WILL SUBJECT US TO
ADDITIONAL BUSINESS RISKS.
For the quarter ended March 31, 1999, 14% of our total revenues were from
international sales activities. We plan to increase our international sales
activities. Our international sales will be limited if we cannot establish
relationships with international distributors, establish additional foreign
operations, expand international sales channel management, hire additional
personnel and develop relationships with international service providers. Even
if we are able to successfully continue international operations, we may not be
able to maintain or increase international market demand for our products. Our
international operations are subject to a number of risks, including:
- multiple protectionist, adverse and changing governmental laws and
regulations;
- reduced or limited protections of intellectual property rights;
- potentially adverse tax consequences resulting from changes in tax laws;
and
- political and economic instability.
To date, none of our international net revenues and costs have been
denominated in foreign currencies. As a result, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products more
expensive and thus less competitive in foreign markets. A portion of our
international net revenues may be denominated in foreign currencies in the
future, which would subject us to risks associated with fluctuations in those
foreign currencies.
WE MAY BECOME INVOLVED IN COSTLY AND TIME-CONSUMING LITIGATION.
We may from time to time become involved in various lawsuits and legal
proceedings which arise in the ordinary course of our business. For example, in
May 1999, a former employee filed a complaint against us. We believe this claim
is without merit and that resolution of this claim will not have a material
adverse effect on our financial condition. However, litigation is subject to
inherent uncertainties, and an adverse result in this or other matters that may
arise from time-to-time may harm our business.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS' EQUITY AND
CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES.
As part of our strategy, we expect to review opportunities to buy other
businesses or technologies that would complement our current products, expand
the breadth of our market or enhance our technical capabilities, or that may
otherwise offer growth opportunities. While we have no current agreements or
negotiations underway, we may buy businesses, products or technologies in the
future. In the event of any future purchases, we could:
- issue stock that would dilute our current stockholders' percentage
ownership;
- incur debt; or
- assume liabilities.
These purchases could also involve numerous risks, including:
- problems integrating the purchased operations, technologies or products;
- unanticipated costs;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with suppliers and
customers;
- risks associated with entering markets in which we have no or limited
prior experience; and
16
<PAGE> 18
- potential loss of key employees of purchased organizations.
We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might purchase in the future.
OUR PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT VOTING POWER AND MAY TAKE ACTIONS
THAT MAY NOT BE IN THE BEST INTERESTS OF OUR OTHER STOCKHOLDERS.
Upon completion of this offering, our executive officers, directors and
principal stockholders who hold 5% or more of the outstanding common stock and
their affiliates will beneficially own, in the aggregate, approximately 61.1% of
our outstanding common stock. As a result, these stockholders will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could delay or prevent an outside party from acquiring or
merging with us. For a full presentation of the equity ownership of these
stockholders, see "Principal Stockholders."
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL OF OUR COMPANY AND MAY REDUCE THE MARKET PRICE OF OUR COMMON
STOCK.
Provisions of our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include:
- authorizing our board of directors to issue preferred stock without
stockholder approval;
- providing for a classified board of directors with staggered, three-year
terms;
- prohibiting cumulative voting in the election of directors;
- requiring super-majority voting to effect significant amendments to our
certificate of incorporation and bylaws;
- eliminating the ability of stockholders to call special meetings;
- prohibiting stockholder actions by written consent; and
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Certain provisions of Delaware law also may discourage, delay or prevent
someone from acquiring or merging with us, which may cause the market price of
our common stock to decline.
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
There has been no public market for our common stock prior to this
offering. The initial public offering price for our common stock will be
determined through negotiations between the underwriters and us. This initial
public offering price may vary from the market price of our common stock after
the offering. If you purchase shares of common stock, you may not be able to
resell those shares at or above the initial public offering price. The market
price of our common stock may fluctuate significantly in response to factors,
some of which are beyond our control, including the following:
- actual or anticipated fluctuations in our operating results;
- changes in market valuations of other technology companies;
17
<PAGE> 19
- announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
- losses of major original equipment manufacturer customers, value added
resellers or distributors;
- additions or departures of key personnel; and
- sales of common stock in the future.
In addition, the stock market has experienced extreme volatility that often
has been unrelated to the performance of particular companies. These market
fluctuations may cause our stock price to fall regardless of our performance.
You should read the "Underwriting" section for a more complete discussion
of the factors which were considered in determining the initial public offering
price of our common stock.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS WHICH WOULD LIMIT OUR
ABILITY TO GROW.
We believe that the net proceeds of this offering, together with our
existing cash balances, credit facilities and cash flow expected to be generated
from future operations, will be sufficient to meet our capital requirements at
least through the next 12 months. However, we may be required, or could elect,
to seek additional funding prior to that time. In the event we are required to
raise additional funds we may not be able to do so on favorable terms, if at
all. Further, if we issue new equity securities, stockholders may experience
additional dilution or the new equity securities may have rights, preferences or
privileges senior to those of existing holders of common stock. If we cannot
raise funds on acceptable terms, we may not be able to develop or enhance our
products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements. For additional information on our
anticipated future capital requirements, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS
OUR STOCK PRICE.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock after this offering could cause
our stock price to fall. In addition, the sale of these shares could impair our
ability to raise capital through the sale of additional stock. You should read
"Shares Eligible for Future Sale" for a full discussion of shares that may be
sold in the public market in the future.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF YOUR SHARES.
The initial public offering price is expected to be substantially higher
than the book value per share of our outstanding common stock immediately after
the offering. Accordingly, if you purchase common stock in the offering, you
will incur immediate dilution of approximately $7.97 in the book value per share
of our common stock from the price you pay for our common stock. For additional
information on this calculation, see "Dilution."
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<PAGE> 20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
the federal securities laws that relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "intend," "potential" or "continue" or the
negative of such terms or other comparable terminology. In addition, these
forward-looking statements include, but are not limited to, statements regarding
the following: (1) anticipated development and release of new products, (2)
anticipated sources of future revenues, (3) anticipated product return rates,
(4) future third-party manufacturing arrangements, (5) anticipated expenditures
for research and development, sales and marketing and general and administrative
expenses, (6) the adequacy of our capital resources to fund our operations and
(7) our assessment of our readiness to address, and risks relating to, year 2000
issues. These statements are only predictions.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus or to conform these statements to actual results.
USE OF PROCEEDS
We expect to receive net proceeds of approximately $36,325,000 from the
sale of the 4,000,000 shares of common stock (approximately $41,905,000 if the
underwriters exercise their over-allotment option in full), at an assumed
initial public offering price of $10.00 per share, after deducting the
underwriting discount and estimated offering expenses.
We expect to use the net proceeds from this offering for working capital
and general corporate purposes, including expenditures for research and
development of new products, sales channel development and other corporate
purposes. In addition, we may use a portion of the net proceeds to acquire
businesses, products or technologies that are complementary to our current or
future business and product lines. We are not currently negotiating any
acquisitions and we have no agreements with any third party for any acquisition.
Pending use of the net proceeds of this offering, we intend to invest the net
proceeds in interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. In addition, under our existing credit facility, we cannot
pay dividends without our bank's consent, with limited exceptions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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<PAGE> 21
CAPITALIZATION
The following table sets forth our capitalization and short-term debt as of
March 31, 1999 on the following three bases:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all outstanding shares
of our preferred stock into 13,907,399 shares of common stock effective
automatically upon the closing of this offering; and
- on a pro forma as adjusted basis to reflect (1) the sale of 4,000,000
shares of common stock in this offering at an assumed initial public
offering price of $10.00 per share and the application of the net
proceeds (after deducting underwriting discounts and commissions and
estimated offering expenses), (2) the conversion of all outstanding
shares of our preferred stock into 13,907,399 shares of common stock
effective automatically upon the closing of this offering, and (3) the
conversion of $7,925,400 of our convertible note into 1,036,000 shares of
common stock.
You should read this table in conjunction with our Financial Statements and
the Notes thereto and Selected Financial Data included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C>
Current portion of long-term obligations.... $ 1,451 $ 1,451 $ 1,451
-------- -------- --------
Long-term obligations, less current
portion................................... 15,057 15,057 7,132
Stockholders' equity:
Preferred Stock, $0.005 par value per
share: 16,500,000 shares authorized,
13,907,399 shares outstanding, actual;
10,000,000 shares authorized, no shares
outstanding pro forma and pro forma as
adjusted............................... 69 -- --
Common stock, $0.005 par value per share:
40,000,000 shares authorized, 5,589,729
shares outstanding, actual; 40,000,000
shares authorized, 19,497,128 shares
outstanding, pro forma; 150,000,000
shares authorized, 24,533,128 shares
outstanding, pro forma as
adjusted(1)............................ 28 97 122
Additional paid-in capital................ 37,081 37,081 81,306
Deferred compensation..................... (2,425) (2,425) (2,425)
Accumulated deficit....................... (29,094) (29,094) (29,094)
-------- -------- --------
Total stockholders' equity........ $ 5,659 $ 5,659 $ 49,909
-------- -------- --------
Total capitalization.............. $ 22,167 $ 22,167 $ 58,492
======== ======== ========
</TABLE>
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<PAGE> 22
- -------------------------
(1) The number of shares of common stock outstanding after this offering
excludes the following:
- 4,529,692 shares issuable upon exercise of outstanding stock options as
of March 31, 1999 with a weighted average exercise price of $0.97 per
share;
- 1,441,478 shares reserved for issuance under our Amended and Restated
1993 Stock Plan, 1999 Director Option Plan and 1999 Employee Stock
Purchase Plan (including amounts authorized for issuance subsequent to
March 31, 1999);
- up to 932,282 shares issuable upon conversion of the balance of our
convertible note at a conversion price per share of $7.65; and
- 47,849 shares issuable upon exercise of warrants outstanding as of March
31, 1999 with a weighted average exercise price of $5.96 per share.
For additional information regarding these shares, see "Management -- Stock
Plans," "Certain Transactions," "Description of Capital Stock -- Warrants"
and Note 10 of the Notes to Financial Statements.
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<PAGE> 23
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. In the table below, we have calculated net
tangible book value per share by dividing the net tangible book value (total
assets less intangible assets and total liabilities) by the number of
outstanding shares of common stock.
The pro forma net tangible book value of our company at March 31, 1999, was
$5,659,000, or $0.29 per share of common stock. Pro forma net tangible book
value per share represents total tangible assets less total liabilities, divided
by the number of outstanding shares of common stock after giving effect to the
conversion of all outstanding shares of our preferred stock into 13,907,399
shares of common stock effective automatically upon the closing of this
offering. After giving effect to the sale of the 4,000,000 shares of common
stock at an assumed initial public offering price of $10.00 per share (less
underwriting discounts and commissions and estimated offering expenses) and
conversion of approximately $7,925,400 of our convertible note (including
accrued interest), our pro forma as adjusted net tangible book value at March
31, 1999, would be $49,909,000 or $2.03 per share. This represents an immediate
increase in the pro forma as adjusted net tangible book value of $1.74 per share
to existing stockholders and an immediate dilution of $7.97 per share to new
investors, or approximately 80% of the assumed offering price of $10.00 per
share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $10.00
Pro forma net tangible book value per share at March 31,
1999................................................... $0.29
Accretion per share attributable to conversion of our
convertible note....................................... 0.37
Increase per share attributable to this offering.......... 1.37
-----
Pro forma as adjusted net tangible book value per share
after the offering........................................ 2.03
------
Dilution per share to new investors......................... $ $ 7.97
======
</TABLE>
The following table shows on a pro forma as adjusted basis at March 31,
1999, after giving effect to the sale of the 4,000,000 shares of common stock at
an assumed initial public offering price of $10.00 per share (less underwriting
discounts and estimated offering expenses), conversion of approximately
$7,925,400 of our convertible note (including accrued interest) and conversion
of all preferred stock into common stock for the number of shares of common
stock purchased from us, the total consideration paid to us and the average
price paid per share by existing stockholders and by new investors purchasing
common stock in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------ PRICE
NUMBER(1) PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 19,497,128 80% $33,833,859 41% $ 1.74
Conversion of convertible
note.................... 1,036,000 4 7,925,400 10 7.65
New investors............. 400,000 16 47,925,400 49 $10.00
---------- --- ----------- --- ------
Total........... 24,533,128 100% $81,759,259 100%
</TABLE>
- -------------------------
(1) The number of shares of common stock outstanding after this offering
excludes 6,951,306 shares which may be issued upon exercise of outstanding
options and warrants or which may be issued, under our various stock
compensation plans, and upon conversion of a portion of our convertible
note. For additional information regarding these shares, see Footnote 1 to
the "Capitalization Table."
22
<PAGE> 24
SELECTED FINANCIAL DATA
You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Financial Statements and the Notes thereto included
elsewhere in this prospectus. The statement of operations data for the years
ended March 31, 1997, 1998 and 1999 and the balance sheet data at March 31, 1998
and 1999 are derived from, and are qualified by reference to, the audited
Financial Statements and Notes thereto appearing elsewhere in this prospectus.
The statements of operations data for the years ended March 31, 1995 and 1996
and the balance sheet data as of March 31, 1995, 1996 and 1997 are derived from,
and are qualified by reference to, financial statements not appearing in this
prospectus. Historical results are not necessarily indicative of results that
may be expected for any future period.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues..................... $ -- $ 104 $ 823 $ 9,811 $ 24,821
Cost of revenues................. -- 68 483 7,898 18,638
-------- -------- -------- -------- --------
Gross margin..................... -- 36 340 1,913 6,183
-------- -------- -------- -------- --------
Operating expenses:
Research and development...... 230 458 2,168 7,178 13,928
Sales and marketing........... -- 126 1,126 2,974 5,765
General and administrative.... 86 333 902 1,774 1,649
Amortization of deferred
compensation................ -- -- -- -- 547
-------- -------- -------- -------- --------
Total operating
expenses............... 316 917 4,196 11,926 21,889
Loss from operations............. (316) (881) (3,856) (10,013) (15,706)
Interest income, net of interest
expense....................... 6 25 259 373 (226)
Sale of electronic test equipment
rights, net................... -- -- 1,508 -- --
-------- -------- -------- -------- --------
Net loss......................... $ (310) $ (856) $ (2,089) $ (9,640) $(15,932)
======== ======== ======== ======== ========
Basic net loss per share......... $ (0.59) $ (2.41) $ (3.33)
======== ======== ========
Weighted average shares used in
computing basic loss per
share(1)...................... 3,551 3,995 4,789
======== ======== ========
Pro forma basic net loss per
share (unaudited)............. $ (0.91)
========
Weighted average shares used in
computing pro forma basic net
loss per share
(unaudited)(1)................ 17,594
========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term
investments........................ $ 690 $ 1,729 $ 7,067 $ 4,624 $12,202
Working capital....................... 674 1,647 6,895 6,385 15,912
Total assets.......................... 772 2,108 8,825 14,942 28,598
Long-term obligations, less current
portion............................ -- -- 16 1,426 15,057
Total stockholders' equity............ 710 1,859 7,820 8,169 5,659
</TABLE>
- -------------------------
(1) See Note 2 of Notes to the Financial Statements for an explanation of the
determination of the weighted average common and common equivalent shares
used to compute net loss per share and pro forma net loss per share.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our Financial
Statements and the Notes thereto included elsewhere in this prospectus. The
results described below are not necessarily indicative of the results to be
expected in any future period. Certain statements in this discussion and
analysis are forward-looking statements within the meaning of the federal
securities laws. These forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or our predictions. See "Special Note Regarding
Forward-Looking Statements."
OVERVIEW
We are a leading provider of hardware and software products for storage
area networks, or SANs. Our SAN products are designed to leverage the
capabilities of fibre channel technology to enable companies to better manage
the growth in mission-critical data by overcoming the limitations of the
traditional captive storage architecture. We sell our SAN products, primarily
through leading original equipment manufacturers, including Hewlett-Packard
Company, Compaq Computer Corporation, Avid Technology Corporation and Data
General Corporation. We also sell our products through distribution channel
partners.
We were founded in April 1992 and initially developed electronic test
equipment. Since October 1995, we have focused on developing fibre channel
network products that address the needs of the SAN market. In fiscal 1997, we
sold our patent rights to the electronic test equipment. Prior to fiscal 1998,
our operating activities related primarily to increasing our research and
development capabilities, designing and developing the hardware and software
products which we currently sell and staffing our administrative, marketing and
sales organizations. Since our inception, we have incurred significant losses,
and as of March 31, 1999, we had an accumulated deficit of $29.1 million, and
for the fiscal year ended March 31, 1999 our net loss was $15.9 million. We have
not achieved profitability on a quarterly or annual basis and anticipate that we
will incur net losses for the foreseeable future. We expect to continue to incur
significant sales and marketing, product development and administrative
expenses, and as a result, we will need to generate significant net revenues to
achieve and maintain profitability. Although our net revenues have grown, we may
not be able to sustain these growth rates, and we may not realize sufficient net
revenues to achieve profitability.
We currently derive substantially all of our net revenues from sales of a
limited number of products within the same product line. During fiscal 1999,
substantially all of our net revenues were derived from sales of our hub
products. Although we plan to begin selling our Capellix switch products during
the second quarter of fiscal 2000, we expect that substantially all of our net
revenues in fiscal 2000 will continue to be generated from sales of our hub
products. We may not be successful in our efforts to diversify our product base
and introduce switch products to our customers.
We depend on a few key customers. In fiscal 1999, approximately 84% of our
net revenues came from five customers with sales to Compaq Computer Corporation,
Digital Equipment Corporation and Hewlett-Packard Company each accounting for
more than 10% of our revenue. In fiscal 1998, approximately 69% of our net
revenues came from sales to two customers. While we are seeking to diversify our
customer base and expand the portion of our net revenues which is derived from
sales through various channels, we anticipate that our operating results will
continue to depend on volume sales to a relatively
24
<PAGE> 26
small number of original equipment manufacturer customers and distribution
channel partners. We may not be successful in our efforts to diversify our
customer base.
We record product net revenues upon shipment, with the exception of sales
to several distribution channel partners whose product return rates we cannot
reasonably estimate. Where product return rates cannot be reasonably estimated,
revenue is recognized upon sell-through to the end user by the distribution
channel partner. Allowances for estimated sales returns are provided at the time
of revenue recognition.
Our gross margins are affected by fluctuations in demand for our products,
the mix of products sold, the mix of sales channels through which our products
are sold, the timing and size of customer orders and product implementations,
new product introductions both by us and by our competitors, changes in our
pricing policies and those of our competitors, component costs, and the volume
manufacturing pricing we are able to obtain from our contract manufacturer.
Although we enter into general sales contracts with our customers, none of
our customers are obligated to purchase any amount of our products pursuant to
these contracts. We rely on our customers to submit purchase orders for specific
quantities of our products. All of our sales contracts contain provisions
regarding the following:
- products and pricing;
- order dates, rescheduling and cancellations;
- warranties and repair procedures; and
- marketing and/or sales support and training obligations.
Our original equipment manufacturer contracts generally contain additional
provisions regarding product technical specifications, labeling and boxing
instructions and other customization instructions. Several of our original
equipment manufacturer sales contracts contain favored pricing provisions as
well as confidentiality provisions. Two of our original equipment manufacturer
sales contracts provide the original equipment manufacturer the right to
manufacture our product in the event of a material default we are unable to cure
within a specified time period.
Our contracts with our distribution channel partners generally contain
additional provisions for stock rotation, which provide for a right of return
for up to 10% of the value of purchases during the prior three months, to be
offset with an immediately deliverable order in an amount equal to or greater
than the stock to be rotated. For these customers, we record a sales return
reserve equal to the amount returnable. Two of our distribution channel partners
have broader rights of return. For those two distribution channel partners, we
defer recognition of revenues until their right of return has lapsed. Although
we also provide a reserve for general product returns, we have not experienced
significant product returns from any of our customers. However, our past product
return experience may not be indicative of future product return rates.
We currently outsource substantially all of our manufacturing to Sanmina
Corporation, a third-party manufacturer. Our agreement with Sanmina Corporation
provides for two months of rolling purchase orders and rolling forecasts for the
nine months immediately following the purchase order period. Purchase prices are
negotiable throughout the three-year contract period. We are liable for
materials that Sanmina Corporation purchases on our behalf that we cannot use,
cannot be cancelled before receipt or are unique parts otherwise unusable by
Sanmina Corporation. The agreement restricts our ability to reschedule orders
and allows us to cancel existing orders subject to penalties
25
<PAGE> 27
of up to the total purchase price. Sanmina Corporation provides warranties on
workmanship and pass-through warranties on component parts. Sanmina Corporation
purchases most of the key components used to manufacture our products. We obtain
some of these key components, such as our application specific integrated
circuits, or ASICs, from sole sources and other components, such as power
supplies and chassis, from limited sources. If we inaccurately forecast demand
for our products, Sanmina Corporation may be unable to provide us with adequate
manufacturing capacity. In addition, Sanmina Corporation may not be able to
obtain adequate supplies of components to meet our customers' delivery
requirements. Alternatively, excess inventories may be accumulated by Sanmina
Corporation for our account. In order to reduce the costs of sales, we
anticipate that we may relocate our manufacturing operations from Sanmina
Corporation's manufacturing facility in Santa Clara, California to its
manufacturing facility in Guntersville, Alabama during the second half of fiscal
2000. Additionally, we may consider moving the outsourced manufacturing to other
new locations or to a new contract manufacturer. These relocations could be time
consuming and expensive and there can be no assurance that such moves would not
disrupt the manufacturing of our products. Such disruptions could cause us to
lose net revenues and damage our customer relationships.
RESULTS OF OPERATIONS
The following table sets forth financial data for the fiscal years
indicated as a percentage of total revenue:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Net revenues...................................... 100.0% 100.0% 100.0%
Cost of revenues.................................. 58.7 80.5 75.1
------ ------ ------
Gross margin...................................... 41.3 19.5 24.9
------ ------ ------
Operating expenses:
Research and development....................... 263.4 73.1 56.1
Sales and marketing............................ 136.8 30.3 23.2
General and administrative..................... 109.6 18.1 6.7
Amortization of deferred compensation.......... -- -- 2.2
------ ------ ------
Total operating expenses.................. 509.8 121.5 88.2
------ ------ ------
Loss from operations.............................. (468.5) (102.0) (63.3)
Interest income, net of interest expense.......... 31.5 3.8 (0.9)
Sale of electronic test equipment rights, net..... 183.2 -- --
------ ------ ------
Net loss.......................................... (253.8)% (98.2)% (64.2)%
====== ====== ======
</TABLE>
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
Net Revenues
We began volume shipments of our SAN product line in fiscal 1997, and
recognized $823,000 of net revenues for that year from continued sales of our
Bitstrip product hub and initial sales of our Gibraltar 10-port hub. Net
revenues increased to $9.8 million in fiscal 1998 through sales of the Bitstrip
product and our Gibraltar 10-port and 12-port products. In fiscal 1999 we began
sales of our Gibraltar 6-port hub and Denali switch and recognized $24.8 million
in net revenues. Net revenues increased in each of these years, primarily due to
a broadening of our product line, additions of new original equipment
manufacturer customers and an expansion of our sales through our distribution
channel partners.
26
<PAGE> 28
Gross Margin
Gross margin increased from $340,000 in fiscal 1997 to $1.9 million in
fiscal 1998 to $6.2 million in fiscal 1999. Gross margin as a percentage of net
revenues decreased from 41.3% in fiscal 1997 to 19.5% in fiscal 1998 and
increased to 24.9% in fiscal 1999. The decrease in gross margin as a percentage
of net revenues from fiscal 1997 to fiscal 1998 was primarily due to the
introduction of new products with low initial sales volumes and manufacturing
difficulties experienced by our previous contract manufacturer. The increase in
gross margin as a percentage of net revenues from fiscal 1998 to fiscal 1999 was
primarily due to higher sales volumes, resulting in economies of scale and cost
savings due to our transition to Sanmina Corporation for contract manufacturing.
Our gross margins for sales of products manufactured by our prior contract
manufacturer were approximately 22% for the quarter ended March 31, 1998,
approximately 23% for the quarter ended June 30, 1998, and approximately 25% for
the quarter ended September 30, 1998. During the quarter ended December 31,
1998, we began shifting our manufacturing to Sanmina Corporation. Gross margins
on sales during the December 1998 quarter were lower than expected because sales
of our higher margin Bitstrip product were lower than expected and Sanmina
Corporation had not yet fully assumed all of our manufacturing obligations.
During the quarter ended March 31, 1999, Sanmina Corporation assumed all of our
manufacturing obligations, including purchasing substantially all components. We
do not believe that past cost savings are indicative of cost savings in the
future.
Research and Development Expenses
Research and development expenses consist primarily of salaries and related
personnel expenses, fees paid to consultants and outside service providers,
material costs for prototype and test units and other expenses related to the
design, development, testing and enhancements of our products. We expense our
research and development costs as they are incurred. Research and development
expenses increased from $2.2 million in fiscal 1997 to $7.2 million in fiscal
1998 and to $13.9 million in fiscal 1999. These increases were primarily due to
additional research and development personnel, including the addition of our
strategic research and development team and our two ASIC development teams
primarily devoted to our development of the Capellix and other switch products.
As net revenues have increased, these expenses have declined as a percentage of
revenues from 263.4% in fiscal 1997 to 73.1% in fiscal 1998 and to 56.1% in
fiscal 1999. We believe that a significant level of investment for product
research and development is required to remain competitive. Accordingly, we
expect to continue to devote substantial resources to product research and
development such that research and development expenses will increase in
absolute dollars.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with trade shows,
promotional activities and travel expenses. Sales and marketing expenses
increased from $1.1 million in fiscal 1997 to $3.0 million in fiscal 1998 and to
$5.8 million in fiscal 1999. As revenues have increased, these expenses have
declined as a percentage of net revenues from 136.8% in fiscal 1997 to 30.3% in
fiscal 1998 and to 23.2% in fiscal 1999. In absolute dollars the increase in
each of these years was primarily due to the hiring of additional sales and
marketing personnel and the expansion of our sales and marketing efforts. We
intend to expand our sales and marketing operations and efforts substantially,
both domestically and internationally, in
27
<PAGE> 29
order to increase market awareness and to generate sales of our products.
However, we cannot be certain that any increased expenditures will result in
higher net revenues. In addition, we believe our future success depends upon
establishing successful relationships with a variety of channel partners. We
believe that continued investment in sales and marketing is critical to our
success and expect these expenses to increase in absolute dollars in the future.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, information technology,
facilities and human resources personnel, recruiting expenses, professional fees
and costs associated with expanding our information systems. General and
administrative expenses increased from $902,000 in fiscal 1997 to $1.8 million
in fiscal 1998 and decreased to $1.6 million in fiscal 1999. The increase in
absolute dollars from fiscal 1997 to fiscal 1998 was primarily due to increased
staffing and associated expenses necessary to manage and support our increased
scale of operations. During fiscal 1997 and fiscal 1998, administrative services
were provided to functional departments from a central administration pool. The
decrease in general and administrative expenses in absolute dollars in fiscal
1999 was primarily due to the transfer of several employees from the general and
administrative area to other departments, such as sales, marketing,
manufacturing and research and development. As revenues have increased, these
expenses have declined as a percentage of net revenues from 109.6% in fiscal
1997 to 18.1% in fiscal 1998 and to 6.7% in fiscal 1999. We expect these
expenses to increase in absolute dollars as we add personnel and incur
additional costs related to the growth of our business, expansion of our
information infrastructure and our operation as a public company.
Amortization of Deferred Compensation
In connection with the grant of stock options to employees, we recorded
deferred compensation within stockholders' equity of approximately $3.0 million,
representing the difference between the estimated fair value of the common stock
for accounting purposes and the option exercise price of these options at the
date of grant. We recorded amortization of deferred compensation of $547,000
during fiscal 1999. At March 31, 1999, the remaining deferred compensation of
approximately $2.4 million will be amortized as follows: $1.3 million during
fiscal 2000, $670,000 during fiscal 2001, $350,000 during fiscal 2002 and
$120,000 for fiscal 2003. The amortization expense relates to options awarded to
employees in all operating expenses categories. The amount of deferred
compensation expense to be recorded in future periods could decrease if options
for which accrued but unvested compensation has been recorded are forfeited. See
Note 10 of the Notes to the Financial Statements.
Interest Income, Net of Interest Expense
Interest income, net of interest expense related to our debt and lease
obligations, includes income from our cash investments net of expenses related
to our financing obligations. Interest income, net of interest expense, totaled
$259,000 in fiscal 1997 and $373,000 in fiscal 1998. Interest expense, net of
interest income, totaled $226,000 in fiscal 1999. The increase from fiscal 1997
to fiscal 1998 was primarily due to interest income from proceeds from issuances
of our preferred stock, partially offset by increased interest charges on debt
and capital lease obligations. The interest expense, net of interest income,
28
<PAGE> 30
during fiscal 1999 was primarily due to the interest accrued but not paid in
cash on our convertible note issued in September 1998.
Income Taxes
As of March 31, 1999, we had approximately $26.8 million of federal and
$3.3 million of state net operating loss carryforwards for tax purposes
available to offset future taxable income. Such net operating loss carryforwards
expire through 2014. We have not recognized any benefit from the future use of
loss carryforwards for these periods or for any other periods since inception
because management's estimate of the realizability of the tax benefits of the
loss carryforwards indicates that the underlying assumptions of future
profitable operations contain risks that do not provide sufficient assurance for
us to recognize such benefits currently.
29
<PAGE> 31
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for each of the eight
quarters in the period ending March 31, 1999. The information for each of these
quarters is unaudited and has been prepared on the same basis as the audited
financial statements appearing elsewhere in this prospectus. In the opinion of
management, all necessary adjustments (consisting only of normal recurring
adjustments) have been included to present fairly the unaudited quarterly
results when read in conjunction with our audited Financial Statements and Notes
thereto appearing elsewhere in this prospectus. These operating results are not
necessarily indicative of the results of any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT AS A PERCENTAGE OF NET REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues.......................... $ 651 $ 1,573 $ 3,238 $ 4,349 $ 5,406 $ 5,851 $ 5,983 $ 7,581
Cost of revenues...................... 631 1,299 2,580 3,388 4,181 4,412 4,550 5,495
------- ------- ------- ------- ------- ------- ------- -------
Gross margin.......................... 20 274 658 961 1,225 1,439 1,433 2,086
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development............ 1,133 1,590 1,877 2,578 3,112 3,411 3,750 3,655
Sales and marketing................. 590 495 776 1,113 1,347 1,240 1,577 1,601
General and administrative.......... 376 414 423 561 262 301 434 652
Amortization of deferred
compensation...................... -- -- -- -- 28 87 184 248
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses....... 2,099 2,499 3,076 4,252 4,749 5,039 5,945 6,156
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.................. (2,079) (2,225) (2,418) (3,291) (3,524) (3,600) (4,512) (4,070)
------- ------- ------- ------- ------- ------- ------- -------
Total other income (expense)... 121 112 112 28 (21) (40) (51) (114)
------- ------- ------- ------- ------- ------- ------- -------
Net loss.............................. $(1,958) $(2,113) $(2,306) $(3,263) $(3,545) $(3,640) $(4,563) $(4,184)
======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF NET REVENUE:
Net revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................... 97.0 82.6 79.7 77.9 77.3 75.4 76.0 72.5
------- ------- ------- ------- ------- ------- ------- -------
Gross margin.......................... 3.0 17.4 20.3 22.1 22.7 24.6 24.0 27.5
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development............ 174.0 101.1 58.0 59.3 57.6 58.3 62.7 48.2
Sales and marketing................. 90.6 31.5 24.0 25.6 24.9 21.2 26.4 21.1
General and administrative.......... 57.8 26.3 13.0 12.9 4.9 5.1 7.2 8.6
Amortization of deferred
compensation...................... -- -- -- -- 0.5 1.5 3.1 3.3
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses....... 322.4 158.9 95.0 97.8 87.9 86.1 99.4 81.2
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.................. (319.4) (141.5) (74.7) (75.7) (65.2) (61.5) (75.4) (53.7)
------- ------- ------- ------- ------- ------- ------- -------
Total other income (expense)... 18.6 7.2 3.5 0.6 (0.4) (0.7) (0.9) (1.5)
------- ------- ------- ------- ------- ------- ------- -------
Net loss.............................. (300.8)% (134.3)% (71.2)% (75.1)% (65.6)% (62.2)% (76.3)% (55.2)%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
30
<PAGE> 32
Net revenues increased in each of the eight quarters ended March 31, 1999.
