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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1999
REGISTRATION NO. 333-78029
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 6
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 3576 77-0308899
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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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, ESQ. WILLIAM D. SHERMAN, ESQ.
BRUCE M. MCNAMARA, ESQ. JUSTIN L. BASTIAN, ESQ.
THOMAS I. SAVAGE, ESQ. ROCHELLE A. KRAUSE, ESQ.
MICHAEL L. HUSKINS, ESQ. GARY A. TRUJILLO, ESQ.
WILSON SONSINI GOODRICH & ROSATI MORRISON & FOERSTER LLP
PROFESSIONAL CORPORATION 755 PAGE MILL ROAD
650 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94304-1018
PALO ALTO, CALIFORNIA 94304-1050 (650) 813-5600
(650) 493-9300
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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. [ ]
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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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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 JULY 16, 1999
3,500,000 Shares
gadzoox LOGO
GADZOOX NETWORKS, INC.
Common Stock
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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 $18.00 and $20.00 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 525,000 additional
shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.
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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.
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TABLE OF CONTENTS
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Page
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PROSPECTUS SUMMARY............... 3
RISK FACTORS..................... 6
SPECIAL NOTE REGARDING
FORWARD-LOOKING
STATEMENTS..................... 18
USE OF PROCEEDS.................. 18
DIVIDEND POLICY.................. 18
CAPITALIZATION................... 19
DILUTION......................... 20
SELECTED FINANCIAL DATA.......... 21
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...... 22
BUSINESS......................... 36
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Page
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MANAGEMENT....................... 54
CERTAIN TRANSACTIONS............. 65
PRINCIPAL STOCKHOLDERS........... 70
DESCRIPTION OF CAPITAL STOCK..... 73
SHARES ELIGIBLE FOR
FUTURE SALE.................... 76
UNDERWRITING..................... 78
NOTICE TO CANADIAN RESIDENTS..... 80
LEGAL MATTERS.................... 81
CHANGE IN INDEPENDENT
ACCOUNTANTS.................... 81
EXPERTS.......................... 81
ADDITIONAL INFORMATION........... 82
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.
<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 $7,994,250 of our convertible
note into 1,045,000 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 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 have only been 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 made up
of computers and 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 hub
and switch ports shipped in the two years ended December 31, 1998. We believe we
have the largest installed base of SAN networking ports.
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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..........3,500,000 shares
Common stock to be outstanding
after this offering.........24,587,393 shares(1)
Use of proceeds...............General corporate purposes, including capital
expenditures, working capital and potential
acquisitions
Nasdaq National Market
symbol........................ZOOX
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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QUARTER ENDED
YEAR ENDED MARCH 31, JUNE 30,
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1995 1996 1997 1998 1999 1998 1999
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(UNAUDITED)
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STATEMENTS OF OPERATIONS DATA:
Net revenues............................. $ -- $ 104 $ 823 $ 9,811 $ 24,821 $ 5,406 $ 9,211
Loss from operations..................... $(316) $(881) $(3,856) $(10,013) $(15,706) $(3,524) $(3,094)
Net loss................................. $(310) $(856) $(2,089) $ (9,640) $(15,932) $(3,545) $(3,236)
Basic net loss per share................. $ (0.59) $ (2.41) $ (3.33) $ (0.79) $ (0.58)
Weighted average shares used in computing
basic loss per share(2)............... 3,551 3,995 4,789 4,468 5,626
Pro forma basic net loss per share
(unaudited)........................... $ (0.91) $ (0.21) $ (0.17)
Weighted average shares used in computing
pro forma basic net loss per share
(unaudited)(1)(2)..................... 17,594 16,789 19,533
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JUNE 30, 1999
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PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
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(UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 8,845 $ 8,845 $69,815
Working capital........................................... 13,156 13,156 74,126
Total assets.............................................. 25,274 25,274 86,244
Long-term obligations..................................... 15,047 15,047 7,053
Total stockholders' equity................................ 2,950 2,950 71,914
</TABLE>
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(1) Based on the number of shares of common stock outstanding as of June 30,
1999 (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
6,225,254 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 table
in "Capitalization."
(2) 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.
(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 amounts reflect (1) the sale of 3,500,000 shares
of common stock in this offering at an assumed initial public offering price
of $19.00 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 $7,994,250 of our convertible
note into 1,045,000 shares of common stock upon the closing of this
offering.
5
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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 June 30, 1999, our accumulated deficit was $32.3 million. For the fiscal
year ended March 31, 1999, our net loss was $15.9 million, and for the quarter
ended June 30, 1999, our net loss was $3.2 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 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."
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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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- 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, in May, 1999, we 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 WILL 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> 11
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, 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 net revenues.
For the quarter ended June 30, 1999, approximately 76% of our net revenues came
from three customers with Compaq Computer Corporation (which now incorporates
all sales previously reported separately for Digital Equipment Corporation),
Hewlett-Packard Company and Bell Microproducts, Inc. each accounting for more
than 10% of our net revenues. 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 net
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
10
<PAGE> 12
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 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
11
<PAGE> 13
could be seriously harmed, particularly if the average selling price of our
products decreases significantly.
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 June 30, 1999, we had a total of 146
employees. We plan to continue to hire new employees to expand our operations
significantly to pursue existing
12
<PAGE> 14
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 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 EFFORTS TO PROTECT IT 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.
13
<PAGE> 15
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.
14
<PAGE> 16
WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES WHICH WILL SUBJECT US TO
ADDITIONAL BUSINESS RISKS.