This quarterly increase was primarily due to the introduction of our Gibraltar
12-port and 6-port products, increased sales of our Bitstrip and Gibraltar
10-port products, and the addition of new original equipment manufacturer and
distribution customers. These increases may not be indicative of future
quarterly revenues.
Gross margins have generally increased in each of the eight quarters ended
March 31, 1999 with the exception of a decrease in the quarter ended December
31, 1998. This decrease was due to lower than anticipated sales of our Bitstrip
product and the transition from our prior contract manufacturer to Sanmina
Corporation. During the quarter ended December 31, 1998 Sanmina Corporation had
not assumed full turnkey manufacturing.
Research and development expenses increased in each of the eight quarters
ended March 31, 1999 primarily due to the addition of personnel and costs
incurred for the development of the Capellix switch and other new products. We
expect research and development costs to continue to increase in absolute
dollars.
Sales and marketing expenses have generally increased due to our increasing
net revenues. Additionally, sales and marketing expenses in the June and
December quarters have historically been higher primarily due to the
Networld+Interop tradeshow in the June quarters and the Comdex tradeshow during
the December quarters. We expect sales and marketing costs to continue to
increase in absolute dollars.
General and administrative expenses increased for each of the four quarters
ended March 31, 1998. During this period of time, administrative personnel
provided functions to all departments from a centralized pool of personnel.
During the four quarters ended March 31, 1999, we transferred several employees
from the general and administrative area to other departments such as sales,
marketing, manufacturing and research and development resulting in a decrease in
general and administrative costs. During the quarter ended December 31, 1998, we
moved to a new corporate headquarters facility in northern California, incurred
moving costs and wrote off the unamortized portion of leasehold improvements
from the prior facility. We increased our facility size from approximately
27,000 square feet to approximately 53,000 square feet, increasing facility
costs during the quarter ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of convertible preferred stock, the issuance of a convertible note and
equipment financings.
In fiscal 1999, we used $15.7 million in cash for operations, an increase
of 33% from $11.8 million used in fiscal 1998. This increase was primarily due
to an increase in our net loss from $9.6 million in fiscal 1998 to $15.9 million
in fiscal 1999, partially offset by increased non-cash charges in fiscal 1999.
In fiscal 1999, we used $1.6 million in cash from investing activities to
acquire property and equipment. In fiscal 1998, we received proceeds of $6.9
million from the sale of available-for-sale securities and used $1.4 million of
cash to acquire property and equipment.
In addition to convertible preferred stock, we have used debt and leases to
partially finance our operations and capital purchases and plan to continue this
practice. In fiscal 1999, we generated $24.9 million in cash from financing
activities, an increase of 132.7% from the $10.7 million generated in fiscal
1998. This increase was primarily due to an increase in private sales of
convertible preferred stock and the issuance of a convertible note.
31
<PAGE> 33
In September 1998, we entered into a $15.0 million convertible note
agreement with Seagate Technology, Inc. Under this agreement, Seagate
Technology, Inc. purchased a convertible note in the aggregate principle amount
of $15.0 million, which bears simple interest on the unpaid principal balance at
a rate equal to 5.75% per annum with principal and interest maturing on
September 18, 2001. At our sole option, any portion or all of the then
outstanding balance of principal and interest on this convertible note into
shares of our Series G preferred stock at a price of $7.65 per share.
The agreement also provides that, without our consent, conversion of the
convertible note may not result in Seagate holding more than 19.9% of our
outstanding shares of common stock. Accrued interest is converted prior to any
principal owing under this convertible note. See "Certain Transactions." In the
event of a default, as defined in the convertible note agreement, Seagate may
declare all outstanding interest and principal immediately due and payable in
cash. We may, upon 30 days written notice to Seagate, prepay the convertible
note in whole or in part.
In October 1998, we converted approximately $59,000 of interest and
approximately $1.8 million of principal of the convertible note into 242,694
shares of Series G preferred stock. Upon the closing of this offering, those
242,694 shares of Series G preferred stock will convert into 242,694 shares of
our common stock. As of March 31, 1999, the total amount of outstanding
principal and accrued interest on the convertible note was $13,554,000. We
intend to convert a portion of the unpaid principal and interest on our
convertible note sufficient to maintain Seagate Technology's holdings of our
common stock at 19.9%. In this prospectus we have assumed, based upon the number
of shares of our common stock outstanding as of March 31, 1999, that we will
convert approximately $7,925,400 of our convertible note into 1,036,000 shares
of our common stock. Accordingly, following the conversion of this amount, there
would be $7,132,000 of our convertible note outstanding, which would be
convertible into 932,287 shares of our common stock. For a more complete
discussion of the convertible note and our agreement with Seagate, see "Certain
Transactions."
In fiscal 1998 and 1999, we acquired $3.3 million in equipment under
capitalized leases. At March 31, 1999, we had $2.4 million in capitalized lease
obligations outstanding.
In January 1998, we entered into a revolving credit agreement with a bank,
which provided for maximum borrowings of an amount not to exceed the lower of
70% of eligible accounts receivable or $5.0 million. On March 15, 1999, we
renewed this agreement, which expires on February 1, 2000. Currently, there are
no borrowings under this line of credit. Borrowings under this line of credit
are secured by all of our assets and bear interest at the bank's prime rate plus
0.5% per annum (approximately 8.25% at March 31, 1999). The agreement requires
that we maintain certain financial ratios and levels of tangible net worth and
also restricts our ability to pay cash dividends. See Note 8 of Notes to the
Financial Statements.
Cash, cash equivalents and short-term investments totaled $12.2 million at
March 31, 1999, up from $4.6 million at March 31, 1998. The increase was
primarily due to proceeds from our financing activities, net of cash used in
operations and the purchase of design tools, leasehold improvements and other
equipment.
Our capital requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to developing, marketing,
selling and supporting our products, the timing and expense associated with
expanding our distribution channels, and other factors. We expect to devote
substantial capital resources to continue our research and development efforts,
to hire and expand our sales, support, marketing and product development
organizations, to expand marketing programs, to establish additional facilities
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<PAGE> 34
worldwide and for other general corporate activities. We believe that the
proceeds from this offering together with our existing cash balances, credit
facilities and cash flows expected to be generated from future operations will
be sufficient to fund our operations for at least the next 12 months. However,
we may require additional financing within this time frame and additional
funding, if needed, may not be available on terms acceptable, or at all.
YEAR 2000 READINESS
The Year 2000 Issue
The year 2000 issue refers to the potential for disruption to business
activities caused by system failures or miscalculations which are triggered by
advancement of date records past the year 1999. For example, if software that
uses the calendar year in computations is not ready for the millennial calendar
change, it may interpret a 21st century date as a 20th century date (for
example, mistaking 2001 for 1901).
Readiness of Our Products
We have designed our products to be ready for the year 2000 calendar
change. We represent to our customers that each hardware, software and firmware
product supplied by us will accurately process date data from, into and between
the 20th and 21st centuries and the years 1999 and 2000, including leap year
calculations, when used in accordance with the product documentation provided by
us. We also represent to our customers that upon notification of any year 2000
problems with our products, we will remedy it by product repair or replacement.
We do not represent to our customers that the storage area networks and
local area networks that incorporate our products will not have problems with
year 2000 issues, since these networks incorporate hardware and software
products supplied by other companies. We cannot evaluate the readiness of our
products for year 2000 with the innumerable combinations possible with other
companies' products. We may, therefore, face claims or complaints based on year
2000 problems related to our customers' networks, even when we are not the
source of their problem. We are not aware of any such claims or complaints about
us or other companies building products for storage area networks, but we may
incur the cost of legal or other defense and explanation of our product
regardless of the merits of such claims.
Readiness of Our Systems and Facilities
Our business may be affected by year 2000 issues. We plan to complete our
systems updates, upgrades and replacements of non-ready systems by Fall 1999.
Systems include internal hardware and software as well as external services
provided by other companies, including contract manufacturing, product
development, information processing and facility services. We will prepare
contingency plans for unexpected internal system failures and failures of
external systems. We are not currently aware of any unresolved year 2000
problems relating to any of our internal systems. We do not believe that we have
any significant systems that are not year 2000 compliant. Most of our software,
hardware and operating systems have been acquired as new product in the last two
years. Most of it is shrink wrapped product and is still maintained by vendors
extant. We do not believe that we have any significant systems that contain
embedded chips that are not year 2000 compliant. Most of our hardware is made of
branded components and has been acquired in the last two years from
manufacturers extant. We are not using legacy hardware or software that would be
more likely to have calendar issues because of its age.
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<PAGE> 35
Cost of Product and Internal Systems Preparation
Based on our assessment to date, we do not expect the total cost of year
2000 preparation and remediation to be material to our business. To date, our
costs of analysis of our year 2000 readiness have not been material.
Risks
An internal or external business disruption caused by the year 2000 issue
could interrupt our operations and damage our relationships with our customers.
An internal disruption unique to us could give a comparative advantage to our
competitors. Failure of our internal systems and critical external services to
be ready for the year 2000 could delay order processing, issuing invoices or
development and shipment of products. The cost of recovery from failures could
be significant.
Our customers' purchasing plans could be affected by year 2000 issues if
they need to expend significant resources to fix their existing systems. This
situation could divert funds and resources otherwise available for new product
purchase. In addition, some customers may wait to purchase our products until
after the year 2000, which may reduce our net revenues in the near future.
We are unable to determine at this time whether these or other year 2000
failures will occur and will have a material impact on our business, results of
operations, or financial condition. This inability is particularly due to the
potential scope of the year 2000 problem and the inability to assure the
readiness of external service providers, including utilities, government
entities and other vendors. We have not developed, and we have no current plans
to develop in the near future, a contingency plan to deal with the effects of
this worst case scenario.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Comprehensive Income," which we adopted in fiscal 1999. SFAS No. 130 requires
companies to report a new, additional measure of income on the statement of
operations or to create a new financial statement that has the new measure of
income on it. "Comprehensive Income" is to include amounts which have been
previously excluded from net income and reflected instead in equity.
Comprehensive loss for each of the three years ended March 31, 1999 approximated
net loss.
In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131 "Disclosures About Segments of an Enterprise and Related Information," which
we adopted in fiscal 1999. SFAS No. 131 establishes standards for disclosures
about operating segments, products and services, geographic areas and major
customers. We are organized and operate as one operating segment: the design,
development, manufacturing, marketing and selling of SAN products. We sell our
SAN products internationally. During fiscal 1997, product net revenues amounted
to 95% of total net revenues, in fiscal 1998 they amounted to 99%, and in fiscal
1999 they amounted to 98%.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1 "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use," which we adopted in fiscal
1999. SOP No. 98-1 requires entities to capitalize certain costs related to
internal-use software once certain criteria has been met. The adoption did not
have a material impact on our financial position or results of operations.
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<PAGE> 36
In April 1998, the American Institute of Certified Public Accountants
issued SOP No. 98-5 "Reporting on the Costs of Start-Up Activities," which we
adopted in fiscal 1999. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were previously capitalized must be written off when SOP No. 98-5 is
adopted. The adoption did not have a material impact on our financial position
or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires certain accounting and reporting standards for derivative financial
instruments and hedging activities. We will become subject to SFAS No. 133
beginning on July 1, 1999. Because we do not currently hold any derivative
instruments and do not engage in hedging activities, we do not believe that the
adoption of SFAS No. 133 will have a material impact on our financial position
or results of operations.
In December 1998, the American Institute of Certified Public Accountants
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 and SOP 98-4 by
extending the deferral of the application of certain provisions of SOP 97-2,
amended by SOP 98-4, through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. We do not expect the adoption of
SOP 98-9 to have a significant effect on our financial position or results of
operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET INTEREST RATE SENSITIVITY
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we may invest
in may be subject to market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, government and non-government debt securities. In general,
money market funds are not subject to market risk because the interest paid on
such funds fluctuates with the prevailing interest rate. As of March 31, 1999,
all of our investments were in money market funds. See Note 2 of the Notes to
the Financial Statements.
We have operated primarily in the United States and all sales to date have
been made in U.S. dollars. Accordingly, we have not had any material exposure to
foreign currency rate fluctuations.
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<PAGE> 37
BUSINESS
OVERVIEW
We are a leading provider of hardware and software products for storage
area networks, or SANs. We pioneered the development of SANs by applying a
networking model to the connectivity of enterprise servers and storage devices.
Our SAN products are designed to leverage the capabilities of fibre channel
technology to enable companies to better manage the growth of mission-critical
data by overcoming the limitations of the traditional captive storage
architecture, and creating a foundation for data centralization.
We believe that we have developed the most comprehensive line of products
in the SAN industry. These products include (1) the Bitstrip active hub, a
gigabit fibre channel hub, which provides a cost-effective solution for
entry-level SANs; (2) the Gibraltar line of hubs, a managed hub designed to
provide centralized management of a SAN; (3) the Denali area switch, a fibre
channel switch to support data backup without a server; (4) the Capellix chassis
switch, a modular, scalable, multi-protocol chassis switch; and (5) the Ventana
SAN Manager, a SAN management software application which provides monitoring and
control of SAN devices.
We began commercial shipments of our SAN products in October 1995. Our
primary customers include original equipment manufacturer customers and
distribution channel partners. Our original equipment manufacturer customers
include Hewlett-Packard Company, Compaq Computer Corporation, Data General
Corporation and Avid Technology, Inc. Additionally, we have developed a two-tier
distribution channel comprised of distributors and resellers including Andataco,
Inc., Bell Microproducts, Inc., Decision Support Systems, Inc., Merisel, Inc.,
Rorke Data, Inc. and Tokyo Electron Limited. According to International Data
Corporation (January 1999), our installed base of fibre channel networking ports
represents the largest share of the total combined hub and switch ports shipped
in calendar 1997 and 1998. We believe we have the largest installed base of SAN
networking ports.
We believe that the SAN infrastructure created by our network products
forms the foundation for a new data management architecture. Just as the
infrastructure created by local area networks, or LANs, formed a platform for
the development of client-server computing, we believe that the SAN
infrastructure has the potential to enable the development of a distributed data
management architecture. We plan to leverage our technological expertise, our
market leadership and the strength of our partnerships to drive the development
of this architecture and create new opportunities for our business.
INDUSTRY BACKGROUND
Growth of Enterprise Data
The volume of data generated in today's enterprise environment continues to
grow at a significant rate. International Data Corporation (September 1998)
estimates that multiuser disk storage grew from approximately 10,000 terabytes
in 1994 to approximately 116,000 terabytes in 1998, and will reach approximately
1,400,000 terabytes in 2002. This growth in the volume of enterprise data has
been fueled by a number of factors, including:
- the emergence and rapid growth of data-intensive applications such as
e-commerce, online transaction processing, web-serving, digital video and
other multimedia applications and enterprise resource planning;
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<PAGE> 38
- the increasing importance of digital information as a strategic business
asset;
- the need for redundant depositories of data to enable continuous access;
- advances in storage technology and the resulting decline in the cost of
storage capacity; and
- a trend toward distributing data in the enterprise client-server
environment.
Traditional Captive Storage Architecture
The growth of the amount of enterprise data has resulted in a corresponding
need to manage, share, back-up and make data widely accessible. This need has
traditionally been addressed by storage architectures consisting of individual
servers connected to dedicated storage devices. This connection is accomplished
through the use of the small computer system interface, or SCSI, technology.
[GRAPHIC: GRAPHICAL REPRESENTATION OF THE TRADITIONAL STORAGE ARCHITECTURE]
The traditional captive storage architecture has several significant
limitations, including:
- Capacity Constraints. SCSI cannot typically support more than 15
individual disk drives. In general, to add additional storage capacity,
additional servers must be added, which is costly and inefficient.
- Performance Constraints. The bandwidth of commercially-available SCSI is
fixed at 40 or 80 megabytes per second. Accordingly, the addition of a
new storage device may not result in a proportional increase in
performance because the available bandwidth may be fully utilized by the
amount of data already flowing between the server and the existing
storage devices. Further, the addition of new storage devices may
actually degrade performance as more devices compete to utilize available
bandwidth.
- Lack of Management. SCSI does not have any inherent management
capability for connections, storage or data. As a result, servers are
burdened with the management tasks. This is cumbersome because there is
no centralized monitoring and control. This is also inefficient because
server bandwidth is spent managing data and not serving clients,
generating a need for more servers. We believe this lack of centralized
management has resulted in a total cost of ownership model where the cost
of managing storage exceeds the cost of the storage devices themselves.
- Lack of Availability and Disaster Tolerance. In general, a
SCSI-connected device can only be accessed by its dedicated server. If
the server becomes unavailable for any reason, such as a breakdown of the
server or a disaster affecting the entire data center, data on its
connected storage devices becomes inaccessible. This lack of fault and
disaster tolerance makes the enterprise vulnerable to server or data
center failures. Because the SCSI standard typically limits the distance
between servers and storage devices to 25 meters, redundant storage
devices in remote locations are generally not practical or
cost-effective. As a result, sustained data availability in a captive
storage architecture following a system failure or disaster is difficult
to achieve.
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Development of Fibre Channel
In 1994, the American National Standards Institute approved the fibre
channel standard as an open standard technology specifically for high
performance, input/output intensive environments such as server-storage
connectivity. Commercially available fibre channel products offer over 1 gigabit
per second of bandwidth. Multiple fibre channel links of up to 10 kilometers
each may be interconnected to enable long distances between servers and storage
devices. Fibre channel technology also enables hundreds of storage devices and
servers to be interconnected.
The Need for a New Storage Architecture
Despite the greater bandwidth and capacity offered by fibre channel, fibre
channel alone does not address the data management, data availability and
disaster tolerance issues resulting from the growth of enterprise data. A new
storage architecture comprised of a new connectivity model and a foundation for
distributing data management applications is needed.
THE GADZOOX SOLUTION
We sell hardware and software products that create storage area networks,
or SANs, for the intelligent management of enterprise data. To address
limitations of the traditional captive storage architecture, we pioneered the
development of the SAN by leveraging the capabilities of fibre channel to create
a new network architecture that is designed to enable multiple storage devices
to be connected to multiple servers. We believe the combination of our technical
innovation and our market vision has influenced and will continue to impact the
evolution of the SAN market. According to International Data Corporation
(January 1999), our installed base of fibre channel networking ports represents
the largest share of the total combined hub and switch ports shipped in 1997 and
1998. We believe we have the largest installed base of SAN ports.
We developed some of the first storage area network devices and introduced
products that are designed to manage data from within a SAN without relying on
servers. We introduced the first active hub, the first hub with intelligent
diagnostics, the first area switch and the first chassis switch for SANs.
Utilizing the proven principles of centralized network management for LANs, we
were also the first to deliver managed network devices and management software
for SANs. These devices are designed to centralize the monitoring, diagnosis and
control of a storage area network.
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Our storage area network solution is based on the following topology:
[GRAPHIC: Graphical representation of the topology of the SAN.]
Our storage connectivity products address the limitations of traditional
captive storage architectures in the following ways:
Capacity Scalability
Our hub, switch and SAN management products are designed to allow users to
scale servers and storage capacity independently to meet their individual needs.
For example, our proprietary PerfectPort feature is designed to enable the
reliable linking of multiple hubs and switches to scale storage capacity. As a
result, our products help users realize fibre channel's ability to connect
hundreds of storage devices or subsystems to multiple servers. This is more
cost-effective than the traditional captive storage architecture, which requires
enterprises to purchase one or more servers to facilitate the addition of
storage devices.
Increased Performance
Our products are designed to provide access to data at speeds exceeding 1
gigabit per second. In addition, our Capellix switch has greater port capacity
and a faster switching backplane than the 8-port and 16-port SAN switches
currently available in the market. This enables higher performance and more cost
effective scaling because more devices can be connected through a single
Capellix switch with higher available bandwidth than can be connected through
existing switches. Our products leverage the multiple server/multiple storage
device topology of SANs to allow multiple users simultaneously access to stored
data over independent paths within the SAN. This permits faster access to data
by more users than is possible in a traditional captive storage architecture.
Manageability
Our management products are designed to provide centralized monitoring and
control of storage and networking devices in a distributed SAN environment. For
example, our proprietary management features and Ventana SAN Manager software
are designed to minimize downtime by monitoring, detecting, isolating and
troubleshooting faults as they occur. Our products leverage the SAN environment
to facilitate the sharing of storage resources, such as disk arrays and tape
backup devices, and reduce the total cost of ownership of storage networks. We
believe that centralized management results in a total cost of ownership model
where the cost of data management is significantly less than the cost of the
storage devices themselves.
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Data Availability and Disaster Tolerance
Our products are designed to further enhance SANs through their high
availability configuration features, which allow network administrators to
specify primary and secondary failover links. SANs are substantially more fault
tolerant than the traditional captive storage architecture because access to
storage devices on a SAN is independent of any single server. As a result, even
if one or more servers fail, data stored on SAN storage devices is still
accessible by other servers connected to the SAN. In addition, because fibre
channel allows devices to be located farther apart physically than SCSI, storage
devices on the same SAN can be placed in remote locations to increase disaster
tolerance.
Our products offer the following additional benefits and features:
Interoperability
Our products leverage the fibre channel arbitrated loop protocol. This
protocol is the most widely-deployed fibre channel standard. As a result, our
products are compatible with substantially all major fibre channel servers and
storage subsystems. This interoperability allows customers to install our
products into their existing SANs, which allows them to preserve their
investment in legacy equipment.
Modular Scalability
The modular design of our products allows users to scale and upgrade the
capabilities of their SANs as required. Our customers are able to meet their
evolving storage and performance needs through the incremental installation or
upgrade of hubs, switches and SAN management features.
Increased Network Stability
Our proprietary Reflex feature is integrated in all of our products and is
designed to automatically bypass faulty links and devices to help ensure network
stability. Our proprietary PerfectPort feature is designed to increase the
reliability of each fibre channel link to our hub or switch products. This
enhances the reliability of the SAN. In addition, the use of PerfectPort in each
link enables all devices in the SAN to be interconnected without limitation in
the number of network devices or the distance between SAN devices.
Platform for Advanced Data Management
We have embedded intelligence in our products that is designed to allow
storage devices to share data without the intervention of a server. This
intelligence creates a platform that helps enable third-party applications such
as serverless backup, an application that allows backups to be performed over a
SAN without a server. Serverless backup helps alleviate servers and LANs of
backup traffic so they can more effectively serve clients.
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STRATEGY
Our objective is to maintain and extend our leadership position in the SAN
market by continuing to deliver enhanced and innovative network products. Key
elements of this strategy include the following:
Leverage Technology Leadership
We intend to leverage our technological leadership and expertise to
introduce high-quality, cost-effective products and product enhancements to meet
the needs of the evolving SAN market. We have significant technological
expertise in both storage and networking. Several of our employees were involved
in the establishment of the original fibre channel standards, which allowed us
to have early insight into the potential of fibre channel as the enabling
technology for SANs. We believe that this technological expertise has been
instrumental in developing our SAN architecture and introducing innovative
products. We intend to continue to devote substantial resources to our product
development efforts.
We remain committed to advancing the standardization of SAN capabilities
through our participation in industry standards organizations, trade groups and
strategic partnerships. Today, our technical personnel are members of more than
11 standards organizations and chair four working groups that are developing new
open standards.
Develop Products Consistent with SAN Evolution
We develop and introduce products timed to the development of the SAN
market. Recognizing that the SAN architecture was a new storage connectivity
paradigm, we targeted our initial product development efforts to the
introduction of active hubs as the basic building block of SANs. As the SAN
architecture began to gain market acceptance, we introduced managed hubs and SAN
management software to allow centralized monitoring and control in larger
distributed environments. We then introduced area switches that support
applications such as remote backup, serverless backup and remote SAN to SAN
connectivity. In May 1999, we announced the introduction of Capellix, our
chassis switch. When configured with storage switch plug-in modules, the
Capellix switch is designed to provide highly scalable switching capabilities
without the need to change other elements of the SAN such as servers and storage
devices. In preserving compatibility with existing SAN devices, the need to
reengineer systems to accommodate the more complex fibre channel fabric protocol
is diminished. By focusing on the delivery of products consistent with SAN
evolution, we believe we have been a significant factor in the emergence of the
SAN market. As the SAN architecture gains wider market acceptance, we intend to
continue to introduce products designed to enable greater capabilities.
Leverage Modular Architecture
We intend to continue to implement product designs that offer upgradability
and extensibility to provide a broad range of products, enhancements and
services to our growing installed base. This represents a significant
opportunity because we believe we have the largest installed base of SAN ports.
The modular design of our products allows users to scale and upgrade the
capabilities of their SANs as required. Our products serve as a foundation that
facilitates growth by supporting downloadable agents, "plug-in" expansion
modules and upgradable software applications.
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Develop Data Management Architecture
We plan to leverage the SAN infrastructure to develop a new data management
architecture. Although the SAN architecture addresses a number of problems
resulting from the growth of enterprise data, we believe that its role will
continue to evolve over time. Similar to the way that the LAN architecture
evolved from a connectivity method for the sharing of data and printers into an
infrastructure that enabled the advent of client-server computing, we believe
the SAN architecture holds the potential of enabling further changes in the way
data is managed. By eliminating the dependency between individual servers and
the access to storage, the SAN architecture enables the removal of data
management applications from the server. In doing so, server processing capacity
can be applied to business critical applications while data management functions
are distributed within the SAN infrastructure. We believe that the improvements
in reliability and security resulting from a distributed data management
environment can enhance overall data availability. Correspondingly, the elevated
role of an intelligent SAN infrastructure can result in higher-value SAN product
segments. To influence these evolutionary steps, we plan to work with industry
standards organizations, original equipment manufacturer customers, distribution
channel partners and strategic partners to develop, standardize and promote a
distributed SAN-based data management architecture.
Focus on Key Original Equipment Manufacturer Customers and Expand Distribution
Channel
We intend to continue to focus on our original equipment manufacturer
customer relationships and to expand distribution channels to develop new
markets. We believe that by continuing to partner with leading original
equipment manufacturer customers, we are well-positioned to introduce new
products and develop new markets. Our original equipment manufacturer customers
currently include the following:
<TABLE>
<S> <C>
Compaq Computer Corporation Fujitsu Limited
Hewlett-Packard Company Hitachi Limited
Data General Corporation Groupe Bull, S.A.
Avid Technology Corporation MTI Technology Corporation
NEC Limited
</TABLE>
While our original equipment manufacturer customers have accounted for the
majority of our net revenues, we believe that our success depends in part on the
successful creation of an open market channel through distributors and
resellers. To this end, we have developed a network of over 60 leading
distributor and reseller partners in 15 countries. We offer comprehensive
training and marketing program support to our partners through our Gadzoox
Associates in Networking (GAIN) program. We intend to enter into agreements with
additional distributors and resellers, both in the United States and abroad, to
increase our geographic coverage and address new vertical markets. We expect
that sales through our distribution channels will constitute an increasing
portion of our total sales.
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Work Closely with Strategic Partners
We intend to continue working closely with leaders in the storage,
networking and computing industries to develop new and enhanced SAN products. We
believe that establishing strategic relationships with technology partners is
essential to facilitate the efficient and reliable integration of their
capabilities into SAN solutions. To this end, we have developed strategic
relationships with leading technology companies, including the following:
ATL Products, Inc.
(data backup applications)
Compaq Computer Corporation
(storage management)
EMC Corporation
(Internet Engineering Task
Force standards)
Exabyte Corporation
(data backup applications)
Legato Systems, Inc.
(data backup applications)
Microsoft Corporation
(server clustering and web-based
management)
Seagate Technology, Inc.
(storage device interface
technologies)
Sun Microsystems, Inc.
(storage management architecture)
Veritas Software Corporation
(storage management architecture)
Employ Reusable Elements
Our products incorporate reusable ASIC cores and firmware agents. This
allows us to accelerate time-to-market, reduce development costs and leverage
interoperability with existing products. We intend to continue developing
reusable elements and leverage them in order to quickly respond to changes in
market requirements.
PRODUCTS
We offer a comprehensive line of products, consisting of SAN hubs, switches
and management software. Our products are designed to address the needs of our
existing and potential customers and enable the adoption and growth of SANs for
a broad range of markets and applications.
Network Products
Our line of network products currently includes active hubs, managed hubs,
area switches and chassis switches. We believe that our product line is the most
comprehensive in the SAN market. Designed as a set of modular building blocks,
our products enable the cost-effective installation, scaling and extension of
SAN capacity, performance and management capabilities.
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The following table summarizes the key features and benefits of our
networking products:
<TABLE>
<C> <S> <C> <C> <C> <C>
---------------------------------------------------------------------------------------
FIRST
COMMERCIAL DESCRIPTION BENEFITS
PRODUCT NAME SHIPMENT
- -------------------------------------------------------------------------------------------------
</TABLE>
ENTRY-LEVEL HUB
<TABLE>
<C> <S> <C> <C> <C> <C>
- Gigabit fibre channel - Enables a
hub cost-effective solution
- 9-port active hub for entry-level SANs
Bitstrip October 1995 - Compact, simple design
enhances ease of
installation and use
---------------------------------------------------------------------------------------
- Entry-level managed - Enables cost-effective
hub centralized management
Gibraltar GL May 1998 - 6-port managed hub of work-group
environments
- Management via Ventana
- -------------------------------------------------------------------------------------------------
</TABLE>
HIGH-END HUB
<TABLE>
<C> <S> <C> <C> <C> <C>
- Managed hub - Enables efficient
- 10-port managed hub scalability for
Gibraltar C/XM February 1997 enterprise
environments
- Management via Ventana
---------------------------------------------------------------------------------------
- Modular managed hub - Provides modular
- 12-port managed hub management and
scalability for high-
Gibraltar GS August 1997 capacity enterprise
environments
- Management via Ventana
- -------------------------------------------------------------------------------------------------
</TABLE>
ENTRY-LEVEL SWITCH
<TABLE>
<C> <S> <C> <C> <C> <C>
- Switch that supports - Protocol compatibility
embedded backup agents with existing SAN
for serverless backup devices enhances ease
- 3-port area switch of installation
Denali GM September 1998 - Supports remote backup
and mirroring
topologies to enhance
disaster tolerance
- Management via Ventana
- -------------------------------------------------------------------------------------------------
</TABLE>
HIGH-END SWITCH
<TABLE>
<C> <S> <C> <C> <C> <C>
- Multi-protocol chassis - High bandwidth
switch backplane enables more
- Modular chassis-based effective scalability
design than 8-port or 16-port
- Scalable from 6 ports switches
to 34 ports - Designed to be
- 28-gigabit per second integrated without
switching backplane reengineering or
- Innovative, standards- changes to existing
Capellix (1) based storage switch devices
technology - "Plug-in" modules
- Supports multiple provide configuration
fibre channel and flexibility
networking protocols - Modular hardware and
through protocol plug agent design offers
in modules upgradability and
extensibility
- Management via Ventana
- -------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 46
(1) Capellix is currently in Beta evaluation with several of our key original
equipment manufacturer partners. We expect to begin commercial shipments in
the third calendar quarter of 1999. However, we cannot assure that shipments
of Capellix will begin in this timeframe.
Management Products
Our modular, upgradable management products are designed to enable users to
deploy management capabilities as required and enhance the ability to maintain
compliance with future management standards. To minimize the requirement for
multiple connections from managed hubs and switches to a management console, our
products employ our proprietary IntraCom proxy management system. Unlike other
products that impose distance limitations or require multiple connections, our
proxy management system is designed to enable a single managed "master" device
to manage other "slave" devices over existing fibre channel links without
impacting the flow of data.
The following table summarizes the key features and benefits of our
management products:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
FIRST DESCRIPTION BENEFITS
PRODUCT NAME COMMERCIAL
SHIPMENT
- -----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
</TABLE>
MANAGEMENT APPLICATION
<TABLE>
<C> <S> <C> <C> <C> <C>
- SAN management appli- - Centralizes network and
cation data management
- Monitors, detects, - Enhances data
isolates and availability
troubleshoots faults as
Ventana SAN they occur - Designed to integrate
Manager May 1997 into enterprise platforms
such as OpenView,
Unicenter, and Tivoli
- Provides intuitive
graphical management
interface
- -----------------------------------------------------------------------------------------------
</TABLE>
MANAGEMENT MODULE
<TABLE>
<C> <S> <C> <C> <C> <C>
- Management module for - Converts any Gibraltar
Gibraltar GL and GS GS/GL hub into an
Gibraltar hubs IntraCom proxy "master"
IntraCom
Management April 1998 - Field installable and - Allows addition of SAN
Module upgradable management as required
- Management via Ventana
- -----------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 47
CUSTOMERS
We began commercial shipment of our SAN products in fiscal 1996, and as of
March 31, 1999 have shipped products to over 130 organizations in 15 countries.
Original Equipment Manufacturer Customers
Our primary customers are original equipment manufacturers. The following
is a list of our top five original equipment manufacturer customers based on net
revenues in fiscal 1999:
<TABLE>
<S> <C>
Hewlett-Packard Company Digital Equipment Corporation
Compaq Computer Corporation Avid Technology Corporation
Data General Corporation
</TABLE>
In fiscal 1999, Hewlett-Packard Company's Enterprise Storage Solution
Division represented 28% of our net revenues, Compaq Computer Corporation
represented 15% of our net revenues and Hewlett-Packard Company's Network Server
Division represented 14% of our net revenues. In fiscal 1998, Hewlett-Packard
Company's Enterprise Storage Solution Division represented 58% of our net
revenues, Compaq Computer Corporation represented 5% of our net revenues and
Hewlett-Packard Company's Network Server Division represented less than 1% of
our net revenues.
Distribution Channel Partners
Our other customers include distribution channel partners comprised of
distributors and resellers. Our top four distribution channel partners based on
net revenues in fiscal 1999 were as follows:
<TABLE>
<S> <C>
Bell Microproducts, Inc. Ideal Hardware plc
Tokyo Electron Limited Itochu Limited
</TABLE>
In addition, we have recently shipped products to distributors and
resellers such as Merisel, Inc., Andataco, Inc., Cranel, Inc. and Agate
Technology Pty Limited.
SALES, MARKETING AND CUSTOMER SERVICE
Our sales and marketing strategy is focused on the development of the SAN
market through relationships with original equipment manufacturer customers and
distribution channel partners. By maintaining a balance of both of these
indirect models, we believe that we can leverage each of their strengths to help
the market evolve and to enhance our ability to address a large end-user base.
As of March 31, 1999, our sales and marketing organization consisted of a
total of 28 people, including field sales representatives, systems engineers,
applications engineers, customer service personnel, product marketing, product
management, channel marketing, marketing communications and market research
personnel. Our field sales personnel are located in Austin, Texas, Boston,
Massachusetts, Houston, Texas and Swallowfield, England.
Original Equipment Manufacturers
Historically, we have focused on sales to original equipment manufacturer
customers because we believed that they were most capable of influencing the
development of the early SAN market. We believe that by partnering with leading
original equipment manufacturer customers, we will continue to be
well-positioned to introduce new products and develop new markets. We work
closely with our original equipment manufacturer
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<PAGE> 48
customers as we develop new products and rely on these original equipment
manufacturer customers for market feedback.
Our original equipment manufacturer focus targets the manufacturers of Unix
and Windows(R) NT servers and high-end disk and tape storage subsystems.
Original equipment manufacturer customers have been a key to our growth in the
various stages of the emerging market and have represented a significant portion
of our revenues. We believe that this is largely due to the ability of our
original equipment manufacturer customers to deliver complete,
factory-configured solutions, which are installed and serviced by their
dedicated technical support organization. Even as the technology of a given
solution matures and becomes suitable to transition to an open market
integration model, the evolutionary nature of the SAN market should enable us to
continue to present our original equipment manufacturer customers with the
opportunity to integrate and deploy new capabilities as they are developed. To
help ensure the successful deployment of these capabilities, we plan to continue
to strengthen our original equipment manufacturer customer relationships and
focus on the advancements of technology and standards.
Distribution Channel Partners
As the SAN market has matured, we have developed a two-tier distribution
channel that is comprised of distributors and resellers. We believe that our
channel, consisting of over 60 partners in 15 countries as of March 31, 1999, is
one of the largest in the SAN market. We believe that as the market for SANs
matures, open-market sales through distributors will represent an increasing
percentage of our sales.
In addition to providing an open market fulfillment path for more mature
enterprise applications and solutions, distributors enable us to more
effectively pursue a number of vertical markets. Vertical markets and
applications such as e-commerce, Internet service providers, digital video,
digital publishing, oil and gas exploration and medical imaging are targets of
our channel partners.
In October 1998, we announced the launch of a two-tier distribution
marketing program. Our Gadzoox Associates in Networking (GAIN) program addresses
the SAN market development challenges and opportunities. By providing our
partners with a comprehensive set of sales tools and in-depth training in
technology, products, interoperability and applications, we believe that we
enhance their ability to identify sales opportunities and successfully deploy
solutions. In addition to partner development activities, we also actively work
on end-user education. With the goal of generating awareness and pull-through
demand for SAN solutions, we have participated in a number seminars with
partners such as ATL Products, Inc., Data General Corporation, Exabyte, Inc.,
Hewlett-Packard Company, Legato Systems, Inc., Meta Group, Inc., Microsoft
Corporation, Seagate Software, Inc., Veritas Software Corporation and Seagate
Technology, Inc. We plan to continue these educational seminars in conjunction
with our channel partners and strategic partners as an important component of
the GAIN program.
Customer Service
Our customer service organization provides product and technical support to
our original equipment manufacturer customers and distribution channel partners.
Through our indirect sales model and our partner training programs we minimize
the need for a large end-user support organization. We provide direct
self-service support for our products through our website. As of March 31, 1999,
our customer service organization included two full-time employees. We plan to
augment that staff as required in the future.
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<PAGE> 49
TECHNOLOGY
We believe that we possess a high level of multi-disciplinary technological
expertise, which we utilize in designing our products. This expertise includes
fibre channel technology, LAN and wide area network (WAN) technologies, core
ASIC design, system design and software design. We believe that our expertise in
these technologies provide us with competitive advantages in time-to-market,
cost-to-market, interoperability and product capabilities.
Fibre Channel and Other Networking Technologies
Fibre channel has been adopted by and is being supported by most major
computer and storage device manufacturers including International Business
Machines Corporation, Sun Microsystems, Inc., Hewlett-Packard Company, Compaq
Computer Corporation, Seagate Technology, Inc. and EMC Corporation.
There are two main industry standards for the fibre channel protocol: fibre
channel arbitrated loop (FC-AL) and fibre channel switched fabric (FC-SW),
commonly known as "Fabric." Based on the cost-effective nature and wide industry
deployment of the FC-AL protocol, we elected to base the design of our initial
hub and switch products on that standard. As the needs of the market evolve and
as more third-party products are developed to interoperate with other protocols,
including Fabric, we plan to introduce products and modular enhancements that
support these protocol standards. As fibre channel standards are enhanced and
new industry standards are developed, we expect to contribute to these
developments by leveraging our technical expertise in areas such as SCSI, next
generation input/output (NGIO), ethernet, asynchronous transfer mode (ATM) and
transmission control protocol/Internet protocol (TCP/IP).
We believe that knowledge in fibre channel technology is critical in
achieving and maintaining a leadership position. We employ a number of
technologists that have been significant contributors in the development and
standardization of fibre channel. Based on their expertise, we believe that we
possess insight and understanding of the capabilities and limitations of the
technology.
Core ASIC Design
We design our own core ASICs and employ personnel with expertise in
semiconductor process and design methods. Our proprietary ASICs are manufactured
using gallium arsenide (GaAs) and CMOS technologies. We have successfully
designed proprietary GaAs ASICs clocked at over 1 gigahertz. We have a strategic
and business partnership with GaAs foundry Vitesse Semiconductor, Inc. Our CMOS
ASIC staff possesses expertise in ASIC architecture, design and test. We have a
CMOS foundry relationship with LSI Logic Corporation.
System Design
We employ our own computer aided design (CAD) engineers and design our
printed circuit boards (PCBs). Our system design team has expertise in the
containment of high-frequency electromagnetic interference (EMI), which is
inherent in high-speed networking devices. We have expertise in chassis design,
including design for manufacturability, testability, usability, reliability and
low cost.
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<PAGE> 50
Software
As of March 31, 1999, our engineering staff included 16 software engineers
with expertise in embedded firmware, distributed agents and graphical user
interface technologies. The team has experience in programming for several
microprocessor and operating environments. We have considerable experience in
software implementation to support fibre channel protocol standards such as
FC-PH, FC-AL, FCP, FC-FLA, FC-GS and FC-SW. We have also demonstrated
development capabilities in proprietary and standard SAN management protocols.
Our team also possesses expertise in the areas of graphical user interface
software and network management middleware. We employ personnel with expertise
in a variety of application development environments and tools. Our graphical
user interface development efforts focus on the Microsoft Windows(R) family of
operating systems, as well as platform-independent applications, through the
Java programming environment.
MANUFACTURING
Contract Manufacturing
Our manufacturing strategy focuses on the use of contract manufacturing
sites for the material procurement, assembly, test, packaging, warehousing and
shipment of our products to our customers. Based on its strength in the volume
manufacture of high-speed data networking equipment, we selected Sanmina
Corporation as our contract manufacturing partner. Using a contract manufacturer
allows us to reduce costly investment in manufacturing capital and inventory
warehousing. To reduce our cost of sales, we anticipate that we may relocate our
manufacturing operations to Sanmina Corporation's manufacturing facility in
Guntersville, Alabama during the second half of fiscal 2000. In the future we
may need to find a new contract manufacturer that can manufacture our products
in higher volume and at a lower cost. As our needs and the needs of our
customers continue to evolve, we plan to reassess our manufacturing requirements
on a periodic basis and address changes as we deem necessary. See "Risk
Factors -- We would be unable to manufacture or sell our products if our sole
product manufacturer is unable to meet our manufacturing needs."
While our contract manufacturer manages material procurement for the
majority of the components that are incorporated in our products, we continue to
manage the evaluation and selection of certain key components. These components
include our proprietary ASICs, power supplies, chassis and optical transceivers.
In addition to the management of key components, our internal manufacturing
expertise is focused on product testability, manufacturability and the transfer
of products from development to manufacturing.
Although we use standard parts and components for our products where
possible, we currently purchase several key components used in the manufacture
of our products from single or limited sources. Our principal single source
components include ASICs, optical transceivers and power supplies. See "Risk
Factors -- Because we depend on sole source and limited source suppliers for key
components, we are susceptible to supply shortages that could adversely affect
our operating results."
ISO 9001
In April 1999, we received recommendation for ISO 9001 registration from
SGS International Certification Services, Inc. ISO 9001 is an international set
of quality
49
<PAGE> 51
assurance standards for companies involved in the design, development,
manufacturing, installation and servicing of products or services. These
standards are set by the International Organization for Standardization (ISO),
an international federation of national standards bodies. To be recommended for
ISO 9001 certification, a company must be audited by an ISO accredited auditing
company and must meet or surpass ISO's standards. We believe that our customers
value the processes, control and traceability that are required to achieve ISO
9001 certification.
RESEARCH AND DEVELOPMENT
Our research and development expenses were $13.9 million in fiscal 1999,
$7.2 million in fiscal 1998 and $2.2 million in fiscal 1997. We believe that our
research and development efforts are essential to our ability to deliver
innovative products that address the needs of the market and help evolve the
capabilities of SANs. As of March 31, 1999, our staff included personnel with
expertise in several key areas, including 4 people engaged in standards and
architecture, 2 people engaged in advanced technologies, 14 people engaged in
ASIC design, 16 people engaged in software design, 11 people engaged in
manufacturing engineering, 30 people engaged in product development and
engineering and 8 people in purchasing, administrative and supporting functions.
We recognize the need to integrate new and enhanced technologies into our
products and to continue to extend the open SAN architecture. Research and
development programs that we are currently involved in include 2 and 4 gigabit
per second ASIC cores and transceivers, high availability clustering
architectures, SAN management application programming interfaces (APIs),
distributed SAN management agents, and the integration of SAN, LAN and WAN
technologies. In addition to the development of proprietary core technologies,
we plan to continue partnerships with other leading providers of SAN
technologies, products and services to jointly develop architectures and
industry standards.
Our product development efforts may not result in commercially viable
product, and our products may be made obsolete by changing technology or new
product announcements by other companies. See "Risk Factors -- We have limited
product offerings and our business may suffer if demand for any of these
products declines or fails to develop as we expect."
COMPETITION
The competitive environment in the SAN market is still developing. We
anticipate that the market for our products will be highly competitive,
continually evolving and subject to rapid technological change. New SAN products
are being introduced by various server and storage providers, and existing
products will be continually enhanced. We face competition primarily from other
manufacturers of SAN hub and switch products, including Emulex Corporation and
Vixel Corporation in the SAN hub market and Ancor Communications, Inc., Brocade
Communications Systems, Inc. and Vixel Corporation in the SAN switch market.
Furthermore, although we currently offer products that are complementary to SAN
software products offered by companies such as Legato Systems, Inc. and Veritas
Software Corporation, they and other enterprise software developers may in the
future compete with us. We also compete with providers of data storage solutions
that employ traditional technologies, including SCSI-based technology, such as
Adaptec, Inc., LSI Logic Corporation and QLogic Corporation.
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<PAGE> 52
In addition, as the market for SAN products grows, we may face competition
from traditional networking companies and other manufacturers of networking
equipment. These networking companies may enter the SAN market by introducing
their own products, acquiring an existing SAN infrastructure provider or by
entering into an alliance with an existing SAN provider. It is also possible
that original equipment manufacturer customers could develop and introduce
products competitive with our product offerings. We believe the competitive
factors in the SAN market include the following:
- product performance and features;
- product reliability and interoperability;
- price;
- strength of distribution channel;
- ability to meet delivery schedules; and
- customer service and technical support.
Some of our current and potential competitors have longer operating
histories, significantly greater resources and name recognition and a larger
installed base of customers than we have. As a result, these competitors may
have greater credibility with our existing and potential customers. They also
may be able to adopt more aggressive pricing policies and devote greater
resources to the development, promotion and sale of their products than we can
to ours, which would allow them to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. In addition, some of
our current and potential competitors have already established supplier or joint
development relationships with divisions of our current or potential customers.
These competitors may be able to leverage their existing relationships to
discourage these customers from purchasing additional products from us or
persuade them to replace our products with their products. Increased competition
could result in pricing pressures, reduced sales, reduced margins, reduced
profits, reduced market share or the failure of our products to achieve or
maintain market acceptance. We may not have the financial resources, technical
expertise or marketing, manufacturing, distribution and support capabilities to
compete successfully in the future. Additionally, we may not be able to compete
successfully against current or future competitors and competitive pressures may
materially harm our business.
INTELLECTUAL PROPERTY
Our success depends on our proprietary technology. We rely on a combination
of patents, trademarks, and trade secrets, as well as confidentiality agreements
and other contractual restrictions with employees and third parties, to
establish and protect our proprietary rights. We currently hold two United
States patents with respect to our SAN-related technology. We also have six
pending patents in the United States with respect to our technology and are
seeking patent protection for certain aspects of technology in selected
international locations. However, it is possible that patents may not be issued
for these applications. All of our software products are copyrighted with our
banners and notices. We have been granted registration of two trademarks in the
United States. Despite precautions, third parties could copy or otherwise obtain
and use our products or technology without authorization, or develop similar
technology independently. The measures we undertake may not be adequate to
protect our proprietary technology, and these measures may not preclude
competitors from independently developing products with functionality or
features similar to our products. There can be no assurance that the
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<PAGE> 53
precautions we take will prevent misappropriation or infringement of our
technology. Failure to protect our intellectual property could materially harm
our business.
It is possible that litigation may be necessary in the future to enforce
our intellectual property rights, to protect our trade secrets or to determine
the validity and scope of the proprietary rights of others. Litigation could
result in substantial costs and diversion of our resources and could materially
harm our business. From time to time, we have received, and may receive in the
future, notice of claims of infringement of other parties' proprietary rights.
Infringement or other claims could be asserted or prosecuted against us in the
future, and it is possible that past or future assertions or prosecutions could
harm our business. Any such claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, cause delays in the development and release of our
products, or require us to develop non-infringing technology or enter into
royalty or licensing arrangements. Such royalty or licensing arrangements, if
required, may not be available on terms acceptable to us, or at all. For these
reasons, infringement claims could materially harm our business.
BACKLOG
At March 31, 1999, backlog for our products was approximately $4.1 million,
of which 94%, or approximately $3.9 million, is scheduled for delivery to
customers during the June 1999 quarter, compared to backlog of approximately
$3.2 million at March 31, 1998, of which 97%, or approximately $3.1 million was
for scheduled delivery to customers during the June 1998 quarter. Typically, our
original equipment manufacturer customers forecast expected purchases on a three
to six month rolling basis, as compared to channel partners which order as
required with minimal order fulfillment time. All orders are subject to
cancellation or delay by the customers with limited or no penalty. Therefore,
our backlog is not necessarily indicative of actual sales for any succeeding
period.
EMPLOYEES
As of March 31, 1999, we had 149 employees, 146 of whom were full-time. 66
employees were engaged in research and development, 19 were in engineering
services, 28 were in sales and marketing, 21 were in manufacturing and 15 were
in finance, administration and information services. None of our employees are
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be very good.
Our future performance depends in significant part upon the continued
service of our key technical, sales and senior management personnel, none of
whom is bound by an employment agreement requiring service for any defined
period of time. The loss of the services of one or more of our key employees
could have a material adverse effect on our business, financial condition and
results of operations. Our future success also depends on our continuing ability
to attract, train and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is intense, and we may not be able to
retain our key personnel in the future.
LITIGATION
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. For example, in May
1999, a former employee filed a complaint against us. Our management believes
this claim is without merit and that resolution of this claim will not have a
material adverse effect on our
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<PAGE> 54
financial position or statements of operations. However, litigation is subject
to inherent uncertainties, and an adverse result in this or other matters may
arise from time to time that may harm our business. See "Risk Factors -- We rely
heavily on our intellectual property and the protection of which may cause us to
become involved in costly and lengthy litigation which could seriously harm our
business."
FACILITIES
Our corporate headquarters facility of approximately 53,000 square feet, is
located in San Jose, California, pursuant to a lease that expires in November
2005. In addition, we have agreed to begin leasing an additional 12,000 square
feet in this facility beginning in October 1999. We believe this existing
facility is adequate for our needs through September 2000.
We lease approximately 27,000 square feet in San Jose, California, pursuant
to a lease that expires in January 2001. We vacated this facility in October
1998 when we moved to our corporate headquarters facility. We sublease
approximately 21,500 square feet of this facility to sub-tenants pursuant to
subleases which expire in January 2001.
Our Southern California research and development facility of approximately
7,800 square feet is located in Placentia, California. The lease on this
facility expires in October 1999 and we are currently seeking to extend that
lease or locate a suitable new facility. Although we believe a suitable facility
can be obtained to meet our future requirements, we cannot be certain that we
will be able to find such a facility on commercially reasonable terms.
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<PAGE> 55
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors as of the date of this prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bill Sickler................. 50 President, Chief Executive Officer and Director
Dr. Alistair Black........... 37 Chief Technology Officer and Director
Howey Chin................... 40 Chief Strategy Officer
Christine E. Munson.......... 49 Chief Financial Officer, Vice President of
Administration
Kurt Chan.................... 43 Vice President of Development
Wayne Rickard................ 40 Senior Vice President, Research and Development
Kent Bridges................. 53 Vice President of Worldwide Sales
David Tang................... 37 Vice President of Marketing
William Hubbard.............. 55 Vice President of Manufacturing
Dr. Milton Chang(1).......... 56 Director
Dr. Denny R. S. Ko(2)........ 59 Director
Peter Morris(2).............. 43 Director
Robert Kuhling(1)............ 50 Director
Stephen J. Luczo............. 42 Director
</TABLE>
- -------------------------
(1) Member of the compensation committee.
(2) Member of the audit committee.
Bill Sickler has served as our President, Chief Executive Officer and a
director since April 1996. From March 1995 to April 1996, Mr. Sickler was
executive director of software business development for Seagate Technology,
Inc., a software developer and manufacturer of disk drives. From December 1992
to March 1995, he was president and chief executive officer of Networking
Computing, Inc., a provider of network management software for local area
networks. Mr. Sickler is a director of Savoir Technology Group, Inc., a
distributor of computer, storage and networking equipment. Mr. Sickler holds a
B.S. in engineering from Princeton University and an M.B.A. from the University
of California, Berkeley.
Dr. Alistair Black co-founded Gadzoox in April 1992 and has served as a
director and our Chief Technology Officer since April 1996 and as Chief
Executive Officer, Chief Financial Officer and a director from April 1992
through April 1996. Dr. Black received his B.S. in electrical engineering from
the University of California, Berkeley and his M.S. and Ph.D. in electrical
engineering from Stanford University.
Howey Chin has served as our Chief Strategy Officer since March 1998. Mr.
Chin served as our Vice President of Marketing from September 1995 to March
1998. From February 1991 to September 1995, he worked at Vitesse Semiconductor
Corporation as director of marketing for the standard products group and served
as a representative on the Fibre Channel Standards Committee. Mr. Chin was the
original editor of the Jitter Working Group and co-editor of the 10-Bit
Interface Group and is a board member of the Fibre Channel Loop Community, an
organization that promotes fibre channel. Mr. Chin holds a B.S. in electrical
engineering from Mississippi State University.
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<PAGE> 56
Christine E. Munson has served as our Chief Financial Officer and Vice
President of Administration since February 1997. From May 1996 through February
1997, Ms. Munson worked for NetCarta Corporation, a computer software company,
as chief financial officer. From April 1993 through May 1996, Ms. Munson was the
chief financial and administrative officer for the California Culinary Academy,
Inc., a culinary arts school. Ms. Munson is a certified public accountant and
holds a B.S. in business from San Jose State University.
Kurt Chan has served as our Vice President of Development since December
1995. Prior to joining us, Mr. Chan worked for Hewlett-Packard Company, a
computer hardware company, from December 1978 to December 1995 in a variety of
engineering and management positions, most recently as program manager, storage
and subsystems. From June 1994 to June 1995, Mr. Chan served as the technical
editor and facilitator for the Private Loop Disk Profile, which provides the
standards upon which current fibre channel storage implementations are based.
Mr. Chan holds a B.S. in electrical engineering from San Jose State University.
Wayne Rickard has served as our Senior Vice President of Research and
Development and General Manager of our Placentia, California Research and
Development facility since January 1999. Mr. Rickard previously served as Vice
President of Research and Development and General Manager at the Placentia
facility from April 1996 to January 1999. From September 1981 until joining us
in April 1996, Mr. Rickard worked at Emulex Corporation, a data networking
company, where he last served as senior director of engineering from April 1994
through April 1996. Mr. Rickard has been active in the development of many fibre
channel standards and in developing Internet protocol over fibre channel. Mr.
Rickard holds a B.S. in electrical engineering from California State University,
Fullerton and an M.B.A. from Pepperdine University.
Kent Bridges joined us in December 1996 as Vice President of Worldwide
Sales. From December 1994 to September 1996, he served as vice president of
worldwide sales at ZietNet Corporation, an asynchronous transfer mode networking
company. Mr. Bridges holds a B.S. in marketing and finance from Brigham Young
University.
David Tang has served as our Vice President of Marketing since March 1998
and served as our Director of Business Development from December 1996 to March
1998. From September 1994 to November 1996, Mr. Tang served as senior manager of
strategic marketing for Quantum Corporation, a computer data storage company.
Mr. Tang studied electrical engineering at the University of Delaware and is a
graduate of Stanford University's Executive Institute for High Technology
Business Management.
William Hubbard has served as our Vice President of Manufacturing since
September 1997. From May 1995 to July 1997, Mr. Hubbard served as vice
president, manufacturing for Gregory Associates, a contract manufacturing
company. From March 1994 to May 1995, Mr. Hubbard was vice president of
operations for Hughes Lan Networks, a supplier of local area networking
equipment. Mr. Hubbard holds a B.S. in manufacturing technology from Montana
State University and an M.S. in Management Science and Engineering from
Worchester Polytechnic Institute.
Dr. Milton Chang has served as a director of our company since its
inception in April 1992. Dr. Chang is chairman of the board of directors of New
Focus, Inc., a company that supplies photonics tools for laser applications,
which he founded in 1990. From 1996 to 1998, Dr. Chang served on the Visiting
Committee for Advanced Technology of the National Institute of Standards and
Technology. Dr. Chang is a member of the board of
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<PAGE> 57
directors for both Euphonix, Inc. and IRIDEX Corporation. Dr. Chang holds a B.S.
in electrical engineering from the University of Illinois and an M.S. and Ph.D.
in electrical engineering from the California Institute of Technology.
Dr. Denny R. S. Ko has served as a director of our company since December
1994. Dr. Ko has been managing general partner of DynaFund Ventures, a venture
capital firm, since August 1997. Dr. Ko is also the chairman of the board of
directors of Dynamics Technology, Inc., a technical research, engineering and
consulting company, which he founded in 1976. Dr. Ko holds a B.S. in mechanical
engineering from National Taiwan University, an M.S. in aeronautics from the
University of California, Berkeley and a Ph.D. in aeronautics and applied
mathematics from the California Institute of Technology.
Peter Morris has served as a director of our company since September 1996.
Mr. Morris is a general partner at New Enterprise Associates, a venture capital
firm, where he has been employed since 1992. Mr. Morris holds a B.S. in
electrical engineering and an M.B.A. from Stanford University.
Robert Kuhling has served as a director of our company since September
1996. Mr. Kuhling has been a general partner of venture capital funds managed by
ONSET Ventures since 1987. He is a director of Conceptus, Inc. and Euphonix,
Inc. as well as several private companies. Mr. Kuhling holds an M.B.A. from
Harvard University and an A.B. in economics from Hamilton College.
Stephen J. Luczo has served as a director of our company since June 1997.
Mr. Luczo currently serves as chief executive officer, president and director of
Seagate Technology, Inc., a maker of information storage devices. Mr. Luczo
joined Seagate Technology in October 1993 as senior vice president, corporate
development and was promoted to executive vice president, corporate development
in March 1995, where he served until September 1997. He was promoted to
president and chief operating officer of Seagate Technology in September 1997,
and served in the latter capacity until August 1998. In July 1998, Mr. Luczo was
promoted to chief executive officer and appointed to the board of directors. Mr.
Luczo also serves on the board of directors of Veritas Software Corporation.
Prior to the merger of Veritas Software Corporation and Seagate Software, Inc.,
Mr. Luczo also served as chairman of the board of directors of Seagate Software.
Prior to becoming Seagate Software's chairman in July 1997, Mr. Luczo served as
Seagate Software's chief operating officer between March 1995 and July 1997. Mr.
Luczo received a M.B.A. from Stanford University Graduate School of Business,
after completing his undergraduate work at Stanford University where he received
his A.B. degree in economics and psychology.
BOARD OF DIRECTORS
We currently have seven directors. During fiscal 1999, our board of
directors met six times. Currently all directors hold office until the next
annual meeting of stockholders or until their successors are duly elected. Our
board of directors will be divided into three classes, each with staggered
three-year terms, subject to applicable law. As a result, only one class of
directors will be elected at each annual meeting of our stockholders, with the
other classes continuing for the remainder of their respective three-year terms.
Board Committees
Our board of directors currently has an audit committee and a compensation
committee. The audit committee consists of Dr. Ko and Mr. Morris. The audit
committee makes recommendations to the board of directors regarding the
selection of independent
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<PAGE> 58
auditors, reviews the scope of audit and other services by our independent
auditors, reviews the accounting principles and auditing practices and
procedures to be used for our financial statements and reviews the results of
those audits. The compensation committee consists of Dr. Chang and Mr. Kuhling.
The compensation committee makes recommendations to the board of directors
regarding our stock plans and the compensation of officers.
Director Compensation
Our non-employee directors are reimbursed for expenses incurred in
connection with attending board and committee meetings but are not compensated
for their services as board or committee members. We have in the past granted
non-employee directors options to purchase our common stock pursuant to the
terms of our Amended and Restated 1993 Stock Plan. We also grant non-employee
directors options to purchase our common stock pursuant to the terms of our 1999
Director Option Plan. See "-- Stock Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee is currently, or has ever
been at any time since our formation, one of our officers or employees. No
member of the compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more officers
serving as a member of our board of directors or compensation committee.
EXECUTIVE OFFICERS
Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors and
officers.
Compensation
The following table sets forth information concerning compensation for
services rendered to us in all capacities earned in the fiscal year ended March
31, 1999 by our Chief Executive Officer and the four next most highly
compensated executive officers who earned more than aggregate cash compensation
of $100,000 during fiscal 1999 (collectively, our "Named Executive Officers"):
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<PAGE> 59
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION SECURITIES
------------------ UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
--------------------------- -------- ------- ------------
<S> <C> <C> <C>
Bill Sickler(1)................................. $198,827 -- 100,000
President and Chief Executive Officer
Kent Bridges.................................... 160,357 $41,693(2) 20,000
Vice President of Worldwide Sales
Alistair Black.................................. 142,721 -- 55,000
Chief Technology Officer
Wayne Rickard................................... 141,932 -- 45,000
Senior Vice President of Research and
Development
Kurt Chan(3).................................... 138,489 -- 20,000
Vice President of Development
</TABLE>
- -------------------------
(1) In April 1996, Mr. Sickler acquired 1,200,000 shares of restricted stock at
$0.075 per share, subject to our right to repurchase such shares in the
event of the termination of his employment. Our right to repurchase lapses
at a rate of 25% per year. As of March 31, 1999, Mr. Sickler held 350,000
shares of restricted common stock no longer subject to our right of
repurchase, with an aggregate value of $1,583,750 (based on a per share
price of $4.60, the fair market value of our common stock as of March 31,
1999, as determined by our board of directors). No dividends will be paid on
this stock.
(2) Represents sales commissions.