For the quarter ended June 30, 1999, 31.7% of our net revenues were from
international sales activities, and for the fiscal year ended March 31, 1999,
20.5% of our net 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 THAT MAY
SUBSTANTIALLY INCREASE OUR COSTS AND THEREBY HARM OUR BUSINESS.
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;
15
<PAGE> 17
- risks associated with entering markets in which we have no or limited
prior experience; and
- 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 and directors and
their affiliates will beneficially own, in the aggregate, approximately 63.9% 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;
- limiting 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
16
<PAGE> 18
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;
- 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.
IF WE ARE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS, WE MAY BE UNABLE TO
DEVELOP OR ENHANCE OUR PRODUCTS, TAKE ADVANTAGE OF FUTURE OPPORTUNITIES OR
RESPOND TO COMPETITIVE PRESSURES OR UNANTICIPATED REQUIREMENTS, EACH OF WHICH
WOULD MATERIALLY HARM OUR BUSINESS.
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 be unable 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 IN THE BOOK VALUE 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 $16.08 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> 19
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,
including in particular our Capellix switch, (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 $60,970,000 from the
sale of the 3,500,000 shares of common stock (approximately $70,247,000 if the
underwriters exercise their over-allotment option in full), at an assumed
initial public offering price of $19.00 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> 20
CAPITALIZATION
The following table sets forth our capitalization and short-term debt as of
June 30, 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 3,500,000
shares of common stock in this offering at an assumed initial public
offering price of $19.00 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 $7,994,250 of our convertible note into 1,045,000 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>
JUNE 30, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Current portion of long-term obligations.................... $ 1,531 $ 1,531 $ 1,531
-------- -------- ---------
Long-term obligations, less current portion................. 15,047 15,047 7,053
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, 6,134,994 shares outstanding,
actual; 40,000,000 shares authorized, 20,042,393 shares
outstanding, pro forma; 150,000,000 shares authorized,
24,587,393 shares outstanding, pro forma as
adjusted(1)............................................ 31 100 122
Additional paid-in capital................................ 37,283 37,283 106,225
Deferred compensation..................................... (2,103) (2,103) (2,103)
Accumulated deficit....................................... (32,330) (32,330) (32,330)
-------- -------- ---------
Total stockholders' equity........................ $ 2,950 $ 2,950 $ 71,914
-------- -------- ---------
Total capitalization.............................. $ 19,528 $ 19,528 $ 80,498
======== ======== =========
</TABLE>
- -------------------------
(1) The number of shares of common stock outstanding after this offering
excludes the following:
- 4,356,731 shares issuable upon exercise of outstanding stock options as
of June 30, 1999 with a weighted average exercise price of $1.81 per
share;
- 1,069,174 shares reserved for issuance under our Amended and Restated
1993 Stock Plan, 1999 Director Stock Option Plan and 1999 Employee Stock
Purchase Plan as of June 30, 1999;
- up to 751,500 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 June
30, 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> 21
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 June 30, 1999, was
$2,950,000, or $0.15 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 3,500,000 shares of common
stock at an assumed initial public offering price of $19.00 per share (less
underwriting discounts and commissions and estimated offering expenses) and
conversion of approximately $7,994,250 of our convertible note (including
accrued interest), our pro forma as adjusted net tangible book value at June 30,
1999, would be $71,914,000 or $2.92 per share. This represents an immediate
increase in the pro forma as adjusted net tangible book value of $2.77 per share
to existing stockholders and an immediate dilution of $16.08 per share to new
investors, or approximately 85% of the assumed offering price of $19.00 per
share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $19.00
Pro forma net tangible book value per share at June 30,
1999................................................... $0.15
Accretion per share attributable to conversion of our
convertible note....................................... 0.37
Increase per share attributable to this offering.......... 2.40
-----
Pro forma as adjusted net tangible book value per share
after the offering........................................ 2.92
------
Dilution per share to new investors......................... $16.08
======
</TABLE>
The following table shows on a pro forma as adjusted basis at June 30,
1999, after giving effect to the sale of the 3,500,000 shares of common stock at
an assumed initial public offering price of $19.00 per share (before
underwriting discounts and estimated offering expenses), conversion of
approximately $7,994,250 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............. 20,042,393 82% $ 34,038,859 31% $ 1.70
Conversion of convertible note.... 1,045,000 4 7,994,250 8 $ 7.65
New investors..................... 3,500,000 14 66,500,000 61 $19.00
---------- --- ------------ ---
Total................... 24,587,393 100% $108,533,109 100%
========== === ============ ===
</TABLE>
- -------------------------
(1) The number of shares of common stock outstanding after this offering
excludes 6,225,254 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 table in "Capitalization."
20
<PAGE> 22
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. The statement of operations data for the quarters ended June 30,
1998 and June 30, 1999 and balance sheet data as of June 30, 1999 are unaudited.