(3) In November 1995, Mr. Chan acquired 200,000 shares subject to our right of
repurchase in the event of his termination. Our right to repurchase lapses
at a rate of 25% of these shares per year. As of March 31, 1999, Mr. Chan
held 33,333 shares of restricted common stock subject to our right of
repurchase, an aggregate value of $152,498 (based on a per share price of
$4.60, the fair market value of our common stock as of March 31, 1999, as
determined by our board of directors). No dividends will be paid on this
stock.
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<PAGE> 60
Option Grants in Fiscal 1999
The following table sets forth information with respect to stock options
granted to each of our Named Executive Officers during the fiscal year ended
March 31, 1999. In accordance with the rules of the Securities and Exchange
Commission, also shown below is the potential realizable value over the term of
the option (the period from the grant date to the expiration date) based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. These
amounts are mandated by the Securities and Exchange Commission and do not
represent our estimate of future stock price. Actual gains, if any, on stock
option exercises will depend on the future performance of our common stock.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF PERCENT OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS GRANTED STOCK APPRECIATION
UNDERLYING TO EMPLOYEES EXERCISE FOR OPTION TERM(5)
OPTIONS IN FISCAL PRICE PER EXPIRATION ---------------------
NAME GRANTED(1) 1999(2) SHARE(3) DATE(4) 5% 10%
---- ---------- ---------------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Bill Sickler(6)...... 100,000 8.9% $2.00 05/12/08 $125,780 $318,750
Kent Bridges(7)...... 20,000 1.8 3.10 11/18/08 38,999 98,810
Alistair Black....... 55,000 4.9 2.00 05/12/08 69,180 175,310
Wayne Rickard........ 25,000 2.2 3.10 01/20/09 48,740 123,520
20,000 1.8 3.10 11/18/08 38,990 98,810
Kurt Chan............ 20,000 1.8 3.10 11/18/08 38,990 98,810
</TABLE>
- -------------------------
(1) The options for each of the Named Executive Officers vest at the rate of
2.08% of the shares subject to the option per month, except for the option
granted to Mr. Black. Mr. Black's option vests at the rate of 3.79% of the
shares subject to the option per month.
(2) Based on an aggregate of 1,119,400 options we granted to our employees and
consultants, including the Named Executive Officers, in fiscal 1999.
(3) The exercise price per share of each option was equal to the fair market
value of the common stock on the date of grant as determined by our board of
directors.
(4) Options may terminate before their expiration dates if the optionee's status
as an employee is terminated or upon the optionee's death or disability.
(5) The potential realizable value is calculated assuming that the fair market
value of the common stock on the date of grant appreciates at the indicated
annual rate compounded annually for the entire term of the option (ten
years) and that the option is exercised and sold on the last day of its term
for the appreciated stock price.
(6) Upon a change of control, the unvested portion of stock options held by Mr.
Sickler will automatically accelerate as to a number of shares equal to the
lesser of: (1) 25% of the initial number of shares subject to the option or
(2) a number of shares such that following acceleration, 12.5% of the
initial number of shares subject to the option, or if a total of less than
12.5% remain unvested, such total remaining amount, will remain unvested.
Upon a change of control and the involuntary termination of Mr. Sickler, all
of the unvested portion of stock options held by him will automatically
accelerate.
(7) Upon a change of control, 50% of the unvested portion of each stock option
held by Mr. Bridges will automatically accelerate.
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<PAGE> 61
Aggregate Option Exercises in Fiscal 1999 and Fiscal Year-End Option Values
With respect to our Named Executive Officers, the following table sets
forth information concerning option exercises in fiscal 1999 and exercisable and
unexercisable options held as of March 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
SHARES AT MARCH 31, 1999 MARCH 31, 1999(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bill Sickler(2)........ 108,333 $207,729 62,500 129,167 $ 242,396 $431,709
Kent Bridges(3)........ -- -- 192,917 167,083 847,826 684,975
Alistair Black......... -- -- 179,166 75,834 770,623 277,377
Wayne Rickard.......... -- -- 241,626 149,374 1,078,062 540,268
Kurt Chan.............. -- -- 93,501 72,499 410,948 264,882
</TABLE>
- -------------------------
(1) Based on a value of $4.60 per share, the fair market value of our common
stock as of March 31, 1999, minus the per share exercise price, multiplied
by the number of shares underlying the option.
(2) Upon a change of control, the unvested portion of stock options held by Mr.
Sickler will automatically accelerate as to a number of shares equal to the
lesser of: (1) 25% of the initial number of shares subject to the option or
(2) a number of shares such that following acceleration, 12.5% of the
initial number of shares subject to the option, or if a total of less than
12.5% remain invested, such total remaining amount, will remain unvested. If
a change of control had occurred on March 31, 1999, an additional 75,000
shares subject to options held by Mr. Sickler would have vested. Upon a
change of control and the involuntary termination of Mr. Sickler, all of the
unvested portion of stock options held by him will automatically accelerate.
(3) Upon a change of control, 50% of the unvested portion of each stock option
held by Mr. Bridges will automatically accelerate. If a change of control
had occurred on March 31, 1999, an additional 83,542 shares subject to
options held by Mr. Bridges would have vested.
STOCK PLANS
Amended and Restated 1993 Stock Plan
Our Amended and Restated 1993 Stock Plan, as amended and restated, was
adopted by our board of directors in May 1999. We anticipate that our
stockholders will approve this plan, as amended and restated, at their next
annual meeting, scheduled to take place on June 19, 1999. This plan provides for
the grant of incentive stock options to our employees and nonstatutory stock
options and stock purchase rights to our employees, directors and consultants.
We have reserved an aggregate of 8,180,000 shares of common stock for issuance
under this plan. The number of shares reserved for issuance under this plan will
be subject to an annual increase on the first day of each fiscal year equal to
the lesser of (a) 1,500,000 shares, (b) 5% of the outstanding shares on that
date, or (c) a lesser amount as determined by the board of directors. As of
March 31, 1999, options to purchase 4,529,692 shares of common stock were
outstanding, 2,465,151 shares had been issued upon exercise of options, net of
repurchases, and 1,214,478 shares would have been available for future grant
assuming that the amendment and restatement of the stock plan were effective as
of March 31, 1999.
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<PAGE> 62
The compensation committee of our board of directors administers the stock
plan and determines the terms of options granted, including the exercise price,
the number of shares subject to individual option awards and the vesting period
of options. The exercise price of nonstatutory options must generally be at
least 85% of the fair market value of the common stock on the date of grant. The
exercise price of incentive stock options cannot be lower than 100% of the fair
market value of the common stock on the date of grant and, in the case of
incentive stock options granted to holders of more than 10% of our voting power,
not less than 110% of the fair market value. The term of an incentive stock
option cannot exceed 10 years, and the term of an incentive stock option granted
to a holder of more than 10% of our voting power cannot exceed five years.
Options granted under our stock plan will accelerate and become fully
vested in the event we are acquired, unless the successor corporation assumes or
substitutes other options in their place. Our board of directors may not,
without the adversely affected optionee's prior written consent, amend, modify
or terminate the stock plan if the amendment, modification or termination would
impair the rights of optionees. Our stock plan will terminate in 2009 unless
terminated earlier by the board of directors.
1999 Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan was adopted by our board of directors
in May 1999. We anticipate that our stockholders will approve this purchase plan
at their next annual meeting. This plan provides our employees with an
opportunity to purchase our common stock through accumulated payroll deductions.
We initially reserved 150,000 shares of common stock for issuance under this
purchase plan. As of March 31, 1999, we had not issued any shares under this
plan. The number of shares reserved for issuance under the purchase plan will be
subject to an annual increase on the first day of each fiscal year equal to the
lesser of (a) 250,000 shares, (b) 1.0% of the outstanding shares on that date,
or (c) a lesser amount as determined by our board of directors.
Our purchase plan will be administered by our board of directors or by a
committee appointed by the board of directors. The purchase plan permits
eligible employees to purchase our common stock through payroll deductions of up
to 10% of his or her compensation or up to 500 shares of common stock for each
offering period, up to a maximum of $25,000 for all purchases within the same
calendar year. Employees are eligible to participate in this purchase plan if
they are customarily employed by us at least 20 hours per week and more than
five months in any calendar year.
Unless our board of directors or its committee determines otherwise, this
purchase plan will be implemented in a series of consecutive, overlapping
offering periods, each approximately six months in duration. Offering periods
will begin on the first trading day on or after August 1 and February 1 of every
year and terminate on the last trading day in the period six months later,
provided that the first offering period will commence on the effective date of
this offering and will end on January 31, 2000, or the last trading day prior
thereto. If we are acquired and the successor corporation does not assume all
outstanding options under this purchase plan, then the offering and purchase
periods then in progress will be shortened so that all options will be
automatically exercised immediately prior to the date of acquisition. The price
at which common stock will be purchased under this purchase plan is equal to 85%
of the fair market value of the common stock on the first day of the applicable
offering period or the last day of the applicable purchase period, whichever is
lower. Employees may end their participation in the offering period at any time,
and participation automatically ends on termination of
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<PAGE> 63
employment or on the 91st day following an extended leave of absence from which
they have not returned. Our board of directors may not, without the adversely
affected optionee's prior written consent, amend, modify or terminate this
purchase plan at any time if the amendment, modification or termination would
impair the rights of plan participants. This purchase plan will terminate in May
2009, unless terminated earlier in accordance with its provisions.
1999 Director Option Plan
Our 1999 Director Option Plan was adopted by our board of directors in May
1999. We anticipate that this plan will be approved by our stockholders at their
next annual meeting. This director plan provides for the grant of nonstatutory
stock options to non-employee directors. We have reserved a total of 50,000
shares of common stock for issuance under it. The number of shares reserved for
issuance under the plan will be subject to an annual increase every April equal
to a number of shares sufficient to bring the number of shares available for
future option grants to 50,000 shares.
Our director plan provides for the automatic grant of 5,000 shares of
common stock to each of our non-employee directors serving as a member of our
board of directors upon approval of the plan by the stockholders and to each
newly elected non-employee director upon their election. Additionally, each of
our non-employee directors shall automatically be granted an option to purchase
2,500 shares of common stock each year on May 1, if on that date he or she has
served on our board of directors for at least the preceding six months. Each
option shall have a term of three years, and each option is immediately
exercisable. The exercise price of all options shall be 100% of the fair market
value per share of the common stock, as determined by our board of directors,
prior to the existence of a public market for our common stock, or after the
existence of a public market, as reported on The Nasdaq Stock Market's National
Market as the closing price of our common stock on the date of grant or on the
last trading day prior to the date of grant, if the grant is made on a holiday.
Options granted under the director plan must be exercised within 3 months
after the end of an optionee's tenure as a member of our board of directors, or
within 12 months after his or her death or disability, but in any case not later
than the expiration of the option's term.
401(k) Plan
On March 11, 1996, our board of directors adopted a Retirement Savings and
Investment Plan covering our full-time employees located in the United States.
This plan is intended to qualify under Section 401(k) of the Internal Revenue
Code of 1986, as amended, so that contributions to this plan by employees, and
the investment earnings thereon, are not taxable to employees until withdrawn.
Pursuant to this plan, employees may elect to reduce their current compensation
by up to the lesser of 20% of their annual compensation or the statutorily
prescribed annual limit ($10,000 in calendar 1998) and to have the amount of
such reduction contributed to this plan. This plan does not permit additional
matching contributions by us on behalf of plan participants.
CHANGE OF CONTROL AGREEMENTS
We have entered into change of control agreements with Bill Sickler and
Kent Bridges. In the event of a change of control (as defined in the agreements)
and regardless of whether the employment relationship continues following the
change of control, a portion of the
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outstanding stock options issued to these two executives will be accelerated and
a portion of our right to repurchase applicable to their restricted stock, if
any, will lapse.
With regard to Mr. Sickler's change of control agreement, if 18 months or
more of vesting or repurchase option remain, upon a change of control one year
of vesting will accelerate and one year of our repurchase option will lapse. If
more than 6 months but less than 18 months remain, six months of vesting and our
repurchase option will continue over the original vesting schedule and any
remaining unvested portion will accelerate and any remaining repurchase option
will lapse. If less than 6 months remain, a change of control will have no
effect. The change of control agreement also provides that upon a change of
control and an involuntary termination (as defined in the agreement) of Mr.
Sickler, any remaining unvested portion, not otherwise accelerated solely upon a
change of control, of any stock option will be automatically accelerated in full
and any remaining repurchase option on restricted stock will automatically lapse
in full.
Mr. Bridges' change of control agreement provides that one-half of the
unvested portion of any stock option will be accelerated and one-half of any
repurchase option shall lapse upon a change of control. The balance of any
unvested shares not accelerated will continue to vest over the original vesting
schedule and the balance of any shares subject to repurchase option will
continue to lapse over the original schedule.
Both change of control agreements provide that if the acceleration of
vesting or lapse of any applicable repurchase option would cause the transaction
resulting in the change of control to not be eligible for accounting treatment
as a "pooling of interests," then each of these executive's stock options and
restricted stock will not have their vesting accelerated and any applicable
repurchase options will not lapse.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for the following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether the bylaws would permit indemnification.
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<PAGE> 65
We have entered into agreements to indemnify our directors, executive
officers and controller, in addition to indemnification provided for in our
bylaws. These agreements, among other things, provide for indemnification of our
directors and executive officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by or in our rights, arising out
of such person's services as a director or executive officer to us, any of our
subsidiaries or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
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<PAGE> 66
CERTAIN TRANSACTIONS
TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS
On April 15, 1996, we sold 1,200,000 shares of common stock at a price of
$0.075 per share to Bill Sickler for an aggregate purchase price of $90,000.
On September 5, 1996, we sold 4,444,444 shares of Series E preferred stock
at a price per share of $1.80 to a group of private investors that included the
following of our directors and 5% stockholders:.
<TABLE>
<CAPTION>
PURCHASER SHARES OF SERIES E STOCK
--------- ------------------------
<S> <C>
NEA Entities:
New Enterprise Associates VI, L.P............... 1,944,446
NEA Presidents Fund, L.P........................ 41,666
NEA Ventures 1996, L.P.......................... 2,778
ONSET Enterprise Associates II, L.P............... 1,388,888
Dynamics Technology, Inc.......................... 228,106
Milton Chang...................................... 277,778
</TABLE>
New Enterprise Associates VI, L.P., NEA Presidents Fund, L.P. and NEA
Ventures 1996, L.P. are affiliated entities and together are considered a
greater than 5% stockholder. Peter Morris, one of our directors, is a partner of
New Enterprise Associates VI, L.P., NEA Presidents Fund, L.P. and NEA Ventures
1996, L.P. Mr. Morris disclaims any beneficial ownership of the securities held
by such entities, except that due to his proportional partnership interest in
the entities. Rob Kuhling, one of our directors, is a partner of ONSET
Enterprise Associates II, L.P. Mr. Kuhling disclaims any beneficial ownership of
the securities held by ONSET Enterprise Associates II, L.P., except that due to
his proportional partnership interest in the entity. Dr. Denny R. S. Ko, one of
our directors, is the chairman of Dynamics Technology, Inc. Mr. Ko disclaims any
beneficial ownership of the securities held by such entities.
Pursuant to a sale and rights transfer agreement dated as of May 26, 1999,
a third-party investor Corporation sold all of the shares of our capital stock
that it held, a total of 784,314 shares of Series H preferred stock, to three
investors. Of these 784,314 shares, the third-party investor sold 459,317 shares
to New Enterprise Associates VIII, Limited Partnership, 2,500 shares to N.E.A.
Presidents' Fund, L.P. and 322,497 shares to ONSET Enterprise Associates III,
L.P. at a per share purchase price of $10.00 for an aggregate purchase price of
$7,843,140.
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On various occasions during 1999 and the two preceding fiscal years, we
granted the following options to purchase our common stock to the following
officers, directors and stockholders who beneficially own five percent or more
of our securities:
<TABLE>
<CAPTION>
DATE OF NUMBER OF EXERCISE
NAME GRANT OPTIONS PRICE/SHARE
- --------------------------------------- -------- --------- -----------
<S> <C> <C> <C>
Bill Sickler........................... 5/8/96 200,000 $0.0825
5/13/98 100,000 2.00
5/4/99 125,000 9.00
Alistair Black......................... 5/13/98 100,000 2.00
5/4/99 15,000 9.00
Howey Chin............................. 4/19/97 76,000 0.27
11/19/98 20,000 3.10
5/4/99 15,000 9.00
Christine Munson....................... 3/19/97 180,000 0.27
11/19/98 20,000 3.10
5/4/99 15,000 9.00
Kurt Chan.............................. 4/9/97 76,000 0.27
11/19/98 20,000 3.10
5/4/99 15,000 9.00
Wayne Rickard.......................... 4/9/97 76,000 0.27
11/19/98 20,000 3.10
1/21/99 25,000 3.10
5/4/99 15,000 9.00
Kent Bridges........................... 1/9/97 340,000 0.18
11/11/98 20,000 3.10
5/4/99 15,000 9.00
David Tang............................. 1/9/97 47,000 0.18
10/31/97 20,000 0.72
3/26/98 43,000 2.00
11/19/98 30,000 3.10
5/4/99 50,000 9.00
William Hubbard........................ 9/16/97 155,000 0.72
11/19/98 20,000 3.10
5/4/99 15,000 9.00
</TABLE>
RELATIONSHIP WITH SEAGATE TECHNOLOGY, INC.
We have developed a strategic partnership with Seagate Technology, Inc.
pursuant to which we have collaborated with Seagate on the development of
industry standards, the design and development of new SAN products, the
interoperability of products, strategic planning and SAN market development. In
addition, Seagate has made several investments in us as described below. Stephen
J. Luczo, one of our directors, is also the chief executive officer of Seagate.
On May 21, 1997, we sold 2,092,234 shares of Series F preferred stock at a
price per share of $4.78 to Seagate for an aggregate purchase price of
$10,000,879. On June 16, 1998, we sold 652,569 shares of Series G preferred
stock at a price per share of $7.65 to Seagate for an aggregate purchase price
of $4,992,153.
On September 18, 1998, we entered into a $15,000,000 convertible note
purchase agreement with Seagate. The convertible note bears simple interest of
5.75% per annum with principal and interest maturing on September 18, 2001. We
have the option to convert any portion of the then outstanding balance of
principal and interest into Series G preferred stock or common stock, after
completion of this offering, at a price per share of $7.65. Accrued interest
must be converted prior to any principal. We may, upon thirty days written
notice to Seagate, prepay any portion of the convertible note in cash. In the
event of a default, as defined in the agreement, Seagate may declare all
outstanding
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interest and principal immediately due and payable in cash. In the event we
become subject to insolvency proceedings, the outstanding principal and accrued
interest will become immediately due and payable.
On October 12, 1998, we converted approximately $59,000 of accrued interest
and approximately $1,797,000 of principal into 242,694 shares of Series G
preferred stock. As of March 31, 1999, the total amount of outstanding principal
and accrued interest was $13,554,000.
Pursuant to an agreement that we entered into with Seagate and a
third-party investor (which third-party investor subsequently sold all of its
shares of our common stock to funds affiliated with New Enterprise Associates
and ONSET Ventures), on October 12, 1998, Seagate has the right to maintain its
current percentage interest in our common stock of 19.9%. Accordingly, within 30
days of the closing of this offering, Seagate will have the right to purchase
shares of our common stock at the initial public offering purchase price less
underwriting discounts and commissions as long as the percentage of outstanding
common stock they own does not exceed 19.9%. Seagate is obligated to first
convert interest and principal owing under its convertible note into shares of
common stock before it purchases additional shares of common stock to maintain
its percentage interest. The rights of Seagate to maintain terminate 30 days
after the closing of this offering.
Also pursuant to this stockholders agreement, Seagate has agreed to certain
restrictions on its ownership of our common stock. Specifically, unless our
board of directors consents, Seagate has agreed not to:
- acquire beneficial ownership of any of our shares of capital stock if
after acquiring the shares, Seagate would beneficially own more than
19.9% of our outstanding voting stock;
- form, join or in any way participate in a group acting together for the
purpose of acquiring, holding or disposing of shares of our capital stock
if the group beneficially owns more than 5% of our outstanding voting
stock;
- submit any resolution to our stockholders or become a participant in a
proxy solicitation in opposition to the recommendation of a majority of
our directors; or
- enter into any voting arrangement with respect to any shares of our
capital stock.
In addition, if Seagate acquires more than 19.9% of our voting stock we
have the right to purchase from Seagate a sufficient number of shares of voting
stock so as to reduce the voting stock held by Seagate to no more than 19.9% of
our outstanding voting stock. To purchase shares held by Seagate pursuant to
this right, we will have to pay the average per share cash price paid by Seagate
calculated on a last purchased, first sold basis.
We intend to convert a portion of the unpaid principal and interest on our
convertible note sufficient to maintain Seagate Technology's holdings of our
common stock at 19.9%. In this prospectus we have assumed, based upon the number
of shares of our common stock outstanding as of March 31, 1999, that we will
convert approximately $7,925,400 of our convertible note into 1,036,000 shares
of our common stock. Accordingly, following the conversion of this amount, there
would be $7,132,000 of our convertible note outstanding, which would be
convertible into 932,287 shares of our common stock.
These limitations on Seagate's ownership of our capital stock expire upon
the earlier of (1) three years after the closing of this offering, (2) when a
tender offer is made for not less than 50% of our outstanding shares or (3) when
another entity or group acquires not less than 25% ownership of the total
combined voting power of all of our outstanding shares.
67
<PAGE> 69
Pursuant to the stockholders' agreement, Seagate agreed that it will not
nor will they permit any of its affiliates to sell or transfer any shares of our
capital stock to a person or entity that as of October 12, 1998 was engaged in
or had publicly announced its intention to enter into the business of
developing, manufacturing, marketing or selling storage area networks.
In addition, for so long as Seagate owns at least 7% of our outstanding
voting stock, Seagate agreed that it will not nor will they permit any of its
affiliates to sell or transfer any shares of our capital stock, except under the
following circumstances:
- to a person or entity who owned Gadzoox voting stock immediately prior to
the closing of this offering;
- to us or to any person approved by us;
- pursuant to a bona fide public offering registered under the Securities
Act;
- pursuant to Rule 144 under the Securities Act;
- pursuant to a bona fide pledge of shares of our capital stock to an
institutional lender to secure a loan, guarantee or other financial
support, provided that the lender agrees to hold such stock subject to
the same restrictions applicable to Seagate or the other investor;
- in the event of a merger or consolidation in which we are acquired by
another corporation, or pursuant to a plan of liquidation of Gadzoox;
- to a wholly-owned subsidiary that has executed an agreement to be bound
by the same restrictions applicable to Seagate or the other investor;
- sales into any tender or exchange offer (A) which is made by us or on our
behalf; (B) which is made by another person or group and is not opposed
by our board of directors; or (C) subject to our right of first refusal,
which is made by another person or group and which would result in such
person or group owning more than 50% of our total outstanding voting
stock; or
- public distributions, provided that, in cases other than public
distributions underwritten by an underwriter selected by us, no single
purchaser is known to be acquiring more than 5% of our outstanding
capital stock in the distribution.
Pursuant to the stockholders' agreement, Seagate granted us certain rights
of first refusal with respect to any shares of our common stock that they will
hold immediately after the closing of this offering or those shares of common
stock issuable to Seagate upon conversion of the convertible note we issued to
Seagate. With respect to these shares, we have a right of first refusal to
purchase any of these shares sold by Seagate for so long as Seagate owns at
least 7% of our outstanding voting stock. Certain sales of our voting stock by
Seagate, including sales through a registered public offering, are not subject
to this right of first refusal.
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with each of our directors
and officers. Such indemnification agreements will require us to indemnify our
directors and officers to the fullest extent permitted by Delaware law. See
"Management -- Limitations on Liability and Indemnification."
All future transactions, including any loans from our company to our
officers, directors, principal stockholders or affiliates, will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested members of the board of directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to our company than could be obtained from unaffiliated third parties.
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<PAGE> 70
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of May 31, 1999, and as adjusted to
reflect the sale of common stock offered hereby by (i) each stockholder known by
us to own beneficially more than 5% of current common stock, (ii) each Named
Executive Officer, (iii) each of our directors and (iv) all current directors
and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE
OF SHARES
NUMBER OF OUTSTANDING(1)(2)
SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
------------------------ ------------ -------- --------
<S> <C> <C> <C>
Stephen Luczo(3)............................. 3,858,404 19.3% 19.9%(4)
c/o Seagate Technology, Inc.
920 Disc Drive, Building One
Scotts Valley, CA 95066
Seagate Technology, Inc...................... 3,847,987 19.2 19.9(4)
920 Disc Drive, Building One
Scotts Valley, CA 95066
Peter Morris(5).............................. 2,450,707 12.2 9.7
c/o New Enterprise Associates
2490 Sand Hill Road
Menlo Park, CA 94025
Entities associated with New Enterprise
Associates VI, Limited Partnership(6)...... 2,450,707 12.2 9.7
2490 Sand Hill Road
Menlo Park, CA 94025
Alistair Black(7)............................ 1,724,792 8.5 6.8
Rob Kuhling(8)............................... 1,711,385 8.5 6.8
c/o ONSET Ventures
2490 Sand Hill Road
Menlo Park, CA 94025
Entities associated with ONSET Enterprise(8)
Associates II, L.P......................... 1,711,385 8.5 6.8
2490 Sand Hill Road
Menlo Park, CA 94025
Denny R. Ko(9)............................... 1,601,206 8.0 6.4
c/o Dynamics Technology, Inc.
21311 Hawthorne Boulevard
Suite 300
Torrance, CA 90503-5610
Dynamics Technology, Inc.(10)................ 1,601,206 8.0 6.4
21311 Hawthorne Boulevard
Suite 300
Torrance, CA 90503-5610
Bill Sickler(11)............................. 1,418,383 7.1 5.6
Milton Chang................................. 1,223,166 6.1 4.9
c/o New Focus, Inc.
2630 Walsh Avenue
Santa Clara, CA 95051
</TABLE>
69
<PAGE> 71
<TABLE>
<CAPTION>
PERCENTAGE
OF SHARES
NUMBER OF OUTSTANDING(1)(2)
SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
------------------------ ------------ -------- --------
<S> <C> <C> <C>
Kurt Chan(12)................................ 307,958 1.5 1.2
Wayne Rickard(13)............................ 274,833 1.4 1.1
Kent Bridges(14)............................. 223,541 1.1 0.9
All directors and executive officers as a
group
(14 persons)(15)........................... 15,350,216 72.6 78.1(4)
</TABLE>
- -------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person
that are currently exercisable or will become exercisable within 60 days
after May 31, 1999 are deemed outstanding, while such shares are not deemed
outstanding for purposes of computing percentage ownership of any other
person. Unless otherwise indicated in the footnotes below, the persons and
entities named in the table have sole voting and investment power with
respect to all shares beneficially owned, subject to community property
laws where applicable. The number of shares beneficially owned assumes the
conversion of all outstanding shares of preferred stock into common stock
as of May 31, 1999.
(2) Assumes no exercise of the underwriters' over-allotment option.
(3) Mr. Luczo is the chief executive officer of Seagate and a director of our
company. Represents 3,847,987 shares held by Seagate, 8,333 shares of
Common Stock held by Mr. Luczo and 2,084 shares issuable upon exercise of
options held by Mr. Luczo exercisable within 60 days of May 31, 1999. Mr.
Luczo disclaims beneficial ownership of shares held by Seagate.
(4) Based on shares held upon consummation of the offering and shares of common
stock to be issued concurrently with the offering upon conversion of a
portion the convertible note held by Seagate.
(5) Mr. Morris is a general partner of New Enterprise Associates and a director
of our company. Represents 1,944,446 shares held by New Enterprise
Associates VI, Limited Partnership, 459,317 shares held by New Enterprise
Associates VIII, Limited Partnership, 44,166 shares held by NEA Presidents
Fund, L.P. and 2,778 shares held by NEA Ventures 1996, L.P. Includes
459,317 shares purchased on June 2, 1999 by funds affiliated with New
Enterprise Associates from another stockholder of Gadzoox pursuant to an
irrevocable letter of commitment to sell dated May 26, 1999. Mr. Morris
disclaims beneficial ownership of shares held by these entities, except for
his proportional interest arising from his partnership interest in such
funds.
(6) Represents 1,944,446 shares held by New Enterprise Associates VI, Limited
Partnership, 459,317 shares held by New Enterprise Associates VIII, Limited
Partnership, 44,166 shares held by NEA Presidents Fund, L.P. and 2,778
shares held by NEA Ventures 1996, L.P. Includes 459,317 shares purchased on
June 2, 1999 by funds affiliated with New Enterprise Associates from
another stockholder of Gadzoox pursuant to an irrevocable letter of
commitment to sell dated May 26, 1999.
(7) Represents 204,792 shares issuable upon exercise of options held by Mr.
Black exercisable within 60 days of May 31, 1999, 1,482,964 shares held by
The Savage/
70
<PAGE> 72
Black Living Trust, Alistair D. Black and Deborah A. Savage, Trustees,
18,518 shares held by Alistair Black, Custodian for Duncan Oliver Black,
under the California Uniform Transfers to Minors Act and 18,518 shares held
by Alistair Black, Custodian for Dylan Savage Black, under the California
Uniform Transfers to Minors Act.
(8) Mr. Kuhling is a general partner of ONSET Ventures and a director of our
company. Represents 1,388,888 shares held by ONSET Enterprise Associates
II, L.P. and 322,497 shares held by ONSET Enterprise Associates III, L.P.
Includes 322,497 shares purchased on June 2, 1999 by funds affiliated with
ONSET Ventures from another stockholder of Gadzoox pursuant to an
irrevocable letter of commitment to sell executed by the seller of such
shares on May 26, 1999. Mr. Kuhling disclaims beneficial ownership of
shares held by this entity, except for his proportional interest arising
from his partnership interest in ONSET Ventures.
(9) Dr. Ko is the chairman of Dynamics Technology, Inc. and a director of our
company. Represents 1,579,206 shares held by Dynamics Technology, Inc. and
22,000 shares issuable upon exercise of options held by Dynamics
Technology, Inc. exercisable within 60 days of May 31, 1999. Dr. Ko
disclaims beneficial ownership of the shares held by this entity.
(10) Represents 1,579,206 shares held by Dynamics Technology, Inc. and 22,000
shares issuable upon exercise of options held by Dynamics Technology, Inc.
exercisable within 60 days of May 31, 1999.
(11) Represents 88,542 shares issuable upon exercise of options held by Mr.
Sickler exercisable within 60 days of May 31, 1999, 1,308,333 shares held
by K. William Sickler and Gail A. Sickler, Trustees UTA Dated July 16,
1992, 15,238 shares held by the Kenneth J. Sickler Living Trust, of which
Mr. Sickler is the Trustee, 6,270 shares held by K. William Sickler,
Trustee UA 10-14-92 Kenneth J. Sickler Grandchildren's Trust Agreement. Of
the 1,308,333 shares held by K. William Sickler and Gail A. Sickler,
Trustees UTA dated July 16, 1992, 300,000 shares are subject to a right of
repurchase in favor of Gadzoox as of May 31, 1999, which right lapses over
time.
(12) Includes 25,000 shares subject to a right of repurchase in favor of Gadzoox
as of May 31, 1999, which right lapses over time, and 107,958 shares
issuable upon exercise of options held by Mr. Chan exercisable within 60
days of May 31, 1999.
(13) Includes 224,833 shares issuable upon exercise of options held by Mr.
Rickard exercisable within 60 days of May 31, 1999.
(14) Includes 173,541 shares issuable upon exercise of options held by Mr.
Bridges exercisable within 60 days of May 31, 1999.