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 the audited Financial Statements
and the Notes thereto appearing elsewhere in this prospectus. Historical results
are not necessarily indicative of results that may be expected for any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED MARCH 31, JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1998 1999
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues....................... $ -- $ 104 $ 823 $ 9,811 $ 24,821 $ 5,406 $ 9,211
Cost of revenues................... -- 68 483 7,898 18,638 4,181 5,414
-------- -------- -------- -------- -------- ------- -------
Gross margin....................... -- 36 340 1,913 6,183 1,225 3,797
-------- -------- -------- -------- -------- ------- -------
Operating expenses:
Research and development......... 230 458 2,168 7,178 13,928 3,112 3,917
Sales and marketing.............. -- 126 1,126 2,974 5,765 1,347 1,888
General and administrative....... 86 333 902 1,774 1,649 262 764
Amortization of deferred
compensation................... -- -- -- -- 547 28 322
-------- -------- -------- -------- -------- ------- -------
Total operating expenses..... 316 917 4,196 11,926 21,889 4,749 6,891
-------- -------- -------- -------- -------- ------- -------
Loss from operations............... (316) (881) (3,856) (10,013) (15,706) (3,524) (3,094)
Interest income, net of interest
expense.......................... 6 25 259 373 (226) (21) (142)
Sale of electronic test equipment
rights, net...................... -- -- 1,508 -- -- -- --
-------- -------- -------- -------- -------- ------- -------
Net loss........................... $ (310) $ (856) $ (2,089) $ (9,640) $(15,932) $(3,545) (3,236)
======== ======== ======== ======== ======== ======= =======
Basic net loss per share........... $ (0.59) $ (2.41) $ (3.33) $ (0.79) $ (0.58)
======== ======== ======== ======= =======
Weighted average shares used in
computing basic loss per
share(1)......................... 3,551 3,995 4,789 4,468 5,626
======== ======== ======== ======= =======
Pro forma basic net loss per share
(unaudited)...................... $ (0.91) $ (0.21) $ (0.17)
======== ======= =======
Weighted average shares used in
computing pro forma basic net
loss per share (unaudited)(1).... 17,594 16,789 19,533
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER
YEAR ENDED MARCH 31, ENDED
----------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 1999
------- ------- ------- ------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term
investments................................. $ 690 $ 1,729 $ 7,067 $ 4,624 $12,202 $ 8,845
Working capital............................... 674 1,647 6,895 6,385 15,912 13,156
Total assets.................................. 772 2,108 8,825 14,942 28,598 25,274
Long-term obligations, less current portion... -- -- 16 1,426 15,057 15,047
Total stockholders' equity.................... 710 1,859 7,820 8,169 5,659 2,950
</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.
21
<PAGE> 23
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. As of
June 30, 1999, we had an accumulated deficit of $32.3 million and our net loss
for the quarter ended June 30, 1999 was approximately $3.2 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 net revenues. For the quarter ended June 30, 1999,
approximately 76% of our net revenues came from three customers with Compaq
Computer Corporation (which now incorporates all sales previously reported
separately for Digital Equipment Corporation),
22
<PAGE> 24
Hewlett-Packard Company and Bell Microproducts, Inc. each accounting for more
than 10% of our net revenues. 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 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
23
<PAGE> 25
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 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 net revenues:
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED MARCH 31, JUNE 30,
-------------------------- --------------------
1997 1998 1999 1998 1999
------ ------ ------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Net revenues...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................. 58.7 80.5 75.1 77.3 58.8
------ ------ ------ ----- -----
Gross margin...................... 41.3 19.5 24.9 22.7 41.2
------ ------ ------ ----- -----
Operating expenses:
Research and development....... 263.4 73.1 56.1 57.6 42.5
Sales and marketing............ 136.8 30.3 23.2 24.9 20.5
General and administrative..... 109.6 18.1 6.7 4.9 8.3
Amortization of deferred
compensation................. -- -- 2.2 0.5 3.5
------ ------ ------ ----- -----
Total operating
expenses................ 509.8 121.5 88.2 87.9 74.8
------ ------ ------ ----- -----
Loss from operations.............. (468.5) (102.0) (63.3) (65.2) (33.6)
Interest income, net of interest
expense........................ 31.5 3.8 (0.9) (0.4) (1.5)
Sale of electronic test equipment
rights, net.................... 183.2 -- -- -- --
------ ------ ------ ----- -----
Net loss.......................... (253.8)% (98.2)% (64.2)% (65.6)% (35.1)%
====== ====== ====== ===== =====
</TABLE>
24
<PAGE> 26
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.
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
net 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.
25
<PAGE> 27
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 net 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. The increase in absolute dollars 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 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
26
<PAGE> 28
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 and 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 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.
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Net Revenues
Net revenues for the quarter ended June 30, 1999 were $9.2 million, an
increase of $3.8 million, or 70%, compared with net revenues of $5.4 million for
the quarter ended June 30, 1998. The increase in net revenues from the quarter
ended June 30, 1998 to June 30, 1999 was primarily due to greater sales to
original equipment manufacturers and distribution channel partners.
Gross Margin
Gross margins increased to $3.8 million, or 41.2% of net revenues, during
the quarter ended June 30, 1999 from gross margins of $1.2 million, or 22.7% of
net revenues during the quarter ended June 30, 1998. Our gross margin increased
primarily due to the following factors:
- Our economies of scale increased in the quarter ended June 30, 1999
primarily due to higher net revenues and cost savings achieved by Sanmina
Corporation, our current contract manufacturer.
- Approximately 28% of our net revenues came from sales to distribution
channel customers during the quarter ended June 30, 1999 compared to
approximately 6% of our net revenues from our distribution channel
customer sales during the quarter ended June 30, 1998. Selling prices to
distribution channel customers are typically higher than selling prices
to our OEM customers.
- During the quarter ended June 30, 1999, we sold fewer units of the lower
margin Gibraltar GL product than in previous quarters.
27
<PAGE> 29
Gross margins achieved during the quarter ended June 30, 1999 may not be
indicative of gross margins in future quarters.
Research and Development Expenses
Research and development expenses were $3.9 million for the quarter ended
June 30, 1999, an increase of $805,000, or 26%, over research and development
expenses of $3.1 million for the quarter ended June 30, 1998. During the quarter
ended June 30, 1999, our research and development efforts focused primarily on
the design and development of the Capellix storage switch, two new ASIC chips
and several new products and product enhancements. We expect to begin commercial
shipment of our Capellix storage switch product during the quarter ending
September 30, 1999.