(15) Includes shares described in footnotes 3, 5, 7, 8, 9 and 11 - 14 that are
beneficially owned by the directors and officers and an aggregate of
1,108,237 shares issuable upon exercise of options held by these
individuals exercisable within 60 days of May 31, 1999.
71
<PAGE> 73
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, Gadzoox will be authorized to issue
150,000,000 shares of common stock, $0.005 par value, and 10,000,000 shares of
undesignated preferred stock, $0.005 par value. The following description of our
capital stock does not purport to be complete. This description is subject to
and qualified in its entirety by our certificate of incorporation and bylaws,
which are included as exhibits to the registration statement of which this
prospectus forms a part, and by the provisions of applicable Delaware law.
COMMON STOCK
As of March 31, 1999, there were 19,497,128 shares of common stock
outstanding that were held of record by approximately 77 stockholders (assuming
conversion of all shares of preferred stock outstanding as of March 31, 1999).
There will be 25,078,393 shares of common stock outstanding (assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options) after giving effect to the sale of common stock offered in
this offering and the conversion of an aggregate of approximately $7,925,000 of
our convertible note (including accrued interest) into an aggregate of 1,036,000
shares. There are outstanding options to purchase a total of 4,529,692 shares of
our 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. Our stockholders
do not have cumulative voting rights in the election of directors. Accordingly,
holders of a majority of the shares voting are able to elect all of the
directors. Subject to preferences that may be granted to any then outstanding
preferred stock, holders of common stock are entitled to receive ratably only
those dividends as may be declared by the board of directors out of funds
legally available therefor, as well as any distributions to the stockholders.
See "Dividend Policy." In the event of a liquidation, dissolution or winding up
of Gadzoox, holders of common stock are entitled to share ratably in all assets
of Gadzoox remaining after we pay our liabilities and distribute the liquidation
preference of any then outstanding preferred stock. Holders of common stock have
no preemptive or other subscription or conversion rights.
PREFERRED STOCK
Our certificate of incorporation filed in connection with this offering
provides that our board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series. The rights,
preferences and privileges of each series of preferred stock may be greater than
the rights of Gadzoox common stock. It is not possible to state the actual
effect of the issuance of any shares of preferred stock upon the rights of
holders of our common stock until the board of directors determines the specific
rights of the holders of any preferred stock that may be issued. However, the
effects might include, among other things: (1) restricting dividends on the
common stock, (2) diluting the voting power of the common stock, (3) impairing
the liquidation rights of the common stock and (4) delaying or preventing a
change in control of Gadzoox without further action by the stockholders. Upon
the closing of this offering, no shares of preferred stock will be outstanding,
and Gadzoox has no present plans to issue any shares of preferred stock.
72
<PAGE> 74
WARRANTS
As of the closing of this offering, there will be warrants to purchase
28,242 shares of our common stock at an exercise price of $4.78, which will
remain exercisable until July 30, 2007. In addition, as of the closing of this
offering, there will be warrants to purchase 19,607 shares of our common stock
at an exercise price of $7.65, which will remain exercisable until July 6, 2003.
REGISTRATION RIGHTS
Pursuant to a registration and information rights agreement entered into
between us and holders of 3,026,364 shares of common stock and holders of
13,907,399 shares of common stock issuable upon conversion of our Series A,
Series B, Series C, Series D, Series E, Series F, Series G and Series H
preferred stock and upon conversion of the convertible note held by Seagate, we
are obligated, under limited circumstances and subject to specified conditions
and limitations, to use our best efforts to register the registrable shares.
We must use our best efforts to register shares of the registrable shares:
- if we receive written notice from holders of 50% or more of the
registrable shares requesting that we effect a registration with respect
to not less than 20% of the registrable shares then held by the holders
requesting registration (or a lesser percentage where the reasonably
anticipated price to the public of the sale of the registrable shares
will exceed $2,000,000);
- if we decide to register our own securities (except in connection with
this offering); or
- if (1) we receive written notice from holders of 25% or more of the
registrable shares requesting that we effect a registration on Form S-3
(a shortened form of registration statement) with respect to shares of
the registrable shares, the reasonably anticipated price to the public of
which exceeds $1,000,000 and (2) we are then eligible to use Form S-3
(which at the earliest will occur twelve calendar months after the
closing of this offering).
However, in addition to certain other conditions and limitations, if
requested to register shares of registrable shares, we can delay registration
not more than once in any 12-month period and for not more than 90 days. In
addition, unless the request is for a registration on Form S-3, we are obligated
to effect only two registrations requested by the holders of the registrable
shares. In any case where we decide to register our own securities pursuant to
an underwritten offering, the managing underwriter may limit the registrable
shares to be included in the registration to not less than 10% of the total
value of securities to be registered.
These registration rights terminate with respect to each registrable share
upon the first to occur of when the holder can transfer his or her registrable
shares pursuant to Rule 144 or five years after the closing of this offering. In
addition, the holders of these registration rights have entered into lockup
agreements and waived their registration rights until 180 days following the
closing of this offering.
STOCKHOLDERS' AGREEMENT
We have entered into a stockholders' agreement with two of our
stockholders, pursuant to which we granted those stockholders certain rights,
and those stockholders
73
<PAGE> 75
agreed to limitations and restrictions with respect to their shares of our
capital stock. For a more complete discussion of this stockholders' agreement,
see "Certain Transactions -- Relationship with Seagate Technology, Inc."
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make more difficult the acquisition of our company by means of a
tender offer, a proxy contest or otherwise and the removal of incumbent officers
and directors. These provisions, summarized below, may discourage certain types
of coercive takeover practices and inadequate takeover bids and encourage
persons seeking to acquire control of our company to first negotiate with our
company. We believe that the benefits of increased protection of our company's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure our company outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless (with certain exceptions) the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of interested
stockholder status, did own) 15% or more of a corporation's voting stock. The
existence of this provision would be expected to have an anti-takeover effect
with respect to transactions not approved in advance by the board of directors,
including discouraging attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.
Our certificate of incorporation eliminates the right of stockholders to
act by written consent without a meeting. The certificate of incorporation and
bylaws do not provide for cumulative voting in the election of directors. The
authorization of undesignated preferred stock makes it possible for the board of
directors to issue preferred stock with voting or other rights or preferences
that could impede the success of any attempt to change control of our company.
These and other provisions may have the effect of deterring hostile takeovers or
delaying changes in control or management of our company. The amendment of any
of these provisions would require approval by holders of at least 66 2/3% of our
outstanding common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is BankBoston, N.A.
NATIONAL MARKET LISTING
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "ZOOX."
74
<PAGE> 76
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of our common stock in the
public market could adversely affect the market price of our common stock.
Upon completion of this offering, we will have outstanding 25,078,393
shares of common stock, assuming (1) the issuance of 4,000,000 shares of common
stock offered by us, (2) no exercise of the underwriters' over-allotment option,
(3) conversion of $7,925,400 of our convertible note into 1,036,000 shares of
common stock and (4) no exercise of options or warrants after May 31, 1999. All
of the 4,000,000 shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act. However, the sale
of any of these shares if purchased by "affiliates" as that term is defined in
Rule 144 are subject to certain limitations and restrictions that are described
below.
The remaining 21,211,493 shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. These shares are "restricted
shares" as that term is defined in Rule 144 and therefore may not be sold
publicly unless they are registered under the Securities Act or are sold
pursuant to Rule 144 or another exemption from registration. In addition, our
directors and officers as well as other stockholders and optionholders have
entered into "lock-up agreements" with the underwriters. These lock-up
agreements provide that, except under limited exceptions, the stockholder may
not offer, sell, contract to sell or otherwise dispose of any of our common
stock or securities that are convertible into or exchangeable for, or that
represent the right to receive, our common stock for a period of 180 days after
the date of this prospectus. Accordingly, of the remaining 21,211,493 shares,
the following shares will become eligible for sale on the dates set forth in the
table below.
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF
RELEVANT DATES SHARES ELIGIBLE FOR SALE COMMENT
-------------- ------------------------ -------
<S> <C> <C>
On effective date(1)........... 4,000,000 Shares sold in this offering.
180 days after effective 20,286,242
date(2)...................... All shares subject to lock-
up released; shares saleable
under Rules 144 and 701.
</TABLE>
- -------------------------
(1) Assumes no exercise of underwriters' over-allotment option.
(2) Assumes effective date of July 15, 1999.
As of May 31, 1999, there were a total of 4,258,181 shares of common stock
subject to outstanding options under our Amended and Restated 1993 Stock Plan,
1,533,008 of which were vested, and nearly all of which are subject to lock-up
agreements. Immediately after the completion of the offering, we intend to file
registration statements on Form S-8 under the Securities Act to register all of
the shares of common stock issued or reserved for future issuance under our
Amended and Restated 1993 Stock Plan, our 1999 Employee Stock Purchase Plan and
our 1999 Director Option Plan. On the date 180 days after the effective date of
the offering, a total of 2,418,700 shares of our common stock subject to
outstanding options will be vested. After the effective dates of the
registration statements on Form S-8, shares purchased upon exercise of options
granted pursuant to our Amended and Restated 1993 Stock Plan, our 1999 Employee
Stock Purchase Plan and our 1999 Director Option Plan generally would be
available for resale in the public market.
75
<PAGE> 77
Our officers and directors as well as other stockholders have agreed not to
sell or otherwise dispose of any of their shares for the time periods described
above. Credit Suisse First Boston, however, may in its sole discretion, at any
time without notice, release all or any portion of the shares subject to lock-up
agreements.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 252,214 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice filing and the availability of current
public information about us.
Rule 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an "affiliate," is
entitled to sell such shares without complying with the manner of sale, notice
filing, volume limitation or notice provisions of Rule 144. Therefore, unless
otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
Rule 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchases shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with certain restrictions, including the holding period, contained in
Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this prospectus, may be sold by persons other than
"affiliates," as defined in Rule 144, subject only to the manner of sale
provisions of Rule 144. Securities issued in reliance on Rule 701 may be sold by
"affiliates" under Rule 144 without compliance with its one year minimum holding
period requirement.
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<PAGE> 78
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation,
Hambrecht & Quist LLC and Morgan Keegan & Company, Inc. are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Hambrecht & Quist LLC.......................................
Morgan Keegan & Company, Inc................................
---------
Total............................................. 4,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 600,000 additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
------------------------------- -------------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us..... $ $ $ $
Expenses payable by us..... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We and our executive officers, directors and certain other securityholders
of Gadzoox have agreed not to offer, sell, contract to sell, announce an
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission a registration statement under
the Securities Act relating to, any shares of common stock or securities
convertible into or exchangeable or exercisable for any common stock without the
prior written consent of Credit Suisse First Boston Corporation for a period of
180 days after the date of this prospectus.
77
<PAGE> 79
The underwriters have reserved for sale, at the initial public offering
price up to shares of the common stock for employees,
directors and certain other persons associated with us who have expressed an
interest in purchasing common stock in this offering. The number of shares
available for sale to the general public in this offering will be reduced to the
extent these persons purchase the reserved shares. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "ZOOX."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include: the information in this
prospectus and otherwise available to the underwriters; the history and the
prospects for the industry in which we will compete; the ability of our
management; the prospects for our future earnings; the present state of our
development and our current financial condition; the general condition of the
securities markets at the time of this offering; and the recent market prices
of, and the demand for, publicly traded common stock of generally comparable
companies.
The representatives, may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Exchange Act.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
78
<PAGE> 80
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under the securities laws, (ii) where required
by law, that the purchaser is purchasing as principal and not as agent, and
(iii) the purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or these persons. All or a substantial portion of the assets of the
issuer and these persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or these persons in
Canada or to enforce a judgment obtained in Canadian courts against the issuer
or these persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.
79
<PAGE> 81
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in our common
stock in their particular circumstances and with respect to the eligibility of
our common stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Gadzoox by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters will be passed upon for the Underwriters
by Morrison & Foerster LLP. As of the date of this prospectus, WS Investment
Company 95B an investment partnership composed of certain current and former
members of and persons associated with Wilson Sonsini Goodrich & Rosati,
Professional Corporation, in addition to certain current individual members of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially own an
aggregate of 39,138 shares of Gadzoox common stock.
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective February 1998, Arthur Andersen LLP was engaged as our independent
accountants and replaced other auditors who were dismissed as our independent
accountants on the same date. The decision to change accountants was approved by
our board of directors. Arthur Andersen LLP's reports for each of the three
years in the period ended March 31, 1999, did not contain an adverse opinion or
disclaimer of opinion qualified or modified as to any uncertainty, audit scope
or accounting principle. During our last two fiscal years, there were no
disagreements with our former auditors on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of our former auditors, would
have caused them to make reference thereto in any of their reports. Our former
auditors have not audited or reported on any of the financial statements
included in this prospectus. Prior to February 1998, we had not consulted with
Arthur Andersen LLP on items that involved our accounting principles or the form
of audit opinion to be issued on our financial statements.
EXPERTS
The audited financial statements and schedule included in this prospectus
and elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1. This prospectus, which forms a part of the Registration
Statement, does not contain all the information included in the Registration
Statement. Certain information is omitted and you should refer to the
Registration Statement and its exhibits. With respect to references made in this
prospectus to any contract or other document of Gadzoox, such references are not
necessarily complete and you should refer to the exhibits attached to the
Registration Statement for copies of the actual contract or
80
<PAGE> 82
document. You may review a copy of the Registration Statement, including
exhibits and schedule filed therewith, at the Securities and Exchange
Commission's public reference facilities in Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Securities and Exchange Commission located at 7 World Trade Center, Suite 1300,
New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. You may also obtain copies of such materials from
the Public References Section of the Securities and Exchange Commission, Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, such as Gadzoox, that file
electronically with the Securities and Exchange Commission.
81
<PAGE> 83
GADZOOX NETWORKS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 84
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Gadzoox Networks, Inc.:
We have audited the accompanying balance sheets of Gadzoox Networks, Inc.,
(a Delaware corporation) as of March 31, 1998 and 1999, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended March 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gadzoox Networks, Inc. as of
March 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1999 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Jose, California
April 30, 1999
F-2
<PAGE> 85
GADZOOX NETWORKS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, 1999
MARCH 31, PRO FORMA
------------------- STOCKHOLDERS'
1998 1999 EQUITY (NOTE 9)
-------- -------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,624 $ 12,202
Accounts receivable, net of allowance of $65 and $150,
respectively........................................... 3,424 5,981
Inventories............................................... 3,463 5,306
Prepaid expenses and other current assets................. 221 305
-------- --------
Total current assets.............................. 11,732 23,794
Property and equipment, net................................. 3,125 4,553
Other assets................................................ 85 251
-------- --------
$ 14,942 $ 28,598
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable........................... $ 345 $ 371
Current portion of capital lease obligations.............. 550 1,080
Accounts payable.......................................... 3,302 4,488
Compensation related accruals............................. 767 705
Deferred revenue and other................................ 383 1,238
-------- --------
Total current liabilities......................... 5,347 7,882
Convertible note............................................ -- 13,554
Note payable, net of current portion........................ 567 196
Capital lease obligations, net of current portion........... 859 1,307
-------- --------
Total liabilities................................. 6,773 22,939
-------- --------
Commitments and contingencies (Note 5)
Stockholders' equity:
Convertible preferred stock, $0.005 par value; aggregate
liquidation preference of $34,219 as of March 31, 1999;
12,256,064, 16,500,000 and 10,000,000 shares authorized
in 1998, 1999 and pro forma, respectively; 12,227,822
and 13,907,399 shares issued and outstanding in 1998
and 1999, respectively, and no shares outstanding pro
forma.................................................. 60 69 $ --
Common stock, $0.005 par value; 40,000,000 shares
authorized in 1998 and 1999, respectively, 150,000,000
authorized pro forma; 5,078,328 and 5,589,729 shares
issued and outstanding in 1998 and 1999, respectively,
19,497,128 shares outstanding pro forma................ 26 28 97
Additional paid-in capital................................ 21,245 37,081 37,081
Deferred compensation..................................... -- (2,425) (2,425)
Accumulated deficit....................................... (13,162) (29,094) (29,094)
-------- -------- --------
Total stockholders' equity........................ 8,169 5,659 $ 5,659
-------- -------- ========
$ 14,942 $ 28,598
======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-3
<PAGE> 86
GADZOOX NETWORKS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net revenues................................. $ 823 $ 9,811 $ 24,821
Cost of revenues............................. 483 7,898 18,638
------- -------- --------
Gross margin............................ 340 1,913 6,183
------- -------- --------
Operating expenses:
Research and development................... 2,168 7,178 13,928
Sales and marketing........................ 1,126 2,974 5,765
General and administrative................. 902 1,774 1,649
Amortization of deferred compensation...... -- -- 547
------- -------- --------
Total operating expenses................ 4,196 11,926 21,889
------- -------- --------
Loss from operations......................... (3,856) (10,013) (15,706)
------- -------- --------
Other income (expense), net:
Sale of electronic testing equipment
rights, net............................. 1,508 -- --
Interest income............................ 264 524 489
Interest and other expense................. (5) (151) (715)
------- -------- --------
Total other income (expense), net....... 1,767 373 (226)
------- -------- --------
Net loss..................................... $(2,089) $ (9,640) $(15,932)
======= ======== ========
Basic net loss per share..................... $ (0.59) $ (2.41) $ (3.33)
======= ======== ========
Weighted average shares used in computing
basic net loss per share................... 3,551 3,995 4,789
======= ======== ========
Pro forma basic net loss per share
(unaudited)................................ $ (0.91)
========
Weighted average shares used in computing pro
forma basic net loss per share
(unaudited)................................ 17,594
========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-4
<PAGE> 87
GADZOOX NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL TOTAL
--------------------- ------------------ PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
----------- ------- --------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31,
1996..................... 5,691,144 $28 4,152,000 $21 $ 3,243 $ -- $ (1,433) $ 1,859
Issuance of common stock
for cash............... -- -- 1,236,650 6 87 -- -- 93
Repurchase of common
stock for cash......... -- -- (400,000) (2) (8) -- -- (10)
Issuance of preferred
stock for cash, net.... 4,444,444 22 -- -- 7,945 -- -- 7,967
Net loss................. -- -- -- -- -- -- (2,089) (2,089)
---------- --- --------- --- ------- ------- -------- --------
BALANCE AT MARCH 31,
1997..................... 10,135,588 50 4,988,650 25 11,267 -- (3,522) 7,820
Issuance of common stock
for cash............... -- -- 146,000 1 51 -- -- 52
Repurchase of common
stock for cash......... -- -- (56,322) -- (1) -- -- (1)
Issuance of preferred
stock for cash, net.... 2,092,234 10 -- -- 9,928 -- -- 9,938
Net loss................. -- -- -- -- -- -- (9,640) (9,640)
---------- --- --------- --- ------- ------- -------- --------
BALANCE AT MARCH 31,
1998..................... 12,227,822 60 5,078,328 26 21,245 -- (13,162) 8,169
Issuance of common stock
for cash............... -- -- 511,401 2 128 -- -- 130
Deferred compensation.... -- -- -- -- 2,972 (2,972) -- --
Amortization of deferred
compensation........... -- -- -- -- -- 547 -- 547
Issuance of preferred
stock for cash, net.... 1,436,883 8 -- -- 10,881 -- -- 10,889
Issuance of preferred
stock upon partial
conversion of
convertible note....... 242,694 1 -- -- 1,855 -- -- 1,856
Net loss................. -- -- -- -- -- -- (15,932) (15,932)
---------- --- --------- --- ------- ------- -------- --------
BALANCE AT MARCH 31,
1999..................... 13,907,399 $69 5,589,729 $28 $37,081 $(2,425) $(29,094) $ 5,659
========== === ========= === ======= ======= ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-5
<PAGE> 88
GADZOOX NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(2,089) $ (9,640) $(15,932)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of electronic testing equipment
rights...................................... (1,508) -- --
Depreciation and amortization................. 149 730 1,739
Amortization of deferred compensation......... -- -- 547
Allowance for doubtful accounts............... 50 15 85
Accrued interest.............................. -- -- 460
Loss on disposal of fixed assets.............. -- -- 181
Changes in current assets and liabilities:
Accounts receivable......................... (361) (3,093) (2,642)
Inventories................................. (309) (3,036) (1,843)
Prepaid expenses and other assets........... (40) (239) (250)
Accounts payable and accrued liabilities.... 713 3,490 1,939
------- -------- --------
Net cash used in operating activities.... (3,395) (11,773) (15,716)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............. (807) (1,405) (1,598)
Purchases of available-for-sale securities....... (6,932) -- --
Proceeds from sale of electronic testing
equipment rights.............................. 1,508 -- --
Proceeds from sale of available-for-sale
securities.................................... 500 6,920 --
------- -------- --------
Net cash provided by (used in) investing
activities............................ (5,731) 5,515 (1,598)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible note................... -- -- 15,000
Proceeds from note payable....................... -- 1,082 --
Payments on note payable......................... -- (170) (345)
Payments on capital lease obligations............ (18) (166) (782)
Proceeds from issuance of common stock........... 93 52 130
Repurchase of common stock....................... (10) (1) --
Proceeds from issuance of convertible preferred
stock, net.................................... 7,967 9,938 10,889
------- -------- --------
Net cash provided by financing
activities............................ 8,032 10,735 24,892
------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (1,094) 4,477 7,578
Cash and cash equivalents at beginning of year..... 1,241 147 4,624
------- -------- --------
Cash and cash equivalents at end of year........... $ 147 $ 4,624 $ 12,202
======= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest........................... $ 4 $ 54 $ 240
======= ======== ========
Property and equipment acquired under capital
lease obligations............................. $ 61 $ 1,532 $ 1,750
======= ======== ========
Partial conversion of convertible note to
convertible preferred stock................... $ -- $ -- $ 1,856
======= ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-6
<PAGE> 89
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
1. BACKGROUND
Gadzoox Networks, Inc. ("Gadzoox" or the "Company"), formerly Gadzoox
Microsystems, Inc., was incorporated in the state of California on April 2, 1992
and was reincorporated in Delaware on January 6, 1998 (see Note 2). The Company
is a provider of products for storage area networks ("SANs"). The Company's SAN
products are designed to leverage the capabilities of fibre channel technology
to enable companies to better manage the growth in mission-critical data by
overcoming the limitations of traditional captive storage architecture and
creating a foundation for data centralization.
The Company is subject to a number of risks associated with companies in a
similar stage of development, including reliance on a limited number of key
customers, reliance on a limited number of products, the emergence and
volatility of the storage industry, reliance on a limited number of key
suppliers, dependency on key employees for technology, potential competition
from larger, more established companies, the ability to penetrate the market
with new products, and the ability to obtain adequate financing to support its
growth.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
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.
CASH AND CASH EQUIVALENTS
Gadzoox considers all highly liquid investments with an original maturity
of 90 days or less to be cash equivalents. Cash equivalents at March 31, 1998
and 1999 consist of cash deposited in money market accounts.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Gadzoox to concentrations of
credit risk consist principally of bank deposits and accounts receivable. The
Company places its cash and cash equivalents in checking and money market
accounts in high credit quality financial institutions. The Company's accounts
receivable are derived primarily from sales to original equipment manufacturer
customers and distribution channel partners, located primarily in the U.S., who
are generally large, well established companies. The Company performs ongoing
credit evaluations of its customers and maintains an allowance for potential
doubtful accounts.
F-7
<PAGE> 90
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
At March 31, 1998 and 1999, approximately 83% and 76%, respectively, of
accounts receivable were concentrated with four customers, as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Customer A............................... 59% 44%
Customer B*.............................. 11% 32%
Customer C............................... 13% --%
</TABLE>
- -------------------------
* Data for Customer B reflects the combined accounts receivable for two
customers who merged during fiscal 1999.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Provisions, when required, are made to reduce excess and obsolete
inventories to their estimated net realizable values.
The Company's supplier arrangement for the production of wafers is
concentrated with one key supplier (the "Supplier"). Although there are a number
of other suppliers that could provide similar services, a change in suppliers
could cause a delay in manufacturing and possible loss of sales, which could
adversely affect operating results.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciation and amortization
are provided using the straight-line method based upon the estimated useful
lives of the related assets. Useful lives range from three to five years, or
over the applicable lease term. The components of property and equipment at
March 31, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------ -------
<S> <C> <C>
Computer and laboratory equipment................... $2,407 $ 4,161
Software............................................ 787 1,678
Furniture and equipment............................. 551 809
Leasehold improvements.............................. 299 393
Construction in progress............................ -- 80
------ -------
4,044 7,121
Accumulated depreciation and amortization........... (919) (2,568)
------ -------
Property and equipment, net......................... $3,125 $ 4,553
====== =======
</TABLE>
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of approximately $1,593,000 and $3,370,000, as
of March 31, 1998 and 1999, respectively. Related accumulated amortization of
these leased assets was approximately $213,000 and $1,043,000 as of March 31,
1998 and 1999, respectively.
During fiscal 1999, Gadzoox moved to new headquarter facilities and is
taking steps to fully sublet its previous facilities. Management anticipates
that the sublease income will approximate the Company's lease expense related to
the previous facility. At the time of
F-8
<PAGE> 91
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
the move, the Company disposed of improvements made to the prior facility that
had an original cost of $271,000 and accumulated amortization of $90,000. The
Company received no proceeds for the disposal of these improvements.
The Company periodically evaluates the carrying amount of its long-lived
assets and applies the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed
of " ("SFAS No. 121"). SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used or disposed of by an entity be
reviewed for impairment wherever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
REVENUE RECOGNITION
Gadzoox records product revenue upon shipment, with the exception of sales
to several distribution channel partners where product returns cannot be
reasonably estimated. Where product returns cannot be reasonably estimated,
revenue is recognized upon sell-through to the end user by the distribution
channel partner. Allowances for estimated sales returns are provided at the time
of revenue recognition.
WARRANTY
Gadzoox warrants its products against defects in materials and workmanship
for one to three year periods. The estimated cost of warranty obligations is
recognized at the time of revenue recognition.
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), in October 1995. SFAS No. 123
permits the use of either a fair value based method or the method defined in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") to account for stock-based compensation arrangements.
Companies that elect to employ the valuation method provided in APB 25 are
required to disclose the pro forma net income (loss) that would have resulted
from the use of the fair value based method. Gadzoox has elected to continue to
determine the value of stock-based compensation arrangements under the
provisions of APB 25, and, accordingly, it has included the pro forma
disclosures required under SFAS No. 123 in Note 10.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise
Marketed", development costs incurred in the research and development of new
software products are expensed as incurred until technological feasibility in
the form of a working model has been established. To date, Gadzoox' software
development has been completed concurrent with the establishment of
technological feasibility and, accordingly, all software development costs have
been charged to research and development expense in the accompanying statements
of operations.
F-9
<PAGE> 92
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
STOCK SPLIT AND REINCORPORATION
In May 1997, the Company's Board of Directors approved a two-for-one stock
split of its convertible preferred and common stock. All convertible preferred
and common share amounts in the accompanying financial statements have been
adjusted retroactively to give effect to this split.
In May 1997, the Company's Board of Directors approved the reincorporation
of the Company in Delaware. Upon reincorporation, the Company issued new shares
with a par value of $0.005 per share to all convertible preferred and common
shareholders. All convertible preferred and common share amounts in the
accompanying financial statements have been adjusted retroactively to give
effect to this change.
BASIC NET LOSS PER SHARE AND PRO FORMA BASIC NET LOSS PER SHARE
Historical net loss per share has been calculated under Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Basic net loss per
share on a historical basis is computed using the weighted average number of
shares of common stock outstanding. No diluted loss per share information has
been presented in the accompanying statements of operations since potential
common shares from conversion of the convertible note, convertible preferred
stock, stock options, and warrants are antidilutive. The total number of shares
excluded from diluted loss per share relating to these securities was
12,882,458, 16,481,009 and 20,256,699 shares for fiscal 1997, 1998 and 1999,
respectively.
Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 98, convertible preferred stock and common stock issued or granted
for nominal consideration prior to the anticipated effective date of the initial
public offering must be included in the calculation of basic and diluted net
loss per common share as if they had been outstanding for all periods presented.
To date, Gadzoox has not had any issuances or grants for nominal consideration.
Pro forma basic net loss per share has been calculated assuming the
conversion of convertible preferred stock into an equivalent number of common
shares, as if the shares had converted on the dates of their issuance.
F-10
<PAGE> 93
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
The following table presents the calculation of basic and pro forma basic
net loss per share (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss................................. $(2,089) $(9,640) $(15,932)
======= ======= ========
Basic:
Weighted average shares of common stock
outstanding............................ 4,936 4,980 5,374
Less: Weighted average shares of common
stock subject to repurchase............ (1,385) (985) (585)
------- ------- --------
Weighted average shares used in computing
basic net loss per share............... 3,551 3,995 4,789
======= ======= ========
Basic net loss per share................. $ (0.59) $ (2.41) $ (3.33)
======= ======= ========
Pro forma:
Net loss................................. $(15,932)
========
Shares used above........................ 4,789
Pro forma adjustment to reflect weighted
average effect of assumed conversion of
convertible preferred stock
(unaudited)............................ 12,805
--------
Weighted average shares used in computing
pro forma basic net loss per share
(unaudited)............................ 17,594
========
Pro forma basic net loss per share
(unaudited)............................ $ (0.91)
========
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Comprehensive Income." ("SFAS No. 130"), which was adopted by Gadzoox in fiscal
1999. SFAS No. 130 requires companies to report a new, additional measure of
income on the statement of operations or to create a new financial statement
that has the new measure of income on it. "Comprehensive Income" is to include
amounts which have been previously excluded from net income and reflected
instead in stockholders' equity. Comprehensive loss for each of the three years
in the period ended March 31, 1999 approximated net loss.
In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131 "Disclosures About Segments of an Enterprise and Related Information" ("SFAS
No. 131"). Gadzoox adopted SFAS No. 131 in fiscal 1999. SFAS No. 131 establishes
standards for disclosures about operating segments, products and services,
geographic areas and significant customers. Gadzoox is organized and operates as
one operating segment: the design, development, manufacturing, marketing and
selling of SAN products. For fiscal 1997, 1998 and 1999, product net revenues
amounted to 95%, 99% and 98%, respectively,
F-11
<PAGE> 94
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
of total net revenues. Gadzoox sells its SAN products domestically and
internationally. See Note 3 regarding significant customers and export sales.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-1 "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP No. 98-1"). SOP
No. 98-1 requires entities to capitalize certain costs related to internal-use
software once certain criteria has been met. Gadzoox adopted SOP No. 98-1 in
fiscal 1999. The adoption did not have a material impact on Gadzoox's financial
position or results of operations.
In April 1998, the AICPA issued SOP No. 98-5 "Reporting on the Costs of
Start-Up Activities" ("SOP No. 98-5"). SOP No. 98-5 requires that all start-up
costs related to new operations must be expensed as incurred. In addition, all
start-up costs that were previously capitalized must be written off when SOP No.
98-5 is adopted. Gadzoox adopted SOP No. 98-5 in fiscal 1999. The adoption did
not have a material impact on Gadzoox's financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 will be effective for Gadzoox on July 1, 1999. SFAS No. 133
requires certain accounting and reporting standards for derivative financial
instruments and hedging activities. Because the Company does not currently hold
any derivative instruments and does not engage in hedging activities, management
does not believe that the adoption of SFAS No. 133 will have a material impact
on the Company's financial position or results of operations.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions," ("SOP
98-9"). SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending the deferral of the
application of certain provisions of SOP 97-2, amended by SOP 98-4, through
fiscal years beginning on or before March 15, 1999. All other provisions of SOP
98-9 are effective for transactions entered into in fiscal years beginning after
March 15, 1999. Management does not expect the adoption of SOP 98-9 to have a
significant effect on the Company's financial position or results of operations.