Sales and Marketing Expenses
Sales and marketing expenses were $1.9 million for the quarter ended June
30, 1999, an increase of $541,000, or 40%, over sales and marketing expenses of
$1.3 million for the quarter ended June 30, 1998. Sales and marketing expenses
in the quarter ended June 30 have historically been higher primarily due to the
Networld+Interop tradeshow in that quarter. We have added personnel to our sales
and marketing departments to facilitate growth in our net revenues and to enable
us to further develop our distribution channel through the development of sales
tools, in-depth training in technology, and sales support.
General and Administrative Expenses
General and administrative expenses were approximately $764,000 for the
quarter ended June 30, 1999, an increase of $502,000, or 192%, over general and
administrative expenses of approximately $262,000 for the quarter ended June 30,
1998. This growth in general and administrative expense was primarily due to the
addition of new accounting, finance and information systems personnel.
Amortization of Deferred Compensation
In connection with the grant of stock options to employees, we amortized
approximately $322,000 in deferred compensation during the quarter ended June
30, 1999. The amount of deferred compensation expense during the quarter ended
June 30, 1998 was approximately $28,000.
Interest Income, Net of Interest Expense
Interest income, net of interest expense was approximately $142,000 for the
quarter ended June 30, 1999, an increase of $121,000, or 576%, over interest
income, net of interest expense of approximately $21,000 for the quarter ended
June 30, 1998. The increase was primarily due to interest accrued but not paid
on our convertible note issued in September 1998.
28
<PAGE> 30
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for each of the nine
quarters in the period ending June 30, 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, JUN. 30,
1997 1997 1997 1998 1998 1998 1998 1999 1999
-------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT AS A PERCENTAGE OF NET REVENUES)
<S> <C> <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 $ 9,211
Cost of revenues........... 631 1,299 2,580 3,388 4,181 4,412 4,550 5,495 5,414
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross margin............... 20 274 658 961 1,225 1,439 1,433 2,086 3,797
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development............ 1,133 1,590 1,877 2,578 3,112 3,411 3,750 3,655 3,917
Sales and marketing...... 590 495 776 1,113 1,347 1,240 1,577 1,601 1,888
General and
administrative......... 376 414 423 561 262 301 434 652 764
Amortization of deferred
compensation........... -- -- -- -- 28 87 184 248 322
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.......... 2,099 2,499 3,076 4,252 4,749 5,039 5,945 6,156 6,891
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from operations....... (2,079) (2,225) (2,418) (3,291) (3,524) (3,600) (4,512) (4,070) (3,094)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total other income (expense)... 121 112 112 28 (21) (40) (51) (114) (142)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss................... $(1,958) $(2,113) $(2,306) $(3,263) $(3,545) $(3,640) $(4,563) $(4,184) $(3,236)
======= ======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF NET
REVENUES:
Net revenues............... 100.0% 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 58.8
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross margin............... 3.0 17.4 20.3 22.1 22.7 24.6 24.0 27.5 41.2
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development............ 174.0 101.1 58.0 59.3 57.6 58.3 62.7 48.2 42.5
Sales and marketing...... 90.6 31.5 24.0 25.6 24.9 21.2 26.4 21.1 20.5
General and
administrative......... 57.8 26.3 13.0 12.9 4.9 5.1 7.2 8.6 8.3
Amortization of deferred
compensation........... -- -- -- -- 0.5 1.5 3.1 3.3 3.5
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.......... 322.4 158.9 95.0 97.8 87.9 86.1 99.4 81.2 74.8
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from operations....... (319.4) (141.5) (74.7) (75.7) (65.2) (61.5) (75.4) (53.7) (33.6)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total other income (expense)... 18.6 7.2 3.5 0.6 (0.4) (0.7) (0.9) (1.5) (1.5)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss................... (300.8)% (134.3)% (71.2)% (75.1)% (65.6)% (62.2)% (76.3)% (55.2)% (35.1)%
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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Net revenues increased in each of the nine quarters ended June 30, 1999.
These quarterly increases were 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 nine quarters ended
June 30, 1999 with the exception of a decrease in the quarter ended December 31,
1998. This decrease was primarily 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.
Gross margins increased to $3.8 million, or 41% of net revenues, during the
quarter ended June 30, 1999 from gross margins of $1.2 million, or 22.7% of net
revenues during the quarter ended June 30, 1998. Our gross margin increased
primarily for the following reasons:
- Our economies of scale increased in the quarter ended June 30, 1999
through higher net revenues and cost savings achieved through Sanmina
Corporation, our current contract manufacturer.
- Approximately 28% of our net revenues came from sales to distribution
channel customers during the quarter ended June 30, 1999 compared to
approximately 6% of our net revenues from our distribution channel
customer sales during the quarter ended June 30, 1998. Selling prices to
distribution channel customers are typically higher than selling prices
to our OEM customers.
- During the quarter ended June 30, 1999, we sold fewer units of the lower
margin Gibraltar GL product than in previous quarters.
Gross margins achieved during the quarter ended June 30, 1999 may not be
indicative of gross margins in future quarters.
Research and development expenses have generally increased in each of the
nine quarters ended June 30, 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 quarters ended June 30, and the Comdex
tradeshow during the quarters ended December 31. We expect sales and marketing
costs to continue to increase in absolute dollars.