3. SIGNIFICANT CUSTOMERS AND EXPORT SALES
For the years ended March 31, 1997, 1998 and 1999, certain customers
individually accounted for more than 10% of net revenues as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Customer A................................ 18% 58% 42%
Customer B................................ -- -- 15%
Customer C................................ -- 11% 10%
Customer D................................ 16% -- --
</TABLE>
F-12
<PAGE> 95
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
Sales to Europe and Japan represented approximately 17% (Germany comprising
12%) and 3%, respectively, of net revenues for fiscal 1999. In years prior to
fiscal 1999, export sales were less than 10% of net revenues.
4. INVENTORIES
Inventories consist of the following as of March 31, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Raw materials.................................. $1,539 $2,565
Work-in-process................................ 1,730 210
Finished goods................................. 194 2,531
------ ------
$3,463 $5,306
====== ======
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
During fiscal 1998 and 1999, Gadzoox acquired certain equipment under
capital leases. Additionally, the Company leases three facilities under
non-cancelable operating leases which expire November 1999, January 2002 and
November 2005. Future minimum lease payments under all capital and operating
lease agreements as of March 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
2000........................................ $1,206 $1,358
2001........................................ 1,042 1,477
2002........................................ 332 1,531
2003........................................ 3 1,486
2004........................................ -- 1,256
Thereafter.................................. -- 2,186
------ ------
2,583 $9,294
======
Less amounts representing interest (weighted
average interest rate of 7.25%)........... (196)
------
Present value of minimum lease payments..... 2,387
Less: current portion....................... 1,080
------
Non-current portion......................... $1,307
======
</TABLE>
For the years ended March 31, 1997, 1998 and 1999, rent expense under non-
cancelable operating lease agreements was approximately $144,000, $382,000 and
$781,000, respectively.
LEGAL PROCEEDINGS
From time to time, the Company may become involved in various lawsuits and
legal proceedings which arise in the ordinary course of business. For example,
in May 1999, a
F-13
<PAGE> 96
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
former employee filed a complaint against the Company. Management believes this
claim is without merit and that resolution of this claim will not have a
material adverse effect on the Company's financial position or statements of
operations. However, litigation is subject to inherent uncertainties, and an
adverse result in this or other matters may arise from time to time that may
harm the Company's business.
6. CONVERTIBLE NOTE
In September 1998, Gadzoox entered into a $15,000,000 convertible note
purchase agreement (the "Agreement") with Seagate Technology, Inc. ("Seagate").
Under this Agreement, Seagate purchased a convertible subordinated promissory
note in the aggregate principal amount of $15,000,000 (the "Convertible Note"),
bearing simple interest on the unpaid principal balance at a rate equal to 5.75%
per annum with principal and interest maturing in September 2001. As further
outlined and defined in the Agreement, the Company may convert, at its sole
option, any portion or all of the outstanding balance of principal and interest
on the Convertible Note into shares of Series G preferred stock at a price of
$7.65 per share. Accrued interest is converted prior to any principal owing
under the Convertible Note. The Agreement also provides that without the
Company's consent, conversion of the Convertible Note may not result in Seagate
holding more than 19.9% of the Company's outstanding shares. In the event of a
default, as defined in the Agreement, Seagate may declare all outstanding
interest and principal immediately due and payable in cash. Gadzoox may, upon 30
days written notice to Seagate, prepay the Convertible Note in whole or in part.
In October 1998, the Company converted $59,000 of interest and $1,797,000
of principal into 242,694 shares of Series G preferred stock. At March 31, 1999,
there was a total of $13,554,000 of unpaid principal and interest outstanding
under the Convertible Note which, if converted, would have converted into
1,771,759 shares of Series G preferred stock.
7. NOTE PAYABLE
In August 1997, the Company entered into a loan agreement (the "Note")
secured by equipment. The face amount of the Note was $1,082,000. The repayment
period is 36 months with 35 monthly payments of principal and interest of
approximately $33,000 and a final installment of approximately $162,000 due on
September 1, 2000. The Note bears interest at approximately 9.0% per annum. As
of March 31, 1999, principal maturities under the Note are $371,000 and $196,000
in fiscal 2000 and 2001, respectively.
8. REVOLVING CREDIT AGREEMENT
In January 1998, Gadzoox entered into a revolving credit agreement (the
"Line") with a bank, which provided for maximum borrowings of an amount not to
exceed the lower of 70% of eligible accounts receivable or $5,000,000. On March
15, 1999, the Company renewed the Line, which now expires on February 1, 2000.
Borrowings under the Line are secured by all of the Company's assets and bear
interest at the bank's prime rate plus 0.5% per annum (approximately 8.25% at
March 31, 1999). The agreement requires that the Company maintain certain
financial ratios and levels of tangible net worth and
F-14
<PAGE> 97
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
also restricts the Company's ability to pay cash dividends. During fiscal 1998
and 1999, there were no borrowings outstanding under the line.
9. CONVERTIBLE PREFERRED STOCK
Convertible preferred stock, at par, consists of the following as of March
31 1998 and 1999 (in thousands, except share information):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Series A, 856,600 shares authorized, issued and outstanding
in 1999 and 1998, liquidation preference of $217.......... $ 4 $ 4
Series B, 660,000 shares authorized, issued and outstanding
in 1999 and 1998, liquidation preference of $250.......... 3 3
Series C, 1,454,544 shares authorized, issued and
outstanding in 1999 and 1998, liquidation preference of
$800...................................................... 7 7
Series D, 2,720,000 shares authorized, issued and
outstanding in 1999 and 1998, liquidation preference of
$2,103.................................................... 14 14
Series E, 4,444,444 shares authorized, issued and
outstanding in 1999 and 1998, liquidation preference of
$8,000.................................................... 22 22
Series F, 2,120,476 shares authorized in 1999 and 1998,
2,092,234 issued and outstanding in 1999 and 1998,
liquidation preference of $10,000......................... 10 10
Series G, 3,243,936 shares authorized in 1999 and none in
1998, 895,263 issued and outstanding in 1999 and none in
1998, liquidation preference of $6,849.................... -- 5
Series H, 1,000,000 shares authorized in 1999 and none in
1998, 784,314 issued and outstanding in 1999 and none in
1998, liquidation preference of $6,000.................... -- 4
--- ---
$60 $69
=== ===
</TABLE>
Series A, B, C, D, E, F, G and H convertible preferred stock (collectively,
the "preferred stock") are convertible into common stock at the option of the
shareholder on a one-for-one basis, subject to antidilution adjustments.
Conversion is mandatory concurrent with a firm underwritten public offering of
not less than $10,000,000 and with a per share price of not less than twice the
per share issuance price of Series A, B, C, D, and E and of not less than one
times the per share issuance price of Series F, G and H subject to adjustments.
The holders of the preferred stock have voting rights equal to the voting
rights of the common shareholders on an as-if converted basis.
Series A, B, C, D, E, F, G and H preferred shareholders are entitled to
receive noncumulative dividends, when and as declared by the Board of Directors,
at an annual amount of $0.02, $0.03, $0.045, $0.06, $0.145, $0.38, $0.612 and
$0.612 per share, respectively. No cash dividends have been declared to date by
the Board of Directors.
In the event of a liquidation, Series A, B, C, D, E, F, G and H preferred
shareholders are entitled to receive, prior to, and in preference to any
distribution to the holders of common stock, $0.25275, $0.37875, $0.55, $0.74,
$1.80, $4.78, $7.65 and $7.65 per share, respectively, plus all declared and
unpaid dividends. If undistributed assets remain after
F-15
<PAGE> 98
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
satisfying the preferred shareholders, such assets shall be distributed ratably
among the holders of preferred stock and common stock, on an as-if converted
basis, provided that no holder of preferred stock shall receive a distribution
in excess of twice the original purchase price of each share of preferred stock.
In August 1997, in connection with lease financing and a note payable,
Gadzoox issued warrants to purchase 15,690 and 12,552 shares, respectively, of
Series F preferred stock at an exercise price of $4.78 per share. The warrants
are immediately exercisable for the longer of ten years from the date of
issuance or five years from the effective date of the Company's initial public
offering. The fair value of the warrants at the date of issuance was not
material.
In July 1998, in connection with lease financing, Gadzoox issued warrants
to purchase 19,607 shares of Series G preferred stock at an exercise price of
$7.65 per share. The warrants are immediately exercisable for the longer of five
years or two years from the effective date of the Company's initial public
offering. The fair value of the warrants at the date of issuance was not
material.
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
In May 1999, the Company's Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission to register
shares of its common stock in connection with a proposed initial public offering
(the "IPO"). If the IPO is consummated under the terms presently anticipated,
all of the currently outstanding shares of convertible preferred stock will be
converted into 13,907,399 shares of common stock upon the closing of the IPO.
The effect of the convertible preferred stock conversion has been reflected as
unaudited pro forma stockholders' equity in the accompanying balance sheet as of
March 31, 1999. The conversion of the Convertible Note into 1,771,759 shares of
Series G preferred stock (see Note 6) does not automatically occur in connection
with the IPO and, accordingly, such conversion is not reflected in the unaudited
pro forma stockholders' equity.
10. COMMON STOCK
At March 31, 1999, shares of common stock were reserved for future
issuances as follows:
<TABLE>
<S> <C>
1993 Stock Plan:
Outstanding options and rights................... 4,529,692
Reserved for future grants....................... 741,478
Conversion of preferred stock...................... 13,907,399
Conversion of Convertible Note..................... 1,771,759
Warrants to purchase Series F preferred stock...... 28,242
Warrants to purchase Series G preferred stock...... 19,607
----------
20,998,177
==========
</TABLE>
F-16
<PAGE> 99
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
STOCK OPTION PLAN
Under the 1993 Stock Plan (the "Plan"), Gadzoox may grant incentive stock
options to employees, nonstatutory stock options to employees, consultants and
nonemployee directors of the Company and stock purchase rights up to 7,680,000
shares of common stock. During the year ended March 31, 1999, the Board of
Directors increased the number of stock options available for future grant by
1,100,000. All incentive and nonstatutory stock option grants must be at prices
of at least 100% and 85%, respectively, of the fair value of the stock on the
date of grant, as determined by the Board of Directors.
The options are exercisable as determined by the Board of Directors.
Generally, stock options vest ratably over a four-year period except for options
granted to new employees which vest 25% on the first anniversary of the grant
date and vest ratably over the remaining three years. The options expire upon
the earlier of ten years from the date of grant or thirty days following
termination of employment. Stock purchase rights granted under the Plan must be
accepted within ninety days from the date of grant. Shares purchased pursuant to
the grant of a stock purchase right shall be subject to repurchase, and the
repurchase option shall lapse at a minimum rate of 20% per year.
A summary of transactions under the Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING
OPTIONS AND RIGHTS
SHARES -----------------------------
AVAILABLE WEIGHTED-AVERAGE
FOR GRANT NUMBER EXERCISE PRICE
---------- ---------- ----------------
<S> <C> <C> <C>
Balance at March 31, 1996.............. 2,095,610 1,295,870 $0.074
Authorized........................... 1,551,120 -- --
Granted.............................. (2,691,650) 2,691,650 0.130
Cancelled............................ 4,000 (4,000) 0.025
Exercised............................ -- (1,236,650) 0.075
---------- ----------
Balance at March 31, 1997.............. 959,080 2,746,870 0.128
Authorized........................... 1,028,800 -- --
Granted.............................. (1,664,450) 1,664,450 0.877
Cancelled............................ 77,875 (77,875) 0.098
Exercised............................ -- (108,500) 0.091
Restricted shares repurchased........ 56,322 -- --
---------- ----------
Balance at March 31, 1998.............. 457,627 4,224,945 0.423
Authorized........................... 1,100,000 -- --
Granted.............................. (1,119,400) 1,119,400 2.759
Cancelled............................ 303,251 (303,252) 1.270
Exercised............................ -- (511,401) 0.235
---------- ----------
Balance at March 31, 1999.............. 741,478 4,529,692 0.969
========== ==========
</TABLE>
F-17
<PAGE> 100
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
The following table summarizes the stock options outstanding and
exercisable as of March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICE NUMBER YEARS PRICE NUMBER PRICE
- ---------------- ------------ ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$0.025.......... 11,870 4.4 $0.025 11,870 $0.025
0.075 - $0.083... 1,251,500 6.9 0.076 878,667 0.075
0.18 - $0.27... 1,322,126 7.9 0.23 641,168 0.23
0.72........... 436,967 8.4 0.72 132,663 0.72
1.20........... 207,350 8.7 1.20 69,233 1.20
2.00........... 548,829 9.1 2.00 90,750 2.00
3.10........... 751,050 9.6 3.10 25,867 3.10
--------- ---------
4,529,692 0.969 1,850,218
========= =========
</TABLE>
At March 31, 1999, 391,667 shares previously issued under stock purchase
rights were subject to repurchase at a weighted-average price of $0.066.
VALUATION OF STOCK OPTIONS
Gadzoox has elected to follow APB 25, under which no compensation expense
is recognized when stock options are granted at a price equal to the fair market
value of the underlying shares on the date of grant. Had compensation expense
for the Plan been determined consistent with SFAS No. 123, the Company's pro
forma net loss (reflecting adjustment for compensation expense consistent with
SFAS No. 123) would have been $2,099,000, $9,741,000 and $16,129,000 in fiscal
1997, 1998 and 1999, respectively, and the Company's pro forma net loss per
share (reflecting adjustment for compensation expense consistent with SFAS No.
123) would have been $(0.59), $(2.44), and $(3.37) in fiscal 1997, 1998 and
1999, respectively.
The weighted-average fair value of options granted during fiscal 1997, 1998
and 1999 was $0.015, $0.22 and $0.49, respectively. To determine compensation
expense under SFAS No. 123, Gadzoox used the following assumptions to estimate
the fair value of each option granted on the date of grant using the
Black-Scholes option valuation model: risk-free interest rates ranging from 4.56
to 6.73 percent, expected dividend yields of zero percent, an average expected
life of 4 years, expected volatility of 0.01%.
DEFERRED COMPENSATION
In connection with the grant of certain stock options to employees during
fiscal 1999, Gadzoox recorded deferred compensation within stockholders' equity
of approximately $3.0 million, representing the difference between the estimated
fair value of the common stock for accounting purposes and the option exercise
price of these options at the date of grant. The Company recorded amortization
of deferred compensation of $547,000 during fiscal 1999. At March 31, 1999, the
remaining deferred compensation of approximately $2.4 million will be amortized
as follows: $1.3 million during fiscal 2000, $670,000 during
F-18
<PAGE> 101
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
fiscal 2001, $350,000 during fiscal 2002 and $120,000 during fiscal 2003,
respectively. The amortization expense relates to options awarded to employees
in all operating expense categories. The amortization of deferred compensation
has not been separately allocated to these categories. The amount of deferred
compensation expense to be recorded in future periods could decrease if options
for which accrued but unvested compensation has been recorded are forfeited.
11. SALE OF ELECTRONIC TEST EQUIPMENT RIGHTS
In November 1997, Gadzoox sold its rights to the high-speed parametric test
equipment to a third party for $1,550,000 and recorded $42,000 in expenses. As
part of the sale, a patent with no historical basis held by Gadzoox relating to
the testing technology was assigned to the third party.
12. RELATED PARTY TRANSACTIONS
The holder of the Series H convertible preferred stock (the "Series H
Holder") is a customer of the Company. During fiscal 1999, the Company entered
into a commercial relationship with the Series H Holder providing that the
Series H Holder would reimburse the Company for certain research efforts
undertaken by the Company. During fiscal 1999, the Company received
approximately $489,000 of such reimbursement which has been recorded within
Deferred Revenue and Other on the accompanying balance sheet as of March 31,
1999. In April 1999, the Series H Holder advised the Company of its intent to
exit the SAN market and divest its shares of Series H. The Company has a right
of first refusal for the purchase of the Series H. Management is currently
evaluating whether to exercise its repurchase rights and is negotiating with the
Series H Holder to terminate their commercial relationship. The deferred revenue
will not be recognized until the Company and the Series H Holder reach agreement
on the terms of terminating the commercial relationship. The Series H Holder
accounted for approximately 2% of the Company's net revenues for fiscal 1999.
Management does not anticipate that the termination of the commercial
relationship will have a material effect on the Company's financial position or
results of operations.
13. INCOME TAXES
Due to the Company's loss position, there was no provision for income taxes
for the years ended March 31, 1997, 1998 and 1999.
F-19
<PAGE> 102
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
The components of the net deferred tax asset at March 31, 1998 and 1999
were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Net operating loss carryforwards.......... $ 4,258 $ 9,555
Cumulative book to tax differences........ 964 1,751
Tax credit carryforwards.................. 649 1,699
------- --------
5,871 13,005
Valuation allowance....................... (5,871) (13,005)
------- --------
$ -- $ --
======= ========
</TABLE>
A valuation allowance has been recorded for the entire deferred tax asset
as a result of uncertainties regarding the realization of the asset balance due
to the variability of operating results. As of March 31, 1999, Gadzoox has net
cumulative operating loss carryforwards for Federal and state income tax
reporting purposes of approximately $26,759,000 and $3,324,000, respectively.
The Company also has Federal and state research and development tax credit
carryforwards of approximately $877,000 and $822,000, respectively The net
cumulative operating loss and credit carryforwards will expire at various dates
beginning in the years 1999 through 2014, if not utilized. Utilization of net
operating losses and credits may be subject to a substantial annual limitation
due to the ownership change limitations provided by the Internal Revenue Code of
1986, as amended, and similar state provisions. The annual limitation may result
in the expiration of net operating losses before utilization.
14. SUBSEQUENT EVENTS (UNAUDITED)
1999 EMPLOYEE STOCK PURCHASE PLAN
In May 1999, the Board of Directors approved the adoption of the Company's
1999 Employee Stock Purchase Plan (the "Stock Purchase Plan"), subject to
stockholder approval. A total of 150,000 shares of common stock have been
reserved for issuance under the Stock Purchase Plan. The number of shares
reserved for issuance under the Stock Purchase Plan will be subject to an annual
increase to be added on the first day of the Company's fiscal year, beginning in
2000, equal to the lesser of (i) 250,000 shares, (ii) 0.5% of the outstanding
shares on such date or (iii) a lesser amount determined by the Board of
Directors. The Stock Purchase Plan allows eligible employees to purchase shares
of common stock through payroll deductions at 85% of the fair market value of
the common stock.
1993 STOCK OPTION PLAN
In May 1999, the Board of Directors approved and adopted, subject to
stockholder approval and effective upon the closing of the proposed initial
public offering, an Amended and Restated 1993 Stock Option Plan (the "Amended
Plan"). Under the Amended Plan, the number of shares authorized for issuance is
increased to 8,180,000. The number of shares reserved for issuance under the
Amended Plan will be subject to an annual increase to be added on the first day
of the Company's fiscal year, beginning in 2000, equal to the
F-20
<PAGE> 103
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
lesser of (i) 1,500,000 shares, (ii) 1% of the outstanding shares on such date,
or (iii) a lesser amount determined by the Board of Directors.
1999 DIRECTOR STOCK OPTION PLAN
In May 1999, the Board of Directors approved the adoption of the 1999
Director Stock Option Plan (the "Director Plan") which provides for the
automatic grant of 5,000 shares of common stock to each non-employee director on
the later of the date of adoption of the Director Plan or the date on which such
person first becomes a director (the "Initial Grant"). After the Initial Grant,
the non-employee director will receive an automatic annual grant of 2,500 shares
of common stock. All shares granted under the Director Plan are 100% vested at
the grant date and expire upon the earlier of three years or the resignation of
the director from the Board of Directors. A total of 50,000 shares of common
stock have been reserved for issuance under the Director Plan. The number of
shares reserved for issuance under the Director Plan will be subject to an
annual increase, beginning with the fiscal year beginning in 2000, sufficient to
bring the number of shares available for future issuance to 50,000 shares.
F-21
<PAGE> 104
LOGO
<PAGE> 105
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Gadzoox in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 14,067
NASD filing fee............................................. 5,560
Nasdaq National Market listing fee.......................... 5,000
Printing and engraving costs................................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Blue Sky fees and expenses.................................. 25,000
Transfer Agent and Registrar fees........................... 5,000
Miscellaneous expenses......................................
--------
Total............................................. $875,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article Eighth of the Registrant's restated certificate of incorporation
provides for the indemnification of directors to the fullest extent permissible
under Delaware law.
Article VI of the Registrant's bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the Registrant if such
person acted in good faith and in a manner reasonably believed to be in and not
opposed to the best interest of the Registrant, and, with respect to any
criminal action or proceeding, the indemnified party had no reason to believe
his or her conduct was unlawful.
In addition to indemnification provided for in the Registrant's certificate
of incorporation and bylaws, the Registrant has entered into indemnification
agreements with its directors, executive officers and controller. The Registrant
intends to enter into indemnification agreements with any new directors and
executive officers in the future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant and its predecessor, Gadzoox
Networks, Inc., a California corporation, have issued unregistered securities to
a limited number of persons as described below. The share information and
conversion rates presented below have been adjusted to give effect to the
two-for-one stock split of the Registrant's common stock approved by the board
of directors of the Registrant in May 1997.
1. From inception through April 15, 1999 (the latest practical date),
we granted stock options to purchase an aggregate of 7,379,970 shares of
our common stock at
II-1
<PAGE> 106
exercise prices ranging from $0.025 to $3.10 per share to our employees,
consultants, and directors pursuant to our 1993 Stock Plan.
2. From inception through April 15, 1999 (the latest practical date),
we issued and sold an aggregate of 2,506,088 shares of our common stock to
employees, consultants and directors for aggregate consideration of
$257,862 pursuant to the exercise of options granted under our 1993 Stock
Plan.
3. On September 5, 1996, we sold 4,444,444 shares of Series E
Preferred Stock for $1.80 per share to a group of private investors for an
aggregate purchase price of $7,999,999.
4. On May 21, 1997, we sold 2,092,234 shares of Series F Preferred
Stock for $4.78 per share to Seagate Technology, Inc., a Delaware
corporation, for an aggregate purchase price of $10,000,879.
5. On July 30, 1997, in connection with an equipment lease financing
agreement and a loan agreement, we issued two warrants to Comdisco, Inc., a
Delaware corporation. The first warrant entitled Comdisco to purchase
15,690 shares of our Series F Preferred Stock at an exercise price of $4.78
per share. The second warrant entitled Comdisco to purchase 12,552 shares
of our Series F Preferred Stock at an exercise price of $4.78 per share.
6. On July 30, 1997, in connection with certain consulting agreements,
we issued a total of 30,000 shares of our common stock to three individuals
at $1.20 per share.
7. On September 15, 1997, in connection with a consulting agreement,
we issued 3,750 shares of our common stock to an individual at $0.72 per
share.
8. On December 17, 1997, in connection with a consulting agreement, we
issued 3,750 shares of our common stock to an individual at $1.20 per
share.
9. On June 16, 1998, we sold 652,569 shares of Series G Preferred
Stock for $7.65 per share to Seagate Technology, Inc. for an aggregate
purchase price of $4,992,153.
10. On July 6, 1998, in connection with an equipment lease financing
agreement, we issued a warrant to Comdisco, Inc., to purchase 19,607 shares
of our Series G Preferred Stock at an exercise price of $7.65 per share.
11. On September 18, 1998, we entered into a Note Purchase Agreement
with Seagate Technology, Inc. and issued a convertible note in the amount
of $15,000,000, convertible into shares of our Series G Preferred Stock.
Concurrent with the closing of the Series H Preferred Stock financing on
October 12, 1998, we issued and sold to Seagate Technology, Inc. 242,694
shares of Series G Preferred Stock for $7.65 per share upon conversion of
$1,799,897 aggregate principal amount plus accrued, but unpaid, interest on
the convertible note. The original promissory note for $15,000,000 was
cancelled. A new convertible note containing the same terms was issued in
the amount of $13,200,103, representing the remaining principal amount
outstanding less the principal amount converted into shares of our Series G
Preferred Stock.
12. On October 12, 1998, we sold 784,314 shares of Series H Preferred
Stock for $7.65 per share to 3Com Corporation, a Delaware corporation, for
an aggregate purchase price of $6,000,002.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering. The Registrant believes that
each of the above-
II-2
<PAGE> 107
listed transactions was exempt from any registration requirements by virtue of
Section 4(2) or Regulation D of the Securities Act, or Rule 701 of the
Securities Act for issuances of securities pursuant to compensatory benefit
plans and contracts relating to compensation.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation.**
3.2 Amended and Restated Bylaws.**
4.1 Specimen Common Stock Certificate.*
4.2 First Amended and Restated Registration and Information
Rights Agreement, dated as of October 12, 1998.**
4.3 Warrant to purchase shares of Series F Preferred Stock of
the Registrant issued to Comdisco, Inc.**
4.4 Warrant to purchase shares of Series G Preferred Stock of
the Registrant issued to Comdisco, Inc.**
4.5 First Amended and Restated Series F, G and H Preferred
Stockholders' Agreement, dated as of October 12, 1998.**
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.*
10.1 Form of Indemnification Agreement between the Registrant and
each of its directors and officers.**
10.2 Amended and Restated 1993 Stock Plan and form of agreements
thereunder.**
10.3 1999 Employee Stock Purchase Plan and form of agreements
thereunder.**
10.4 1999 Director Option Plan and form of agreement
thereunder.**
10.5 Agreement for electronic manufacturing services between the
Registrant and Sanmina Corporation dated December 29,
1998.+**
10.6 Convertible Subordinated Promissory Note, dated October 12,
1998, made by the Registrant and payable to Seagate
Technology, Inc.**
10.7 Change of Control Agreement between Registrant and K.
William Sickler, as amended.**
10.8 Change of Control Agreement between Registrant and Kent
Bridges.**
10.9 Restricted Stock Purchase Agreement between Registrant and
K. William Sickler.**
10.10 Compaq Computer Corporation Purchase Agreement -- JIT
Program, entered into as of June 13, 1997, by Compaq
Computer Corporation and Registrant.+
16.1 Letter of Ernst & Young LLP.**
23.1 Consent of Arthur Andersen LLP, Independent Accountants.
23.2 Consent of Counsel (see Exhibit 5.1).*
24.1 Power of Attorney.**
27.1 Financial Data Schedules.**
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment to be requested as to certain portions of this
exhibit.
(b) Financial Statement Schedules
<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifying Accounts............ S-2
</TABLE>
II-3
<PAGE> 108
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this registration statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, 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 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, 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> 109
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993, as amended, the
registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Jose, State of California, on the 11th day of June, 1999.
GADZOOX NETWORKS, INC.
By: *
-----------------------------------
Bill Sickler, President,
Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
* President, Chief June 11, 1999
- --------------------------------------------------- Executive Officer and
Bill Sickler Director (Principal
Executive Officer)
/s/ CHRISTINE E. MUNSON Chief Financial Officer, June 11, 1999
- --------------------------------------------------- Vice President of
Christine E. Munson Administration
(Principal Financial
Officer)
* Chief Technology Officer June 11, 1999
- --------------------------------------------------- and Director
Dr. Alistair Black
* Director June 11, 1999
- ---------------------------------------------------
Dr. Milton Chang
* Director June 11, 1999
- ---------------------------------------------------
Dr. Denny R. S. Ko
* Director June 11, 1999
- ---------------------------------------------------
Robert Kuhling
* Director June 11, 1999
- ---------------------------------------------------
Stephen J. Luzco
* Director June 11, 1999
- ---------------------------------------------------
Peter Morris
*By: /s/ CHRISTINE E. MUNSON
- ---------------------------------------------------
Christine E. Munson
Attorney-in-fact
</TABLE>
II-5
<PAGE> 110
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation.**
3.2 Amended and Restated Bylaws.**
4.1 Specimen Common Stock Certificate.*
4.2 First Amended and Restated Registration and Information
Rights Agreement, dated as of October 12, 1998.**
4.3 Warrant to purchase shares of Series F Preferred Stock of
the Registrant issued to Comdisco, Inc.**
4.4 Warrant to purchase shares of Series G Preferred Stock of
the Registrant issued to Comdisco, Inc.**
4.5 First Amended and Restated Series F, G and H Preferred
Stockholders' Agreement, dated as of October 12, 1998.**
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.*
10.1 Form of Indemnification Agreement between the Registrant and
each of its directors and officers.**
10.2 Amended and Restated 1993 Stock Plan and form of agreements
thereunder.**
10.3 1999 Employee Stock Purchase Plan and form of agreements
thereunder.**
10.4 1999 Director Option Plan and form of agreement
thereunder.**
10.5 Agreement for electronic manufacturing services between the
Registrant and Sanmina Corporation dated December 29,
1998.+**
10.6 Convertible Subordinated Promissory Note, dated October 12,
1998, made by the Registrant and payable to Seagate
Technology, Inc.**
10.7 Change of Control Agreement between Registrant and K.
William Sickler, as amended.**
10.8 Change of Control Agreement between Registrant and Kent
Bridges.**
10.9 Restricted Stock Purchase Agreement between Registrant and
K. William Sickler.**
10.10 Compaq Computer Corporation Purchase Agreement -- JIT
Program, entered into as of June 13, 1997, by Compaq
Computer Corporation and Registrant.+
16.1 Letter of Ernst & Young LLP.**
23.1 Consent of Arthur Andersen LLP, Independent Accountants.
23.2 Consent of Counsel (see Exhibit 5.1).*
24.1 Power of Attorney.**
27.1 Financial Data Schedules.**
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment to be requested as to certain portions of this
exhibit.
<PAGE> 111
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders
of Gadzoox Networks, Inc.
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Gadzoox Networks, Inc. included in this Registration
Statement and have issued our report thereon dated April 30, 1999. Our audits
were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying schedule is the responsibility of
the Company's management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
San Jose, California
April 30, 1999
S-1
<PAGE> 112
GADZOOX NETWORKS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended March 31, 1997:
Allowance for returns and doubtful
accounts........................ $ -- $50,000 $ -- $ 50,000
Year ended March 31, 1998:
Allowance for returns and doubtful
accounts........................ $50,000 $15,000 $ -- $ 65,000
Year ended March 31, 1999:
Allowance for returns and doubtful
accounts........................ $65,000 $88,535 $3,535 $150,000
</TABLE>
S-2
<PAGE> 1
EXHIBIT 10.10
CONFIDENTIAL
Contract No. 9710739
COMPAQ COMPUTER CORPORATION
PURCHASE AGREEMENT
JIT PROGRAM
This Purchase Agreement (this "Agreement") is made and entered into as
of the thirteen day of June, 1997 by Compaq Computer Corporation, a Delaware
corporation ("Buyer"), and the party designated as the Seller on Exhibit A
hereto ("Seller").
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Buyer and Seller hereby agree as follows:
1. DEFINITIONS
1.1. In addition to terms defined elsewhere in this
Agreement, capitalized terms used in this Agreement shall have the
meanings given thereto in Annex 1 hereto.
2. PRODUCT PURCHASES
2.1. The terms and conditions contained in this Agreement
shall govern the purchase and sale of product (the "Product") listed in
a product schedule (the "Product and Pricing Schedule") entered into
from time to time by Buyer and Seller, which schedule shall be
substantially in the form of Exhibit B.
2.2. Notwithstanding anything to the contrary in this
Agreement, this Agreement is not a requirements contract and does not
obligate Buyer to purchase any minimum quantity of Product but only
establishes the terms and conditions for such purchases if, as and when
Buyer submits orders in accordance with this Agreement.