General and administrative expenses increased for each of the five quarters
ended June 30, 1999. 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, 1998, we transferred several employees
from the general and administrative area to other departments such as sales,
marketing, and research and development resulting in a decrease in general and
administrative costs, and a corresponding increase in research and development
and sales and marketing. 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
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facility. We increased our facility size from approximately 27,000 square feet
to approximately 53,000 square feet, increasing facility costs during the
quarters ended March 31, 1999 and June 30, 1999 over facility costs in prior
quarters.
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.
In September 1998, we entered into a $15.0 million convertible note
agreement with Seagate Technology, Inc. Under this agreement, Seagate Technology
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. We
have the option to convert any portion of the then outstanding balance of
principal and interest on this convertible note into shares of our Series G
preferred stock, or common stock after completion of this offering, 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 Technology 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
Technology may declare all outstanding interest and principal immediately due
and payable in cash. We may, upon 30 days written notice to Seagate Technology,
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 June 30, 1999, the total amount of outstanding principal
and accrued interest on the convertible note was $13,743,225. 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 June 30, 1999, that we will convert
approximately $7,994,250 of our convertible note into 1,045,000 shares of our
common stock. Accordingly, following the conversion of this amount, there would
be $5,748,975 of our convertible note outstanding, which would be convertible
into 751,500 shares of our
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<PAGE> 33
common stock. For a more complete discussion of the convertible note and our
agreement with Seagate Technology, 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 $8.8 million at
June 30, 1999, down from $12.2 million at March 31, 1999. Cash, cash equivalents
and short-term investments totaled $8.8 million at June 30, 1999. The decrease
from March 31, 1999 was primarily due to cash used in operations of $2.8 million
and capital expenditures of $603,000.
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
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 21(st) century date as a 20(th) 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 20(th) and 21(st) 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
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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. The majority 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 existing vendors. 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 which are still in business. We are not using legacy hardware or
software that would be more likely to have calendar issues because of its age.
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.
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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. 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%. We sell our SAN
products internationally.
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.
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 are subject to SFAS No. 133 since 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,
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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 June 30, 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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BUSINESS
OVERVIEW
We are a leading provider of hardware and software products that enable the
creation of networks made up of computers and data storage devices which have
become known as "storage area networks," or SANs. We helped pioneer the
development of SANs by taking the concepts used to connect computers to one
another in local area networks and applying those same concepts to the
connection of computers and data storage devices. Our SAN products are based on
fibre channel technology, a set of specifications designed to enable computing
devices to exchange large amounts of data. We have designed our products 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 switch that can be configured to perform multiple functions by adding
hardware; 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 hub and switch ports shipped in the
two years ended December 31, 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 business 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
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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;
- 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 connecting individual high-performance
computers, known as servers, to dedicated storage devices. This approach results
in a "captive" storage architecture where storage devices are connected to only
one server, and not to any of the other servers utilized by an enterprise. These
connections are made 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. Small computer system interface technology 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, or rate at which data can be
transmitted, of commercially-available small computer system interface
technology is fixed at 40 or 80 megabytes per second. Accordingly, the
addition of a new storage
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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. Small computer system interface technology does not
have any inherent capability to manage connections, storage or data. As a
result, servers are burdened with 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. Because of this lack
of centralized management, we believe the cost of managing storage
exceeds the cost of the storage devices themselves.
- Lack of Availability and Disaster Tolerance. In general, a small
computer system interface-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 small computer systems
interface 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.
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 model for connecting storage devices
with servers 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 hub and switch ports shipped in the two years
ended December 31, 1998. We believe we have the largest installed base of SAN
networking ports.
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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. Our products include an active hub, a hub with intelligent diagnostics,
an area switch and a chassis switch for SANs. Utilizing the proven principles of
centralized network management for local area networks, 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.
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
businesses 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 simultaneous 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.
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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 tape backup devices and
disk arrays, or disk drives grouped together to provide added storage capacity.
Our products also leverage the SAN environment to 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.
Data Availability and Disaster Tolerance
Our products are designed to further enhance SANs by allowing network
administrators to specify primary and secondary data transmission pathways known
as 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 small computer system interface
technology, 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, we
believe 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 small computer system interface
technology, which allows them to better preserve their investment in the
equipment that they already own.
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
Our products are designed to allow storage devices to share data without
the intervention of a server. This feature creates a platform that helps enable
third-party applications such as serverless backup, an application that allows
backups to be performed
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over a SAN without a server. Serverless backup helps alleviate servers and local
area networks of backup traffic so they can more effectively serve clients.
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 Technological 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 launch 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 that 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 design products that can be upgraded to provide a
broad range of features, enhancements and services to our growing installed
base. This represents a significant opportunity because we believe that 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
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growth by supporting downloadable agents, "plug-in" expansion modules and
upgradable software applications.
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 local area network
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,
thereby creating a distributed data management environment.
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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<PAGE> 44
Work Closely with Strategic Partners and Industry Alliances
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 and industry alliances with leading technology companies,
including the following:
ATL Products, Inc.
(data backup applications)
Compaq Computer Corporation
(storage management)
EMC Corporation
(Sponsor of FibreAlliance for 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 application specific integrated circuits
(ASIC) cores and firmware agents, or small software applications used to carry
out specific functions. 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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<PAGE> 45
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 hub - Enables a cost-effective solution for
- 9-port active hub entry-level SANs
Bitstrip October 1995 - Compact, simple design enhances ease
of installation and use
------------------------------------------------------------------------------------------------
- Entry-level managed hub - Enables cost-effective centralized
Gibraltar GL May 1998 - 6-port managed hub management of work-group environments
- Management via Ventana
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
HIGH-END HUB
<TABLE>
<C> <S> <C> <C> <C> <C>
- Managed hub - Enables efficient scalability for
Gibraltar C/XM February 1997 - 10-port managed hub enterprise environments
- Management via Ventana
------------------------------------------------------------------------------------------------
- Modular managed hub - Provides modular management and
- 12-port managed hub scalability for high-capacity
Gibraltar GS August 1997 enterprise environments
- Management via Ventana
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ENTRY-LEVEL SWITCH
<TABLE>
<C> <S> <C> <C> <C> <C>
- Switch that supports embedded backup - Protocol compatibility with existing
agents for serverless backup SAN devices enhances ease of
- 3-port area switch 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 switch - High bandwidth backplane enables more
- Modular chassis-based design effective scalability than 8-port or
- Scalable from 6 ports to 34 ports 16-port switches
- 28-gigabit per second switching - Designed to be integrated without
backplane reengineering or changes to existing
Capellix (1) - Innovative, standards- based storage devices
switch technology - "Plug-in" modules provide
- Supports multiple fibre channel and configuration flexibility
networking protocols through protocol - Modular hardware and agent design
plug in modules offers upgradability and extensibility
- Management via Ventana
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
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<PAGE> 46
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
COMMERCIAL
PRODUCT NAME SHIPMENT DESCRIPTION BENEFITS
- -----------------------------------------------------------------------------------------------
<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>
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<PAGE> 47
CUSTOMERS
We began commercial shipment of our SAN products in fiscal 1996, and as of
June 30, 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 June 30, 1999, our sales and marketing organization consisted of a
total of 31 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
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<PAGE> 48
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 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 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 June 30, 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 delivering more mature enterprise applications and solutions
to the open market, 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 end-user 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
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<PAGE> 49
end-user support organization. We provide direct self-service support for our
products through our website. As of June 30, 1999, our customer service
organization included two full-time employees. We plan to augment that staff as
required in the future.
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, local area network and wide area network 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 fibre channel arbitrated loop 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 small computer system interface technology, 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 complementary metal-oxide semiconductor (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
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<PAGE> 50
devices. We have expertise in chassis design, including design for
manufacturability, testability, usability, reliability and low cost.
Software
As of June 30, 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
fibre-channel physical layer (FC-PH), fiber-channel arbitrated loop (FC-AL),
small computer system interface over fibre channel (FCP), fibre-channel fabric
loop attach (FC-FLA), fibre channel general services (FC-GS) and fibre-channel
switch (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 will 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
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<PAGE> 51
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 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 the ISO 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. For the quarter
ended June 30, 1999, our research and development expenses were $3.9 million
compared to $3.1 million for the quarter ended June 30, 1998. 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 June 30, 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, 12 people engaged in
manufacturing engineering, 30 people engaged in product development and
engineering and 9 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, local area
network and wide area network 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
products, 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
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<PAGE> 52
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.
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
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<PAGE> 53
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 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 June 30, 1999, backlog for our products was approximately $7.9 million,
of which 81%, or approximately $6.4 million, is scheduled for delivery to
customers during the September 1999 quarter, compared to backlog of
approximately $2.8 million at June 30, 1998, of which 73%, or approximately $2.0
million, was scheduled for delivery to customers during the September 1998
quarter. Typically, our original equipment manufacturer customers forecast
expected purchases on a three to six month rolling basis, as compared to
distribution 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 June 30, 1999, we had 146 employees, 146 of whom were full-time. 67
employees were engaged in research and development, 20 were in engineering
services, 31 were in sales and marketing, 12 were in manufacturing and 16 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 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
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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 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 efforts
to protect it may cause us to become involved in costly and lengthy litigation
which could seriously harm our business."
FACILITIES
Our corporate headquarters facility, of approximately 65,000 square feet,
is located in San Jose, California. We lease our corporate headquarters facility
pursuant to a lease agreement that expires in November 2005. Of this space,
approximately 12,000 square feet are not available for us to occupy until
October 1999. We believe this existing facility is adequate for our needs
through September 2000.
We lease approximately 23,000 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 19,000 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 May 31, 1999:
<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
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<PAGE> 57
National Institute of Standards and Technology. Dr. Chang is a member of the
board of 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. 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.
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<PAGE> 58
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 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.
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<PAGE> 59
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"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION SECURITIES
------------------ UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
--------------------------- -------- ------- ------------
<S> <C> <C> <C>
Bill Sickler(1)................................. $198,750 -- 100,000
President and Chief Executive Officer
Kent Bridges.................................... 137,667 $63,451(2) 20,000
Vice President of Worldwide Sales
Alistair Black.................................. 142,500 -- 55,000
Chief Technology Officer
Wayne Rickard................................... 143,826 -- 45,000
Senior Vice President of Research and
Development
Kurt Chan(3).................................... 138,250 -- 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% of these shares per year. As of March 31, 1999, Mr. Sickler
held 350,000 shares of restricted common stock 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, with 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 38,990 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 Dr. Black. Dr. 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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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 to be effective upon completion of
this offering. On June 19, 1999, our stockholders approved this plan, as amended
and restated. 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) 5.0% of the outstanding shares on that date, or (c) a lesser amount as
determined by the board of directors. As of June 30, 1999, options to purchase
4,331,731 shares of common stock were outstanding under this plan, 2,954,095
shares had been issued upon exercise of options, net of repurchases, and 894,174
shares are available for future grant.
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
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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 and by our stockholders in June 1999. 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 June 30, 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 1,000 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 and only to the extent that they do not own
more than 5% of our outstanding shares.