2.3. Buyer may purchase Products by issuing from time to time
a purchase order or a blanket purchase order to Seller (the purchase
order and the blanket order may be referred to herein as the "Order" or
the "Blanket Order"). The Order or Blanket Order shall set forth the
quantity of Product, price of Product, and part number, shall specify a
term [*] during which such Order or Blanket
Order shall be. Seller shall accept through the EDI verification
procedures set forth in Section 2.4, any Order or Blanket Order that
materially conforms with the terms of this Agreement. No additional or
different provisions proposed by Seller in any acceptance, confirmation
or acknowledgment shall apply unless expressly agreed to in writing by
Buyer. Buyer hereby gives notice of its objection to any additional or
different terms. Subject to any change orders that may be entered into
in accordance with this Agreement, the Order or Blanket Order represents
the obligation of Buyer to buy and Seller to sell the aggregate quantity
of Products specified in the Order or Blanket Order in accordance with
and subject to the terms of this Agreement and at the price or prices
specified in such Order or Blanket Order (which prices will be
established in accordance with the other provisions of this Agreement
including those set forth in Section 4) during the term specified in the
Order or Blanket Order. However, the specific delivery date for any lot
of Product delivered pursuant to a particular Order or Blanket Order and
the quantity of Product to be delivered on such date shall be
established in accordance with Section 5.
2.4. All Orders or Blanket Orders shall be issued, submitted
or communicated, as applicable by electronic data exchange ("EDI"). All
EDI orders, verifications, forecasts, responses, acknowledgments and
other communications shall (l) reference and be subject to the terms and
conditions of this Agreement and (ii) be in such format as Buyer's
policies, specifications and procedures regarding electronic data
interchange may require from time to time.
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
1
<PAGE> 2
CONFIDENTIAL
2.5. EDI capability at Seller will be phased in over a 90 day
period commencing from the execution of this Agreement. Until the time
that EDI is fully implemented, Buyer shall issue Written Orders to
Seller. Seller shall use commercially reasonable efforts to send written
confirmation of such acceptance within two (2) days after receipt of a
Written Order from Buyer.
2.6. Seller agrees that all of Buyer's Affiliates, wherever
located, shall be entitled to make purchases under this Agreement.
2.7. Buyer agrees that all of Seller's Affiliates, wherever
located, shall be allowed to perform any or all obligations under this
Agreement upon qualification by Buyer.
3. TERM OF AGREEMENT
3.1. The term of this Agreement shall be [*], commencing on
the date of this Agreement (the "Effective Date"). This Agreement will
be automatically renewed at the conclusion of the initial [*] unless one
of the parties notifies the other party not less than 30 days prior to
the end of such [*] period that it does not intend to renew this
Agreement. Such automatic renewal provision shall apply at the end of
each successive [*] period unless either party indicates, in accordance
with the [*] notice provision described in the preceding sentence, that
renewal is not intended. This Agreement may terminate prior to the
aforementioned stated term under the circumstances set forth in Section
13. Notwithstanding the foregoing, this Agreement shall remain in full
force and effect and shall be applicable to any Order issued by Buyer to
Seller during the term of this Agreement until all obligations under
such Order have been fulfilled.
4. PRICING
4.1. The prices for the Products shall be established from
time to time by the parties executing and delivering a pricing schedule
in the form set forth as Exhibit B (the "Product and Pricing Schedule").
The Product prices (the "Prices") set forth in any Pricing Schedule
shall be fixed for the period set forth therein.
4.2. The Prices shall include [*] of the Product to the
Buyer including, without limitation, [*]
4.3. To the extent permitted by applicable law, Seller shall
[*] Seller's execution and delivery of any Pricing Schedule shall be its
representation that the Prices and other terms reflected therein (the
"Subject Terms") comply with the preceding sentence. In the event Seller
fails to sell Product to Buyer on the foregoing terms, Buyer shall be
entitled to [*]
4.4. Seller shall use its best efforts to maintain [*] and to
ensure that [*]. If Buyer does not consider the Subject Terms [*], Buyer
shall have the right, at any time and from time to time, to request an
[*], and Seller shall use its best efforts to amend the [*] by entering
into a [*].
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
2
<PAGE> 3
CONFIDENTIAL
5. CONSUMPTION REPORTS, COMMITS AND OTHER COMMUNICATIONS
5.1. [*], Buyer shall furnish via EDI to Seller [*] under
this Agreement from the period (such period shall be referred to herein
as the [*]) commencing on a date in the current week as specified by
Buyer [*] (defined below), [*] may at times be referred to as an "830
Report". The [*] is the time period for which [*]. [*] shall include
Buyer's part number, quantity and required delivery date and shall be
submitted via EDI. Within [*] of Seller's receipt of Buyer's 830 Report,
Seller shall send to Buyer [*], such report may at times be referred to
herein as an "870 Report", indicating [*] in Buyer's 830 Report. Seller
shall use its best efforts to ensure that the quantity and delivery
dates specified in its 870 Report are equal to those specified in
Buyer's 830 Report. The quantity set forth in Seller's 870 Report for
any particular [*] is referred to herein as the [*]. Although Seller has
[*] beyond the levels indicated in Exhibit C, Flexibility Agreement,
Seller agrees to [*] schedules in accordance with Buyer's 830 Report.
5.2. Provided Seller is providing a JIT Delivery, the
following terms of this Section 5.2 shall apply. From time to time,
Buyer may furnish Seller with a report via EDI, (referred to herein as
an "862 Report"), summarizing [*] or any other particular time period
([*]) specified in such report. During any particular Consumption
Period, Seller shall at all times [*] as indicated in Buyer's 862
Report. Once Buyer's 862 Reports indicate that the [*] (as defined in
Exhibit H) of the Product, Seller shall [*] to Buyer at Buyer's
facilities identified for such Product in accordance with the [*] (as
defined in Exhibit H) the [*] of such Product; provided, in no event
shall Seller be obligated [*] specified for any particular [*]. On the
same day that any shipment is made by Seller, Seller shall furnish Buyer
with an advanced ship report via EDI. The delivery date for each
shipment shall be the last day of the [*] described in Exhibit H and is
referred to as the "On Dock Date".
5.3. The [*] and at the place required under Section 5.2
shall [*]. Seller shall notify Buyer in writing immediately if Seller
has knowledge of any event which is reasonably likely to delay any
agreed delivery date or delivery plan.
5.4. Title and risk of loss of Product shall pass to Buyer at
[*], and Seller, at its cost and expense shall [*]
5.5. If Seller delivers Product in advance of the On-dock
Date therefor, Buyer may, at its option, either (i) return such Product
to Seller at Seller's risk and expense (in which case Seller, at its
expense, shall redeliver such Product to Buyer on the correct On-dock
Date therefor) or (ii) retain such Product and make [*] on the [*] would
have been due based on the correct On-dock Date therefor.
5.6. Changes to delivery dates may only be made by Buyer's
authorized purchasing representatives designated in writing from time to
time by Buyer delivering to Seller a notice in writing or via EDI. Buyer
may, [*], issue change orders for Product quantities and schedule dates
in accordance with the flexibility agreement attached as Exhibit C (the
"Flexibility Agreement").
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
3
<PAGE> 4
CONFIDENTIAL
5.7. In the event that Product scheduled for delivery is more
than [*], Buyer may (i) at its request, require Seller, at Seller's
expense, to ship and deliver such Product via a different mode of
transportation or (ii) [*], consistent with the terms of this Agreement.
5.8. All reports contemplated by Sections 5.1 and 5.2 and
change orders contemplated in Section 5.6 shall be communicated between
Buyer and Seller via the EDI conventions set forth in Section 2.4.
6. PACKING, MARKING, AND SHIPPING INSTRUCTIONS
6.1. Seller shall prepare and pack all Product in a manner
(i) that Buyer from time to time may reasonably specify or, in the
absence of Buyer's specification, that is consistent with practices
customary in the computer component industry and (ii) necessary to meet
a designated carrier's requirements.
6.2. Seller shall mark, or cause to be marked, each shipping
container to adequately show Buyer's Order number, part number, revision
level, lot number, and quantity contained therein. Seller shall include
in each container a packing list showing the Order number.
7. QUALITY
7.1. Seller shall ensure that all Products conform to the
specifications, drawings, samples and other descriptions designated in
the Product Schedule for such Product (the "Specifications"). The
Specifications shall include any labeling requirements imposed by
applicable law.
7.2. Seller shall establish and/or maintain a quality
improvement plan acceptable to Buyer. Seller's initial Quality
Improvement Plan is attached to this Agreement as Exhibit D (the
"Quality Plan") and shall not be amended without Buyer's prior written
consent.
7.3. Upon reasonable notice, Buyer shall be entitled to visit
and inspect Seller's facility sites during normal business hours and
Seller shall cooperate to facilitate such visits. Buyer's inspections
shall in no way relieve Seller of its obligation to deliver conforming
Product or waive Buyer's right of inspection and acceptance at the time
the Products are delivered.
7.4. At Buyer's request, Seller shall provide Buyer with
relevant inspection, quality, and reliability data. Seller shall conform
to the revision level stated on Buyer's Order.
8. CHANGE ORDERS
8.1. Buyer may from time to time change the Specifications
for the Products, and Seller shall use its best efforts to ensure that
all Product complies therewith. [*]. Any request by Seller for any such
adjustment must be made in writing to Buyer [*] of Seller's receipt of
Buyer's notice of change in specifications. No changes shall be made by
Seller in the form, fit, or function of the Product to be purchased
hereunder without [*].
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
4
<PAGE> 5
CONFIDENTIAL
9. INSPECTION AND ACCEPTANCE
9.1 Products purchased or to be purchased pursuant to this
Agreement shall be subject to inspection and test by Buyer at all times
(including during the period of manufacture or development) and places
(including Seller's facilities). Unless otherwise specified in the
Order, final inspection and acceptance of Product by Buyer shall be at
Buyer's facilities. Buyer reserves the right to reject Product which
does not conform to the Specifications or that contains any defect in
material, workmanship or design (the "Defective Product"). Buyer may, at
its option, (i) return Defective Product to Seller, [*] (ii) return
Defective Product to Seller for Seller's correction or replacement or
(iii) exercise any other rights as Buyer may have at law or in equity
that are consistent with the other provisions of this Agreement. Product
required to be corrected or replaced shall be subject to the same
inspection and acceptance provisions of this Agreement as Product
originally delivered under any Order. Seller shall reimburse Buyer for
any costs of any special inspection measures deemed necessary by the
Buyer.
9.2. If Buyer returns Defective Product to Seller for
correction or replacement, Seller shall [*]. Seller shall [*] associated
with [*] including [*]. Seller agrees to provide [*] after receipt
thereof. Seller will also provide Buyer with a written corrective action
report upon request addressing the steps that will be taken to eliminate
the recurrence of the problem, and will use commercially best efforts to
implement the actions addressed in such report.
10. WARRANTY
10.1. Seller hereby warrants to Buyer that Product purchased
hereunder shall (i) vest in Buyer good and valid title to such Product
free and clear of all liens, encumbrances, security interests,
encumbrances, burdens and other claims and (ii) be free from
infringements or violations described in Section 17.1. In addition, [*]
from the date of Buyer's acceptance of Product delivered hereunder,
Seller hereby warrants to Buyer that such Product shall (x) be free from
defects in material, workmanship and design and (y) be in conformity
with the Specifications. The warranty for replaced or repaired Product
will be the same as the original Product. In the case of [*], Seller
shall [*] or, at Buyer's [*] election, [*]. Upon discovery of a defect
in material, workmanship or design in any Product or the discovery of a
Product that is not in compliance with the Specifications during the
[*], Buyer may, at its option, return Product to Seller, [*] (b) for
Seller's prompt correction or replacement and (ii) [*].
10.2. Seller warrants that there are no claims of infringement
or violation of the type described in Section 17.1 with respect to the
Product.
11. OUT OF WARRANTY REPAIRS and SPARE PARTS AVAILABILITY
11.1. Seller agrees to [*] condition any Product no longer
covered by the express warranties set forth elsewhere in this Agreement
(an "Out of Warranty Product") at the refurbishment prices and according
to the terms set forth in Exhibit E. In addition, Seller shall make
available for purchase by Buyer replacement and repair parts for
Products ("Spares") in accordance with the terms set forth in Exhibit E.
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
5
<PAGE> 6
CONFIDENTIAL
12. PAYMENT
12.1 Buyer shall make payment in full for the purchase price
of all Product purchased hereunder (other than items disputed by Buyer
in good faith) and received by Buyer on or before the [*] day after the
date of Seller's invoice; provided, Seller's invoice shall not be dated
earlier than the shipment date of Product covered thereby. Payment of
invoices shall not constitute acceptance of the Product.
12.2. Unless otherwise specified in Exhibit B or agreed to in
writing by the parties, [*].
13. TERMINATION
13.1. Either party (the "Non-Defaulting Party") may terminate
this Agreement and/or any Order issued hereunder by written notice to
the other party (the "Defaulting Party") upon the occurrence of a
Default by the Defaulting Party. [*] This Agreement shall terminate on
the date of such notice (the "Termination Date").
13.2. Upon termination by Seller of this Agreement and/or any
Order due to Buyer's default or upon termination [*], Buyer's entire
liability shall be to purchase, without duplication: [*] as defined in
the Exhibit C as Buyer's [*] and (ii) all Product that Buyer has
received and had not previously paid for.
13.3. Upon termination by Buyer of this Agreement and/or any
Order due to Seller's Default, (i) Buyer shall have [*] (ii) Buyer
shall have such additional remedies as may be [*] any balance due for
Products delivered by Seller before termination.
14. FORCE MAJEURE
14.1. Neither party shall be liable for its failure to perform
any of its obligations hereunder during any period in which performance
is delayed by fire, flood, war, embargo, riot or an unforeseeable
intervention of any government authority that causes complete business
interruption ("Force Majeure"), provided that the party suffering such
delay immediately notifies the other party of the delay. If, however,
Seller's performance is delayed for reasons set forth above for a
cumulative period of [*] or more, [*], notwithstanding any other
provision of this Agreement to the contrary, [*]. In the event such
termination, [*] hereunder shall be for the [*]. In the event the
parties do not terminate this Agreement and/or Order due to a Force
Majeure, the time for performance or cure will be extended for a period
equal to the duration of the Force Majeure.
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
6
<PAGE> 7
CONFIDENTIAL
15. PRODUCT NOTICES
15.1. Any notice given under this Agreement shall be in
writing and will be effective (i) when delivered, if delivered in
person, (ii) during the [*] or (iii) [*] same in the U.S. mail, postage
prepaid and addressed to Seller at the address for notice specified on
Exhibit A or such other address as Seller may specify to Buyer in
accordance with this Section 15.1 or to Buyer at the address set forth
below or at such other address as Buyer may specify to Seller in
accordance with this Section 15.1:
If to Buyer:
COMPAQ COMPUTER CORPORATION
P.O. BOX 692000
S.H. 249
HOUSTON, TEXAS 77269-2000
[*]
with a copy to:
COMPAQ COMPUTER CORPORATION
P.O. BOX 692000
S.H. 249
HOUSTON, TX 77269-2000
[*]
16. COMPLIANCE WITH LAWS
16.1. All Product supplied and work performed under this
Agreement shall comply with [*] including, without limitation, all laws
governing [*]. Upon request, Seller shall [*] applicable laws and
regulations, and provide such evidence of compliance as Buyer may
reasonably request.
17. INDEMNIFICATION; REMEDIES
17.1. Seller shall indemnify, defend and hold harmless Buyer
and its Affiliates and their respective directors, officers,
shareholders, employees and agents (collectively, the "Buyer Indemnified
Parties") from and against any and all [*]
Products furnished under this Agreement [*] right and shall [*]
[*]; provided, the foregoing indemnity shall not apply
to the extent any such claim is attributable solely to design
specifications furnished by Buyer to Seller. Buyer shall notify Seller
of such claim and permit Seller to defend and compromise such claim;
provided, Buyer's failure to so notify Seller shall not diminish
Seller's indemnity obligations hereunder except to the extent any
Buyer's delay in notifying Seller materially prejudices Seller's defense
of such matter. If an injunction or exclusion order preventing the use
of the Products results from such a claim (or, if Buyer reasonably
believes such an injunction is likely) Seller shall, [*], and
at Buyer's request, [*]. In the event that Seller
cannot obtain such right for Buyer, Seller shall [*] and thereupon
Seller [*].
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
7
<PAGE> 8
CONFIDENTIAL
[*]
17.2. Seller shall indemnify, defend and hold harmless the
Buyer Indemnified Parties from and against any Indemnified Loss relating
to or arising out of any [*] from (i) the use of any Product or (ii)
Seller's acts or omissions; provided, the foregoing indemnity shall not
apply to the extent any such claim is attributable solely to design
specifications furnished by Buyer to Seller.
17.3. THIS SECTION 17 SHALL BE ENFORCEABLE TO THE EXTENT SET
FORTH ABOVE NOTWITHSTANDING THE SOLE, CONCURRENT, ACTIVE OR PASSIVE
NEGLIGENCE OF ANY OF THE BUYER INDEMNIFIED PARTIES.
17.4. Subject to Section 17.5, upon the occurrence of a
Default by a party hereto the other party shall be entitled to exercise
such rights and remedies as are available at law or in equity including
the right to seek specific performance [*] failure to [*] unique
products in conformity with the Specifications.
17.5. NEITHER PARTY SHALL BE LIABLE FOR ANY CONSEQUENTIAL
DAMAGES (INCLUDING, WITHOUT LIMITATION, [*] EVEN IF THE OTHER PARTY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES EXCEPT (I) IN CONNECTION
WITH A [*] PROVISIONS SET FORTH IN THIS AGREEMENT AND (II) TO THE EXTENT
ANY SUCH DAMAGES ARE A PART OF AN INDEMNIFIED LOSS AGAINST WHICH [*] IS
ENTITLED TO BE INDEMNIFIED PURSUANT TO THE OTHER PROVISIONS OF THIS
SECTION 17.
18. TRADEMARKS; LOGOS
18.1. Seller is authorized to use the Compaq logo and
trademark only to the extent necessary to meet the required
specification for the Product. No other rights with respect to Buyer's
trademarks, trade names or brand names are conferred, either expressly
or by implication, upon Seller.
19. GRATUITIES
19.1. Each party represents that it has not offered nor given
and will not offer nor give any employee, agent, or representative of
the other party any gratuity with a view toward securing any business
from the other party or influencing such person with respect to the
business between the parties.
20. INSURANCE.
20.1. Seller shall maintain such minimum insurance coverage as
is described on Exhibit F or as the parties may otherwise mutually
agree. All insurance policies maintained by Seller in accordance with
this Section 20 [*]
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
8
<PAGE> 9
CONFIDENTIAL
21. CONFIDENTIAL INFORMATION
21.1. Each party recognizes that it may have previously
entered or will in the future enter into various agreements with the
other party which obligates it to maintain as confidential certain
information disclosed to it by the other party. To the extent that such
information or any further confidential information, which might include
but is not limited to [*] (collectively referred to hereinafter as
"Information") is disclosed in furtherance of this Agreement or any
Order issued hereunder, such Information shall be so disclosed pursuant
to the minimum terms and conditions listed below; provided, however, the
minimum terms and conditions listed below shall in no way relieve the
parties from any obligation or modify such obligations previously agreed
to in other agreements. Both parties agree that this Agreement and any
other agreements regarding confidential information shall hereafter be
considered as coterminous, and shall expire no earlier than the date of
expiration or termination of this Agreement.
21.2. Both parties agree that the party receiving Information
will maintain such Information in confidence for a period of three years
from the date of disclosure of such Information.
21.3. Each party shall protect the other party's Information
to the same extent that it protects it own confidential and proprietary
information and shall take all reasonable precautions to prevent
unauthorized disclosure to third parties.
21.4. The parties acknowledge that the unauthorized disclosure
of such Information will cause irreparable harm. Accordingly, the
parties agree that the injured party shall have the right to seek
immediate injunctive relief enjoining such unauthorized disclosure.
21.5. The provisions of this Section 21 shall not apply to
information (i) known to the receiving party at the time of receipt from
the other party, (ii) generally known or available to the public through
no act or failure to act by the receiving party, (iii) furnished to
third parties by the disclosing party without restriction on disclosure,
(iv) furnished to the receiving party by a third party as a matter of
right and without restriction on disclosure, (v) furnished as required
by court order or similar governmental authority or by the imminent
likelihood thereof or by applicable law, or (vi) is in the possession of
the receiving party without a confidential obligation at the time of
disclosure as shown by the receiving party's files and/or records
immediately prior to disclosure.
21.6. Immediately upon termination of this Agreement or at the
request of the other party, each of the parties shall promptly return
all materials in its possession containing Information of the other
party.
22. COUNTRY OF ORIGIN
22.1. For each Product purchased under this Agreement, Seller
shall furnish Buyer with country of origin (manufacture), by quantity
and part number (Buyer's and Seller's) if necessary. Product shall be
marked with the country of origin as required by applicable law.
22.2. Seller agrees to provide necessary export licenses and
documents to facilitate export of Product. Seller further agrees to
assist Buyer's import of Product as reasonably requested by Buyer.
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
9
<PAGE> 10
CONFIDENTIAL
23. PROPERTY FURNISHED BY BUYER
23.1. Any tools, drawings, specifications, or other materials
furnished by Buyer for use by Seller in its performance under this
Agreement or any Order issued hereunder shall be identified and shall
remain the property of Buyer and shall be used by Seller only in its
performance hereunder. Such property shall be delivered, upon request,
to a destination specified by Buyer in good condition, except for normal
wear and tear.
24. [*]
24.1 The following remedies as stated will be available to
[*]
25. GENERAL
25.1. Any obligations and duties which by their nature extend
beyond the expiration or earlier termination of this Agreement shall
survive any such expiration or termination and remain in effect.
25.2. If any provision or provisions of this Agreement shall
be held to be invalid, illegal or unenforceable, such provision shall be
enforced to the fullest extent permitted by applicable law and the
validity, legality and enforceability of the remaining provisions shall
not in any way be affected or impaired thereby.
25.3. Any waiver of any kind by a party of a breach of this
Agreement must be in writing, shall be effective only to the extent set
forth in such writing and shall not operate or be construed as a waiver
of any subsequent breach. Any delay or omission in exercising any right,
power or remedy pursuant to a breach or default by a party shall not
impair any right, power or remedy which either party may have with
respect to a future breach or default.
25.4. Either party shall not export, re-export or otherwise
disclose, directly or indirectly, technical data received from the other
party or the direct product of such technical data to any person or
destination when such export, re-export or disclosure is prohibited by
the laws of the United States or regulations of a Department of the
United States.
25.5. With respect to any payment, reimbursement or other
amount owed by one party (the [*]) to the other (the "[*]") under this
Agreement, [*] by the [*] to the [*] under this Agreement or any other
agreement. Both parties agree that the [*] is a convenience to both
parties and nothing contained in this Section 25.5 or in the entire
Agreement shall be construed as a barter agreement.
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
10
<PAGE> 11
CONFIDENTIAL
25.6 This Agreement is hereby identified as "Compaq
Confidential" and "Gadzoox Confidential," and any additional
confidentiality requirements between the parties (now or in the future)
applicable to material identified as such shall apply to this Agreement.
25.7. Except to the extent the confidentiality provisions set
forth in Section 22 conflict with confidentiality provisions set forth
in any other confidentiality or non-disclosure agreement between the
parties hereto, this Agreement represents the entire agreement with
respect to the subject matter hereof and supersedes all prior
discussions and agreements between the parties relating to the subject
matter hereof. This Agreement can be modified only by a written
amendment duly signed by persons authorized to sign agreements on behalf
of both parties, and shall not be supplemented or modified by any course
of dealing or trade usage. Variance from or addition to the terms and
conditions of this Agreement in any Order, or other written notification
from Seller will be of no effect.
25.8. THE CONSTRUCTION, VALIDITY, AND PERFORMANCE OF THIS
AGREEMENT AND ANY ORDER ISSUED UNDER IT SHALL BE GOVERNED BY THE LAWS OF
THE CONSTRUCTION, VALIDITY, AND PERFORMANCE OF THIS AGREEMENT AND ANY
ORDER ISSUED UNDER IT SHALL BE GOVERNED BY THE LAWS OF THE STATE [*]
U.S.A. THE PARTIES HEREBY WAIVE APPLICATION OF THE U.N.
CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS.
25.9. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT
WARRANTIES (EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE) OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE HEREBY
DISCLAIMED IN THEIR ENTIRETY.
25.10. Upon the request of either party, the parties shall
cooperate and use commercially reasonable efforts to implement as soon
as practicable an electronic data interchange system to process the
submission and acceptance of Orders, the payment of Product and such
other matters as the parties may mutually agree upon having such terms
and transmissions standards and formats as the parties may agree.
IN WITNESS, THE AUTHORIZED REPRESENTATIVES OF THE PARTIES HAVE EXECUTED THIS
AGREEMENT AS OF THE DATE FIRST WRITTEN ABOVE.
For the Buyer For the Seller
/s/ Glenn McLoughlon /s/ Kent Bridges
- ------------------------------------- ----------------------------------------
Signature Signature
Glenn McLoughlon Kent Bridges
- ------------------------------------- ----------------------------------------
Name Name
Vice President Corporate Materials Vice President Sales
- ------------------------------------- ----------------------------------------
Title Title
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
11
<PAGE> 12
CONFIDENTIAL
[*]
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
12
<PAGE> 13
CONFIDENTIAL
ANNEX 1
DEFINITIONS
"Affiliate" means, with respect to any Person, any other Person controlling,
controlled by, or under the common control with that First Person. As used in
this definition, the term "control" means the possession, directly or indirectly
or the power to direct, or cause the direction of the management and policy of
the controlled person.
"Business Day" shall mean any day other than a Saturday, a Sunday, or a holiday
on which banks in the State of Texas generally are closed.
"Buyer Indemnified Parties" shall have the meaning given thereto in Section
17.1.
"Default" shall mean:
with respect to Buyer, (a) Buyer's failure to comply with any material
provision of this Agreement or any Order issued hereunder, and, in the case of a
breach which is capable of remedy, [*] of notification of said breach; provided,
delays in delivery shall be deemed [*] herein; or (b) Buyer becomes insolvent,
becomes subject to any bankruptcy proceeding, makes an assignment for the
benefit of creditors, or a receiver or similar officer is appointed to take
charge of all or a part of such party's assets and such condition is not cured
within [*]; and
with respect to Seller, (a) Seller's failure to comply with any material
provision of this Agreement or any Order issued hereunder, and in the case of a
breach which is capable of remedy, [*] notification of said breach; provided,
the failure of Seller [*] (b) Seller becomes insolvent, becomes subject to any
bankruptcy proceeding or makes an assignment for the benefit of creditors, or a
receiver or similar officer is appointed to take charge of all or a part of
Seller's assets and such condition is not cured [*] (c) [*] any or all of its
rights or obligations under this Agreement or any Orders issued hereunder to a
third party without [*]. Such approval is not required for changes in ownership
arising from Seller's fund raising activities, mergers, or other changes in
corporate structure provided seller provides notice to Buyer of the above [*]
from occurrence.
"Defective Product" shall have the meaning given thereto in Section 9.1.
[*]
"First Party" shall have the meaning given thereto in Section 25.5.
"Force Majeure" shall have the meaning given thereto in Section 14.1.
"Indemnified Loss" shall have the meaning given thereto in Section 17.1.
"Information" shall have the meaning given thereto in Section 21.1.
"Non-Defaulting Party" shall have the meaning given thereto in Section 13.1.
"On-dock Date" shall have the meaning given thereto in Section 5.2.
"Order" shall have the meaning given thereto in Section 2.3.
"Out of Warranty Product" shall have the meaning given thereto in Section 11.1
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
13
<PAGE> 14
"Prices" shall have the meaning given thereto in Section 4.1.
"Product and Pricing Schedule" shall have the meaning given thereto in Section
4.1.
"Product" has the meaning given in Section 2.1.
"Quality Plan" has the meaning given thereto in Section 7.2.
"Second Party" shall have the meaning given thereto in Section 25.5.
"Spares" shall have the meaning given thereto in Section 11.1.
"Specifications" has the meaning given thereto in Section 7.1.
"Specified Location" has the meaning given thereto in Section 5.1.
"Subject Terms" has the meaning given thereto in Section 4.3.
"Termination Date" shall have the meaning given thereto in Section 13.1.
14
<PAGE> 15
EXHIBIT A
SELLER
Gadzoox Microsystems, Inc.
6840 Via Del Oro
Suite 290
San Jose, CA 95119
15
<PAGE> 16
CONFIDENTIAL
EXHIBIT B
PRODUCTS, PRICING AND [*]
1. FOB Seller Pricing:
<TABLE>
<CAPTION>
ITEM SELLER REFERENCE COMPAQ REFERENCE LEAD-TIME PRICE TIME
- ---- ---------------- ---------------- --------- ----- ----
<S> <C> <C> <C> <C> <C>
1. [*] TBD [*] [*] [*]
</TABLE>
II. DDP Houston Pricing:
<TABLE>
<CAPTION>
ITEM SELLER REFERENCE COMPAQ REFERENCE LEAD-TIME PRICE TIME
- ---- ---------------- ---------------- --------- ----- ----
<S> <C> <C> <C> <C> <C>
1. [*] TBD [*] [*] [*]
</TABLE>
Seller agrees that the price [*] and that [*] prior to the end of the
[*] Seller agrees to [*] for the following [*] calendar quarters.
Seller further agrees to provide price in [*].
[*]
<TABLE>
<CAPTION>
<S> <C>
[*]
</TABLE>
SPECIFICATION
Buyer's specification number TBD is incorporated by reference.
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
16
<PAGE> 17
CONFIDENTIAL
EXHIBIT C
[*]
[*]
The following [*] on existing purchase orders may be made [*] to Buyer.
<TABLE>
<CAPTION>
Number of weeks prior
scheduled delivery dates % increase to
- ------------------------ -------------
<S> <C>
[*] [*]
</TABLE>
Seller agrees to [*] at buyer's request. [*] requirement shall be calculated as
the [*] calculated over the next [*] via the EDI 830 [*].
[*]
The following [*] on existing purchase orders may be made by the Buyer.
<TABLE>
<CAPTION>
[*] [*]
- --------------------------- -----------------
<S> <C>
[*] [*]
</TABLE>
[*]
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
17
<PAGE> 18
CONFIDENTIAL
EXHIBIT C
[*]
[*]
1) Finished Goods:
[*]
2) Work in Process (WIP):
[*]
3) Raw
[*]
At no time is Buyer [*] of Orders for conventional Product, or the 830 [*] for
JIT Product.
[*]
"Raw" shall mean all piece parts and/or other dedicated materials including
packaging materials.
Buyer liability is based on contract price of the revision level at the time of
decrease.
18
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE> 19
CONFIDENTIAL
EXHIBIT C
[*]
[*]
<TABLE>
<CAPTION>
[*] [*] [*]
- -------------------------- ------------------------- --------
<S> <C>
[*] [*] [*]
</TABLE>
For reschedules beyond these limits. [*]
[*]
19
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE> 20
EXHIBIT D
QUALITY IMPROVEMENT PLAN
Compaq Computer Corporation and Gadzoox
Microsystems Quality Plan
All Communications Products
TABLE OF CONTENTS
1.0 Purpose
2.0 Scope
3.0 References
4.0 Quality Systems Survey
5.0 Quality Planning
6.0 Quality Assurance Methodology
7.0 Design/Process Change Requirements
8.0 Inspection Requirements
9.0 Performance Reports
10.0 Traceability Identification
11.0 Reliability
12.0 Ship-to-Stock Criteria
13.0 Supplier obligations
14.0 Compaq's obligations
Attachment 1 Supplier Reporting Requirements
Attachment 2 List of Deliverables from Compaq's 5-Step
Supplier Development Process.