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 at
least 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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employment or on the 91(st) 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 and by our stockholders in June 1999. 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.
Under our director plan, an option to purchase 5,000 shares of common stock
was automatically granted to each of our five non-employee directors serving on
our board of directors upon approval of the plan by the stockholders. Each newly
elected non-employee director will automatically receive an option to purchase
5,000 shares of common stock upon his or her 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.
As of June 30, 1999, options to purchase 25,000 shares of common stock were
outstanding, and options to purchase 25,000 shares of common stock were
available for future issuance.
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.
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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 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
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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.
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. 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 with ONSET Enterprise Associates. 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
except to the extent of his proportional interest therein.
Pursuant to a sale and rights transfer agreement dated as of May 26, 1999,
a third-party investor 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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<PAGE> 67
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 E. 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
11/19/98 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 Technology 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 Technology has made several investments in us
as described below. Stephen J. Luczo, one of our directors, is also the chief
executive officer of Seagate Technology.
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 Technology 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 Technology 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 Technology. 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
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<PAGE> 68
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 Technology, prepay
any portion of the convertible note in cash. In the event of a default, as
defined in the agreement, Seagate Technology may declare all outstanding
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 June 30, 1999, the total amount of outstanding principal
and accrued interest was $13,743,225.
Pursuant to an agreement that we entered into with Seagate Technology 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 Technology 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 Technology
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 Technology 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 Technology to maintain terminate 30 days after the closing of
this offering.
Also pursuant to this stockholders agreement, Seagate Technology has agreed
to certain restrictions on its ownership of our common stock. Specifically,
unless our board of directors consents, Seagate Technology has agreed not to:
- acquire beneficial ownership of any of our shares of capital stock if
after acquiring the shares, Seagate Technology 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 Technology acquires more than 19.9% of our voting
stock we have the right to purchase from Seagate Technology a sufficient number
of shares of voting stock so as to reduce the voting stock held by Seagate
Technology to no more than 19.9% of our outstanding voting stock. To purchase
shares held by Seagate Technology pursuant to this right, we will have to pay
the average per share cash price paid by Seagate Technology 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 June 30, 1999, that we will
convert approximately $7,994,250 of
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<PAGE> 69
our convertible note into 1,045,000 shares of our common stock. Accordingly,
following the conversion of this amount, there would be $5,748,975 of our
convertible note outstanding, which would be convertible into 751,500 shares of
our common stock.
These limitations on Seagate Technology'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.
Pursuant to the stockholders' agreement, Seagate Technology agreed that it
will not nor will it permit any of its affiliates to sell or transfer any shares
of our capital stock to a person or entity that is engaged in or has 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 Technology owns at least 7% of our
outstanding voting stock, Seagate Technology agreed that it will not nor will it
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 our 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 Technology 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 for our liquidation;
- to a wholly-owned subsidiary that has executed an agreement to be bound
by the same restrictions applicable to Seagate Technology 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 Technology 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 Technology upon conversion of the
convertible note we issued to Seagate Technology. With respect to these shares,
we have a right of first refusal to purchase any of these shares sold by Seagate
Technology for so long as Seagate Technology owns at
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<PAGE> 70
least 7% of our outstanding voting stock. Certain sales of our voting stock by
Seagate Technology, 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> 71
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of June 30, 1999, and as adjusted to
reflect the sale of common stock offered hereby by (1) each stockholder known by
us to own beneficially more than 5% of current common stock, (2) each Named
Executive Officer, (3) each of our directors and (4) 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)............................. 3,863,924 19.3% 20.0%(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).............................. 2,455,707 12.3 10.0
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 10.0
2490 Sand Hill Road
Menlo Park, CA 94025
Alistair Black(7)............................ 1,731,353 8.6 7.0
Rob Kuhling(8)............................... 1,716,385 8.6 7.0
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 7.0
2490 Sand Hill Road
Menlo Park, CA 94025
Denny R. Ko(9)............................... 1,606,206 8.0 6.5
c/o Dynamics Technology, Inc.
21311 Hawthorne Boulevard
Suite 300
Torrance, CA 90503-5610
Dynamics Technology, Inc.(10)................ 1,601,206 8.0 6.5
21311 Hawthorne Boulevard
Suite 300
Torrance, CA 90503-5610
Bill Sickler(11)............................. 1,432,315 7.1 5.8
Milton Chang................................. 1,228,166 6.1 5.0
c/o New Focus, Inc.
2630 Walsh Avenue
Santa Clara, CA 95051
</TABLE>
70
<PAGE> 72
<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)................................ 311,728 1.6 1.3
Wayne Rickard(13)............................ 283,291 1.4 1.1
Kent Bridges(14)............................. 251,353 1.1 0.9
All directors and executive officers as a
group
(14 persons)(15)........................... 15,432,361 72.7 63.9(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 June 30, 1999 are deemed outstanding, while such shares are not
deemed outstanding for purposes of computing percentage ownership of any
other person. Percentage of beneficial ownership is based upon 20,042,393
shares of common stock outstanding prior to this offering and 24,587,393
shares of common stock outstanding after this offering. 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 June 30,
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 7,604 shares issuable upon exercise of
options held by Mr. Luczo exercisable within 60 days of June 30, 1999. Mr.
Luczo disclaims beneficial ownership of shares held by Seagate.
(4) 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%. Based upon the number of shares of our common
stock outstanding at June 30, 1999, at the completion of this offering we
would convert $7,994,250 of this convertible note into 1,045,000 shares of
our common stock.