20
<PAGE> 21
CONFIDENTIAL
1.0 Purpose:
This plan documents the specific systems of process and product controls
required to provide defect free product to our customers, on time, and at a
mutually beneficial price.
2.0 Scope:
This plan documents the specific system of process and product controls required
to prevent incidents of non-conforming product. Reliability is defined as the
demonstrated field performance and MTBF of the Communication Product. This plan
identifies actions necessary to assure conformance of:
A. Documentation
B. Equipment Qualification/Calibration Program
C. Correlation (functional/nonfunctional)
D. Workmanship
E. Process Capability
F. Critical Parameters
This document is a supplement to Compaq Computer Corporation's contractual
agreements and engineering specifications. In any case of conflicting
requirements, purchasing and engineering documents shall take precedence.
3.0 References:
The following documents should be consulted with this Quality Plan:
A. Compaq OEM Specifications.
B. World Class (SDP) Supplier Development Process. 4.0 Quality
Systems Survey:
4.0 Quality Systems Survey:
In accordance with the requirements of SDP (Supplier Development Process, Rev.
E), a full quality system survey will be completed.
The results of the survey will be used to establish a baseline from which an
improvement plan may be launched and results measured. [*]
5.0 Quality Planning:
Gadzoox Microsystems shall provide Compaq and must be responsible for a
controlled and capable process to ensure the product is in total compliance with
the product specifications.
5.1 Documentation Review:
As a part of the product evaluation process, members of the Compaq/Gadzoox
Microsystems team will review the current engineering specification package to
assure:
A. All documentation is present and legible.
B. Specified tolerances are defined and sub-tier suppliers'
manufacturing process capabilities known.
C. Specified dimensions do not conflict with other documentation.
D. Clarity of workmanship standards is defined.
Any discrepancies or issues shall be noted on the SDP Print Acceptance Form,
PAF,. The items will be assigned to the Compaq/Gadzoox Microsystems project
teams for resolution. The project teams will be accountable for completing the
items within a specified time frame.
When changes to any content within the Kit have occurred then, each month,
Compaq Procurement Engineering will be responsible for issuing Gadzoox
Microsystems Quality Assurance Manager all new released and ECN documentation.
This documentation distribution will include the assembly, reference
specifications, Receiving Inspection Procedures, and Compaq manufacturing
diagnostics.
[*], Gadzoox Microsystems shall send Compaq Procurement Engineer all Compaq
product drawings, ECNs, and PCNs that affect form, fit, function, P/N changes,
and QA procedures. This information is required for Compaq documentation
control.
21
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE> 22
CONFIDENTIAL
5.2 Work Instruction:
The [*] process document should be a controlled document which includes: [*].
Gadzoox Microsystems shall issue Compaq Procurement Engineer the [*]
documentation before [*].
Each work station (final assembly and mold shop) should have a cosmetic
inspection work aid. The work aid must meet or exceed Compaq requirements.
5.3 Training:
Personnel performing assembly, fabrication, inspection, and tests or any
activity affecting quality shall have appropriate experience and training.
Appropriate records of training shall be maintained.
5.4 [*]
Gadzoox Microsystems shall submit a [*]. The process diagram identifies the
main steps, branches, and eventual outcome of the process. The following
information should be included within the diagram or can be a part of the
Process Management Plan (PMP):
A. [*]
B. Receiving inspection requirements at Gadzoox Microsystems
C. Test locations and equipment type at Gadzoox Microsystems
D. Inspection stations, parameters monitored, location, and
equipment type at Gadzoox Microsystems
E. Storage/Queue locations.
F. Transportation.
G. Rework/MRB activity.
H. [*]
5.5 [*]
Gadzoox Microsystems must submit [*]. The [*] is a pictorial document of the
actual path of the product throughout the manufacturing facility.
5.6 Process/Product Critical Parameter Review
The Compaq/Gadzoox Microsystems team will develop a control plan for [*]
parameters and [*], as defined in the SDP Manual, that insures that all
requirements and processes meet or exceed customer expectations. [*]. Critical
operations are those control areas within the manufacturing process that create
[*]. These systems insure that all requirements and processes meet or exceed
customer expectations.
The [*] must be defined in the following plans:
A. Process Management Plan.
B. Gadzoox Microsystems Inspection Plans.
C. Sub-tier Suppliers' Management Plans.
The Process Management Plan (PMP) shall be completed for all operations at
Gadzoox Microsystems and its sub-tier suppliers, where critical parameters are
affected in the process. Each PMP will contain the following details:
A. Process flow: listing major steps in the operation.
B. [*]
C. [*]
D. [*]
E. Sample Size: number of items evaluated.
F. Control Method: type of chart or method.
G. Equipment: gage description, identification number.
H. Measurement Precision: frequency of Gage R&R studies.
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6.0 Quality Assurance Methodology:
Compaq's objective is to eliminate the function of performing receiving
inspection to accept incoming material for manufacturing. The intent of this
section is to identify specific actions, improvement plans, goals, and
responsibilities to assure product quality and continuous improvement.
The quality data collected must be available to the operator in a timely manner
so it can be used for process improvements. Each operator should know why they
are collecting the quality data, what the requirements are, and the operation
trend.
6.1 Process Capability Studies, per the SDP Manual:
Gadzoox Microsystems Manufacturing Facilities Attribute features shall be
recorded with p-charts and variable characteristics shall be monitored
in-process with mean and range charts. This method will identify runs, [*], and
other quality items.
Also, these critical parameters must be evaluated to establish a [*] and GR&R
process. Identification of the critical parameters are defined in the Supplier
Process Management Plan.
Critical parameters are considered capable if the [*]. Any parameter that
results in a [*] will result in a corrective action or equivalent containment
plan.
The process capability results shall be documented and available for review by
all organizations. Gadzoox Microsystems engineering are responsible for
evaluating this information. [*], Gadzoox Microsystems shall send Process
Parameter Control Plan to Compaq Procurement Engineer along with any and all
required improvement plans.
6.2 Measurement Precision, per the SDP Manual:
Measurement Precision is the extent to which a repeated measurement gives the
same result. Variations may arise from inherent capabilities of the instrument,
from variations of the operators use of the equipment, or from changes in
operating conditions.
All instruments, gages, test equipment, and inspectors/operators shall be
evaluated for Repeatability and Reproducibility.
6.3 Measurement Correlation, per the SDP Manual:
All major inspection techniques and equipment must be correlated in order to
prevent disagreements about product attributes.
Correlation of visual attributes indicate both Compaq and Gadzoox Microsystems
agree in the accept/reject criteria for generic types of non-conformance.
Techniques for documentation include: detail drawings, photographs of
non-conformance, or actual samples of non-conforming product. Both Compaq and
Gadzoox Microsystems shall be utilizing the same accept/reject criteria.
The method to calculate and evaluate a correlation coefficient is in the SDP. A
correlation action is requested if the correlation coefficient, [*]
6.4 First Article Inspection:
Gadzoox Microsystems must submit [*] of all new designs or modifications before
production release. The samples should be representative of a capable process.
If Compaq deems that Gadzoox Microsystems measuring equipment is capable, Compaq
will use Gadzoox Microsystems FAI reports and test results for qualifying a
design/process change.
Compaq Procurement Engineer shall evaluate all samples for qualification. Compaq
will provide Gadzoox Microsystems with written documentation on all reviews
within [*] of receipt.
23
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CONFIDENTIAL
6.5 Supplier Corrective Action Request (SCAR/8D):
Compaq Procurement Engineer will initiate Supplier Corrective Action Request
whenever system or material deficiencies are identified. If Compaq receives
non-conforming material, the part and SCAR will be overnight freighted to
Gadzoox Microsystems Gadzoox Microsystems shall reply within [*], acknowledging
and providing Compaq with a response on their intended containment and
corrective actions. If long term corrective actions are required then the
implementation date for the long term corrective action must be provided within
no more than [*] after receiving the SCAR. Compaq is to be notified if the
specified date for corrective action implementation will not be met prior to the
due date. Notification shall be accompanied with justification for
implementation push-out.
The intent of the SCAR is to eliminate potential problems or recurrence. Gadzoox
Microsystems shall be responsible to answer the following concerns:
A. Non-conformance Description
B. Failure Analysis (FAR)
C. Root Cause
D. Containment
E. Corrective Action
F. Effectivity Dates (containment & corrective action)
G. Verification
6.6 Experimental Design
Design of Experiments will be used throughout the program where applicable.
7.0 Design/Process Change Requirements, per the SDP Manual:
All Engineering changes that effect the [*] must be approved by Compaq prior to
production implementation. Gadzoox Microsystems and Compaq must discuss proposed
changes prior to any [*]. In order for Gadzoox Microsystems to proceed with [*],
Compaq must agree conceptually with the proposed changes. Implementation will be
dependent upon the satisfactory completion of FAI and qualification testing.
7.1 Supplier Change Request and Sample Submittal:
Gadzoox Microsystems should send purpose of change request, the FAI report,
qualification test results, and [*] parts to Compaq Procurement Engineer (for
sustaining product) or the Program Manager (for new product development). The
sample parts must be a result of a capable process, with documentation available
to show capability. If the qualification results are in-process, this should be
noted during the submittal. Compaq will evaluate this information within [*]
If the Gadzoox Microsystems measuring and/or test equipment is not compatible to
Compaq, Compaq will initiate test qualification. Otherwise evaluations will be
given from the Gadzoox Microsystems results.
7.2 Capability Evaluation:
At Compaq's option, a process capability study may be performed on [*] more
parts from pre-production run targeting on the critical dimensions and
parameters.
7.3 Design/Process Change Summary List:
Gadzoox Microsystems will be responsible for recording & reporting all major
design changes to Compaq. Gadzoox Microsystems will be responsible for recording
and reporting all manufacturing process changes at Gadzoox Microsystems to
Compaq. The following information must be recorded: change description,
production effectivity date, and serial number. This product updated listing
should be sent to Compaq after each production cut-in.
8.0 Inspection Requirements:
Unless otherwise specified in the contract or purchase order, Gadzoox
Microsystems shall be responsible for performing inspections that are sufficient
to assure that the parts supplied to Compaq meet the requirements specified in
the product assembly documentation.
24
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8.1 Lot Acceptance:
All lots shall be capable of passing a sampling inspection [*] . All defects
shall be considered [*]. Failed lots will be subject to rejection and returned
to supplier for corrective action.
8.2 Electrical Criteria:
Electrical assemblies and components shall comply with the Gadzoox Microsystems
"Electrical Workmanship Standards Manual". Each product will be [*]. The
inspector shall mark conforming products.
Compaq must approve changes to all critical components before production release
(Mps, oscillators, connectors, cables, and etc.)
8.3 Record Retention:
Gadzoox Microsystems shall record and maintain inspection/test records for a
minimum duration of [*] from the date of shipment or Compaq approved alternate.
Gadzoox Microsystems incoming inspection records shall be capable of tracking
receipt history. Quality status for each process shall be reported to
departments concerned on a regular basis.
8.4 Non-conforming Product:
Rejected assemblies will be verified by Compaq MRB team. If verified as
defective, the material/lot will be dispositioned as RTV(returned to vendor),
UAI(use as is), Scrap or Rework. Supplier Corrective Action will be initiated
for each unit defect (Section 6.5).
8.5 Out Of Box Audit:
Lot sampling of Finished goods should be conducted on an audit basis
employing a [*] The audit should include the following visual checks:
- Compaq critical specs (labels, dimensions, electrical)
- Bard Code labels, board quantity per box.
- Revision level
- Functional Test
[*]
Any audit failure will trigger the lot to be held for disposition. The
lot disposition will be to check [*] the lot for non-conformity before shipping
the lot to Compaq. All audit failures require 8D analysis by the supplier.
8.6 Gadzoox Microsystems Assembly Criteria:
Assemblies shall be [*] functionally tested and visually inspected. (refer to
sec.8.5).
8.7 Compaq Factory Assembly Criteria:
Compaq Receiving Inspection and factory audit personnel shall evaluate each
assembly to the Compaq's Receiving Inspection Plan (RIP) and functionally
tested. Compaq Procurement Engineering Technicians will periodically pull a
sample from an incoming lot. The unit(s) will be disassembled and evaluated for
workmanship and product integrity. (refer to section 12.0).
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HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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CONFIDENTIAL
9.0 PERFORMANCE REPORTS:
Compaq will issue monthly performance reports due by the [*] of the
following month. Example: February's data due by [*]. This information
will trend defective parts per million (DPPM). The reports are as follows:
A. Incoming Inspection
B. Workmanship Audit
C. Factory Audit (when available)
D. Field Returns (when available)
Each month Gadzoox Microsystems will compile final assembly production yield and
functional test yield consisting of the number of units produced and number of
failures by product. If the lots are shipped by air freight, Gadzoox
Microsystems shall compile [*]. These reports shall identify DPPM and
pareto defects. The Gadzoox Microsystems information will be collected by
inspection function:
A. Final Functional Test Results (Total boards tested, Total
Nonfunctional)
B. Out of Box Audit Results (Total Number inspected, Total failed)
C. Reliability Test Results
D. Top [*] Manufacturing Issues for the current Month at each
point in the process.
The Gadzoox Microsystems/Compaq team shall use this information for identifying
trends and developing improvement plans.
10.0 TRACEABILITY IDENTIFICATION:
10.1 MAJOR PIECE PARTS:
The major piece parts shall have traceability identification. The Power Supply
and assembly are examples of major components. The Assembly, and Power Supply
require the following marking:
1. Compaq P/N (silk screened) and/or Gadzoox Microsystems P/N(on
PCB).
2. Revision Level of Controlling Drawing (record on the data base)
3. Manufacturer's Name/Raw material (Country of origin, Silk
screened)
4. Date of Manufacture (record on the data base)
5. Agency Markings (silk screened)
The [*] should also include a Vendor Final QA marking (make-break). Gadzoox
Microsystems can trace this information through their assign SN.
Additional marking is allowed including manufacture S/N, manufacture order,
flammability rating, etc.
10.2 ASSEMBLY TRACEABILITY:
The final test (Functional Tester) acceptance marking shall be placed on the
underside of assembly. This marking shall be traceable to the tester and
operator. Each assembly will be serialized. The label and or marking will
identify: build week, supplier location, part number, serial number and if
necessary, rework status.
11.0 RELIABILITY:
Reliability audits shall be performed at least once a quarter or after any major
design or production change.
An On-Going Reliability Test (ORT) plan shall be approved by Compaq Procurement
Engineering. The purpose is to monitor the production process in an on-going
method. On-Going Reliability Test (ORT) audits shall be performed at-least [*].
11.1 FIELD RETURN VERIFICATION & FAILURE ANALYSIS
Gadzoox Microsystems shall verify field return product and identify reason for
the return. If the defect is verified, Gadzoox Microsystems will identify cause
and initiate corrective action. The field return information should be compiled
in [*]. This information shall be used to improve design, workmanship, quality,
and reliability.
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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12.0 SHIP-TO-STOCK CRITERIA (QUALITY METRICS):
The goal of quality planning is utilization of quality tools that assure
conforming product and elimination of non-value-added inspection. The following
requirements must be fulfilled in order to be considered eligible for
"Ship-to-Stock" status:
o Compaq incoming inspection must have [*] lot acceptance and
[*] as minimum.
o Compaq factory audits must maintain a [*]
o Compaq product integrity audit must meet functional and
workmanship specification. (form/fit, critical dimensions, etc.)
o Process Capability: critical parameters must maintain a process
capability index, [*] or better as proven by objective evidence
with each quarterly review.
o Measurement Precision: Gage operator R/R studies for critical
parameter evaluations must consume [*]
Pending the acceptance of the above criteria, lots will be placed on skip lot
inspections. The number of acceptable lots to reach skip lot status will be
determined by Compaq Procurement Engineer.
If at any time, these requirements are not met, then the commodity shall return
to regular inspection and corrective action initiated.
o Compaq 1997 Quality Goals.
Performance Measures for 1997
<TABLE>
<CAPTION>
QUALITY METRIC 1Q97 2Q97 3Q97 4Q97
-------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
</TABLE>
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FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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13.0 SUPPLIER OBLIGATIONS:
Communication Products:
<TABLE>
<CAPTION>
Cognizant Required
Personnel Due Date
--------- --------
<S> <C> <C>
Process Flow Diagram Gadzoox Microsystems Eng. Pre-Production
- Final Assembly
- Sub Assembly
- Test Inspection
Product Flow Diagram Gadzoox Microsystems Eng. Pre-Production
- Incoming to warehouse
- Final Assembly
- Sub Assembly
Process Critical Parameters Gadzoox Microsystems Pre-Manufacturers.
- Final Assembly Verification Build
- Sub Assembly (MVB)
- Critical Components
Work Instructions Gadzoox Microsystems Pre-Production
- Final Test
- Mechanical Inspection Equipment
-Gaging
Final Inspection Plan Gadzoox Microsystems Pre-Production
- Procedure
- AQL Specifications
- Out-Of-Box Disposition
- Final Disposition
On-Going Reliability Test (ORT) Plan Gadzoox Microsystems Pre-Production
Performance Reports (DPPM) Gadzoox Microsystems [*]
- Final Inspection
- Out-Going Inspection
- Field Return Pareto [*]
- ORT Reports [*]
- - ECN/PCN Summary Report Gadzoox Microsystems [*]
</TABLE>
14.0 COMPAQ OBLIGATIONS: DATE REQUIRED
- Site Survey Rating: SCORE: depends on final site
- Specification Release to A. Pre-Pilot
- Business Reviews [*]
- Quality Performance Reviews [*]
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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CONFIDENTIAL
ATTACHMENT I
SUPPLIER REPORTING REQUIREMENTS
Objective: To establish a consistent and standardized reporting format for all
OEM-Communication Products Suppliers.
[*]:
[*] factory data will be submitted to Compaq Procurement Engineer on the Compaq
"[*] Quality Status" form. For each different [*] part number produced for
Compaq, [*] these sheets must be completed for [*] Final Inspection and the Out
of Box Audits. The [*] must be sent no later than the [*] following the end of
the [*]. The [*] shall be sent attention to: OEM Communication Products
Procurement Engineer at FAX number (281) 518-5710.
[*] factory data reports will include the following:
o A completed Compaq "[*] Supplier Quality Status" form for each Compaq
[*] part number produced. This form will be completed for both the final
inspection and out of box audit data by part number. Also included will
be the [*] for the [*]. (Refer to the note in section 8.5 in this
document).
o An 8D summary report against the defects that represent [*] of the
rejects on the [*].
o A summary sheet reporting all line, process, or design changes to
include initiation date, description of change, reason for change, cut
in date, serial number of product at cut in date, cost savings or
increase.
o A status report for all open, Compaq initiated Supplier Corrective
Action Requests.
o [*] summary on the results of On- Going Reliability Testing (ORT).
(Refer to the note in section 11.0 in this document).
[*]:
[*] factory data will be submitted to Compaq Procurement Engineer on the Compaq
"[*] Supplier Quality Status" form. For each different [*] digit part number
produced for Compaq, one of these sheets must be completed for both Final
Inspection and the Out of Box Audits. The quarterly reports shall be sent
attention to: OEM Communication Products Procurement Engineer at FAX number
(281) 518-5710.
[*] factory data reports will include the following:
o A completed Compaq "[*] Supplier Quality Status" form for each Compaq
[*] digit part number produced. This form will be completed for both the
final inspection and out of box audit data by part number. Also included
will be the quarterly data for the [*].
o A [*] summary report of the results of the Reliability Testing.
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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<PAGE> 30
LIST OF DELIVERABLES
1. [*]
2. Critical Components List
3. Capacity Analysis
4. On-Going Reliability Test Plan (ORT)
5. GR&R
6. [*] Quality Report
7. [*]
8. Final Specification Review(PAF)
9. Out-of-Box Audit (OOBA)
10. Process Management Plan (PMP)
11. [*]
12. Process Flow Diagram
13. Product Flow Diagram
14. Test Data and Bug List
15. Corrective Action Procedures
16. 8D Form
17. Supplier Corrective Action Report Form
18. Failure Analysis Procedures
Note: forms/guidelines for items 1,4,5,6,7,8,9,10,16,17
will be provided by Compaq Procurement Engineering.
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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EXHIBIT E
SERVICE, REPAIR, AND REFURBISHMENT
A. REFURBISHMENT
1. Seller agrees to provide a source for refurbishment to "like new"
condition any Product at the prices & terms outlined below. This obligation
shall be satisfied by either refurbishing Product submitted by Buyer or replace
such Product with either new or refurbished Product. Refurbished Product shall
be at the latest revision level. "Like new" condition means refurbished to meet
the electrical and mechanical requirements of the Buyer's applicable
specifications, as outlined in Exhibit B.
2. Product submitted by Buyer for refurbishment will be in reasonably good
condition and repairable, and [*]. In the event Product submitted for
refurbishment has been tampered with in an attempt to repair it or has been
damaged beyond repair, Seller will not be obligated to refurbish such Product.
3. Seller agrees to provide [*] status reports indicating quantities of
units returned, units which aren't repairable, and units for which no trouble
was found.
4. Seller agrees, upon Buyer's request, to provide repair training, on site
support within [*], documentation, and spare parts to third party service
providers in support of Buyer's service requirements as outlined in this
Exhibit. Training will be charged at [*] plus travel expenses for each trainer
provided by Seller. Such third party service providers will be selected by
mutual agreement.
5. Supplier agrees all repairs will be free of defects in workmanship and
materials for [*] from the date of repair; as noted in affixed human readable
repair date code.
6. Prices for Refurbishment are as follows:
In Warranty: [*] included in Product Price [*]
Out of Warranty: To be negotiated on a case by case basis.
CND (Can Not Duplicate) Failure: [*]
Out of Warranty prices may be renegotiated quarterly. The failure information
provided by the Seller's repair process, will be used as the base line for
setting repair costs.
B. SPARE PARTS AVAILABILITY
1. At Buyer's option, Seller shall make available for purchase by Buyer
replacement parts and/or refurbishment for Products ("Spares"), and Seller
agrees to drop ship such Spares to the location designated by Buyer for a
minimum [*] after delivery of the last shipment of such Product.
Spares shall be [*].
Price for replacement parts, as set forth in Exhibit B will be set based upon
negotiated Product cost. The price for replacement parts after last shipment of
Product will [*] for the [*] Support.
Lead-time for Spares shall be as follows:
In Warranty Refurbishment cycle time - maximum [*] from RMA issuance to
stock
Out of Warranty Refurbishment cycle time - maximum [*] from RMA issuance to
stock
Replacements - [*]
Rush - [*]
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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CONFIDENTIAL
RMA issuance [*]
2. Buyer reserves the right to allocate supplier capacity to be used for
manufacture of Spares in those situations where the supplier is unable to meet
agreed upon replacement/refurbishment lead times.
3. Seller agrees to provide [*] status reports indicating quantities of
units returned, units which aren't repairable, and CND units for which no
trouble was found. In addition supplier will provide [*] reports which
pareto the types of failure found in repair. Such reports shall include, but
shall not be limited to, the following information:
- Buyer's part number
- Compaq Order number
- RMA issuance date
- Quantity
- Receipt date at Seller's repair site
- Ship date to Buyer
- Cycle time for each step of the process outlined in this Exhibit
E
C. DOCUMENTATION
Seller agrees to provide Theory of Operations, schematics, sourced Bill of
Material, etc. sufficient to enable repair of product.
D. TECHNICAL SUPPORT REQUIREMENTS
1. Seller will issue & control [*] requests and all relevant factory
issued field instructions in support of their or Compaq's designated service
provider(s)/repair center(s).
2. Seller shall designate a Seller representative(s) as Buyer's
contact(s) having the overall responsibility for management of the service of
Product and Spares throughout Seller's repair center(s).
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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EXHIBIT F
I. INSURANCE REQUIREMENTS
Without limiting any of the obligations or liabilities of
Seller, Seller shall maintain, as long as this Agreement is in effect, at
Seller's expense, insurance policies of the kind and limits listed below and
shall provide Buyer (Corporate Risk Management Department), at the address
indicated in Section 16 of this Agreement, subsequent to execution of this
Agreement, a Certificate of Insurance evidencing such coverage for the term of
this Agreement. Valid certificates of insurance shall be provided to Buyer per
the above requirement as soon as practicable following the issuance of each
renewal policy.
Seller shall also require any sub-contractors retained by Seller
for the purpose of producing or manufacturing Product to insure against the
following risks to the extent stated.
If such levels of coverage proves not to be available for any
reason, the Seller shall substitute equivalent coverage and notify the Buyer
(Corporate Risk Management Department) of the changes.
All policies listed below in II.A.(1) shall be in a [*]
II. DESCRIPTION OF COVERAGE, LIMITS AND SPECIFIC ENDORSEMENT REQUIREMENTS:
II.A.(1) Commercial General Liability
Bodily Injury/Property Damage [*]
[*]
Comprehensive Form Including (if applicable):
(1) Premises/Operations
(2) Products/Completed Operations
(3) Contractual Liability
(4) Independent Contractors
(5) Broad Form Property Damage
(6) Personal/Advertising Injury
(7) Owners' and Contractors' Protective
(8) Endorsed to add Compaq Computer Corporation as an Additional
Insured as required by contract
II.B All insurance coverages shall provide, where applicable, that:
II.B.1 Each Certificate of Insurance shall contain a provision that
coverage afforded under the policies [*] limits as stated in
II.A.(1). Furthermore, Seller will obtain an [*] policies
providing that the Seller's insurance shall be [*]. Any other valid and
collectible insurance or self-insurance maintained by or in the name of
the [*] shall be excess of the [*] insurance and shall not contribute
to it.
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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II.B.2 Notice of occurrences that may give rise to a claim given by the
insured to the insurer shall be sufficient to invoke protection of the
Policy.
II.B.3 The presence on the site of representatives of the Buyer or the
participation of the Buyer's representatives shall not invalidate the
policy.
II.B.4 Violation of the terms of any other policy issued by the insurer
shall not by itself invalidate the policy.
II.C Seller shall cause each insurance policy issued hereunder to provide:
II.C.1 [*] and that the coverage shall contain no limitations on the
scope of protection afforded to the [*]
II.C.2 that each insurance policy required by this section of the
Agreement, and in accordance with Section II.B.1, shall be endorsed to
state that coverage shall [*]
II.D
II.D.1 It is Seller's responsibility to ensure that the insurance
requirements listed above are in effect for the full term of this
Agreement. [*]
II.D.2 Insurance is to be placed with insurers with a [*] and Seller
shall use best efforts to place insurance with carriers [*]. For use of
any insurance carrier which does not meet this requirement, approval
must be received in writing from the Buyer (Corporate Risk Management
Department).
[*]CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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EXHIBIT G
COMPAQ SUPPLIER COMPLIANCE POLICY
Compaq Computer Corporation is proud of its reputation for integrity and honesty
in its business dealings. Our corporate culture of fairness and quality is one
of our most valuable assets. Maintaining this reputation is an ongoing process,
and Compaq considers it be one of its most important jobs.
It is essential that the highest standards of conduct be observed by Compaq, as
well as its suppliers. In fact, Compaq believes that it suppliers must operate
at the same high level of integrity as Compaq. In this regard, Compaq has
adopted a Supplier Compliance Policy. As part of this policy, Compaq expects
each of its suppliers to comply fully with the requirements set forth below.
This policy requires that Compaq suppliers and their employees exercise the
highest degree of honesty and integrity in conducting their business with
Compaq, as well as other third parties.
1. ETHICAL STANDARDS Compaq expects its suppliers to avoid conflicts of
interest that create opportunities for abuses and allegations of
commercial bribery.
A. Business Courtesies - Business should be won or lost on the merits of
the products and services being offered by its suppliers. Therefore,
supplier funds or personal funds of its employees should not be used to
provide a business courtesy unless the gift is commemorative, ceremonial
or customary in nature and has an insubstantial value. Under no
circumstances should a kickback or bribe ever be offered to Compaq or
its employees.
II. ENVIRONMENTAL STANDARDS Compaq expects its suppliers to conduct
their business in a manner that provides a safe, healthy and
environmentally friendly workplace and meets or exceeds all applicable
environment and work place legal requirements.
A. Hazardous Materials, Air Emissions & Waste Water Discharges - Compaq
requires that each of its suppliers comply with all applicable
environmental laws and regulations regarding hazardous materials, air
emissions and waste water discharges, including those regarding the
manufacture, transportation, storage, disposal, and release to the
environment of such materials.
B. Health & Safety - Compaq expects its suppliers to maintain their
facilities in a safe and healthy manner and in compliance with all
applicable laws and regulations.
III. EMPLOYMENT STANDARDS Compaq expects its suppliers to foster human
dignity by treating their employees fairly and with respect. Compaq
requires that its suppliers comply with all applicable national, state
and local employment laws.
A. Child Labor - Compaq expect its suppliers to refrain from using child
labor. Workers can be no less than 14 years of age and not younger than
the compulsory age to be in school. Compaq supports the development of
legitimate workplace apprenticeship programs for the educational benefit
of young people.
B. Prison Labor - Compaq expects its suppliers to refrain from utilizing
prison or forced labor within their workforces.
C. Disciplinary Practices - Compaq expects its suppliers to refrain from
using corporal punishment or other forms of mental or physical coercion
with their employees.
D. Working Hours - Compaq expects its suppliers to comply with all
applicable laws regarding compensation for overtime work performed by
their employees. Additionally, employees should be allowed at least one
day off in seven.
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IV. COMPETITIVE STANDARDS Compaq expects its suppliers to compete fairly
and vigorously within the marketplace. Compaq discourages
anti-competitive practices by its suppliers that inhibit the operation
of a free-market economy. Compaq requires that its suppliers comply with
all applicable competition laws.
A. Price fixing - Compaq expects its suppliers to refrain from
collaborating with competitors to fix prices for its goods.
B. Anticompetitive Practices - Compaq will not tolerate anticompetitive
practices by its suppliers, including efforts to allocate markets or
customers among their competitors or to fix bids.
V. CONFIDENTIALITY Compaq requires that its suppliers enforce a policy that
ensures the confidentiality of all proprietary or confidential
information provided by Compaq.
A. Non-disclosure Agreement - Compaq requires that its suppliers comply
with the terms of the Confidentiality and Non-disclosure Agreements that
have been entered into with Compaq
B. Other Confidentiality Obligations - Compaq requires its suppliers to
refrain from making unauthorized disclosures to Compaq of third party
confidential information.
VI. COMPLIANCE WITH GOVERNMENT LAWS AND REGULATIONS Compaq expects its
suppliers to comply with all applicable laws and regulations governing
their business relationships with Compaq.
Compaq is dedicated to maintaining its reputation for fairness and integrity. In
many ways the future success of both Compaq and its suppliers depends on our
ability to build on these high standards.
The foregoing requirements are not intended to be all-inclusive, and Compaq
expects its suppliers to exercise ethical judgment beyond strict compliance with
the law, and to be responsive to the concerns of the communities in which they
operate. Failure to comply with the above requirements may result in reduction
of business with Compaq, or in some instances, termination of your relationship
with Compaq. Understanding and complying with the above requirements will help
to ensure that our mutual business activities are conducted in the highest
ethical and professional manner.
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Exhibit H
JIT Requirements
[*]
[*]
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Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our firm) included in or made a part of this
registration statement.
San Jose, California ARTHUR ANDERSEN LLP
June 11, 1999