(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., 2,778 shares held by NEA Ventures 1996, L.P. and 5,000 shares
issuable upon exercise of options held by Mr. Morris exercisable within 60
days of June 30, 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.
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<PAGE> 73
(7) Represents 211,353 shares issuable upon exercise of options held by Dr.
Black exercisable within 60 days of June 30, 1999, 1,482,964 shares held by
The Savage/ 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., 322,497 shares held by ONSET Enterprise Associates III, L.P. and
5,000 shares issuable upon exercise of options held by Mr. Kuhling within
60 days of June 30, 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.,
22,000 shares issuable upon exercise of options held by Dynamics
Technology, Inc. and 5,000 shares issuable upon options held by Dr. Ko
exercisable within 60 days of June 30, 1999. Dr. Ko disclaims beneficial
ownership of the shares held by this entity except to the extent of his
proportional interest therein.
(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 June 30, 1999.
(11) Represents 97,395 shares issuable upon exercise of options held by Mr.
Sickler exercisable within 60 days of June 30, 1999, 1,299,783 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,
4,543 shares held by K. William Sickler, Trustee, or his successor under
the Brett Ellen Sickler Trust, 4,543 shares held by K. William Sickler,
Trustee, or his successor under the Cole William Sickler Trust, and 4,543
shares held by K. William Sickler, Trustee, or his successor under the
Joanna Jackson Sickler Trust. Of the 1,299,783 shares held by K. William
Sickler and Gail A. Sickler, Trustees UTA dated July 16, 1992, 275,000
shares are subject to our right of repurchase as of June 30, 1999, which
right lapses over time.
(12) Includes 20,833 shares subject to our right of repurchase as of June 30,
1999, which right lapses over time, and 111,728 shares issuable upon
exercise of options held by Mr. Chan exercisable within 60 days of June 30,
1999.
(13) Includes 233,291 shares issuable upon exercise of options held by Mr.
Rickard exercisable within 60 days of June 30, 1999.
(14) Includes 181,353 shares issuable upon exercise of options held by Mr.
Bridges exercisable within 60 days of June 30, 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
1,185,303 shares issuable upon exercise of options held by these
individuals exercisable within 60 days of June 30, 1999. Also includes an
aggregate of 295,833 shares subject to our right of repurchase as of June
30, 1999, which right lapses over time.
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<PAGE> 74
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, we 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 June 30, 1999, there were 20,042,393 shares of common stock
outstanding that were held of record by approximately 140 stockholders (assuming
conversion of all shares of preferred stock outstanding as of June 30, 1999).
There will be 24,587,393 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 $7,994,250 of
our convertible note (including accrued interest) into an aggregate of 1,045,000
shares. There are outstanding options to purchase a total of 4,356,731 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 of our
assets 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 our 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 our
control without further action by the stockholders.
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<PAGE> 75
Upon the closing of this offering, no shares of preferred stock will be
outstanding, and we have no present plans to issue any shares of preferred
stock.
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.
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STOCKHOLDERS' AGREEMENT
We entered into a stockholders' agreement with Seagate Technology, Inc.
pursuant to which we granted it certain rights, and Seagate Technology agreed to
limitations and restrictions with respect to the shares of our capital stock
that it holds. 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.
Our board of directors will be divided into three classes, each with
staggered three-year terms. 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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is BankBoston, N.A.
75
<PAGE> 77
NATIONAL MARKET LISTING
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "ZOOX."
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, based on shares outstanding as of June
30, 1999, we will have outstanding 24,587,393 shares of common stock, assuming
(1) the issuance of 3,500,000 shares of common stock in this offering, (2) no
exercise of the underwriters' over-allotment option, (3) conversion of
$7,994,250 of our convertible note into 1,045,000 shares of common stock and (4)
no exercise of options or warrants after June 30, 1999. All of the 3,500,000
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 21,087,393 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. 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. Accordingly, of the remaining 21,087,393
shares, 20,162,142 shares will become eligible for sale 180 days after the
effective date subject to Rules 144 and 701.
As of June 30, 1999, there were a total of 4,331,731 shares of common stock
subject to outstanding options under our Amended and Restated 1993 Stock Plan,
1,646,899 of which were vested, and nearly all of which are subject to lock-up
agreements. In addition, as of June 30, 1999, there were a total of 25,000
shares of common stock subject to outstanding options under our 1999 Director
Option Plan, all of which were vested and all of which were 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, the date that the lock-up agreements expire, a total of 2,423,324
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
76
<PAGE> 78
Purchase Plan and our 1999 Director Option Plan generally would be available for
resale in the public market.
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 245,874 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq Stock
Market's 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,
generally 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 purchase 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.
77
<PAGE> 79
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............................................. 3,500,000
=========
</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 525,000 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
78
<PAGE> 80
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.
The underwriters have reserved for sale, at the initial public offering
price up to 250,000 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 Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.
79
<PAGE> 81
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.
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
80
<PAGE> 82
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, Palo Alto, California.
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.
81
<PAGE> 83
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 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.
82
<PAGE> 84
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> 85
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> 86
GADZOOX NETWORKS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, 1999
MARCH 31, PRO FORMA
------------------- JUNE 30, STOCKHOLDERS'
1998 1999 1999 EQUITY (NOTE 9)
-------- -------- -------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 4,624 $ 12,202 $ 8,845
Accounts receivable, net of allowance of $65, $150
and $150, respectively.......................... 3,424 5,981 7,276
Inventories........................................ 3,463 5,306 3,932
Prepaid expenses and other current assets.......... 221 305 380
-------- -------- --------
Total current assets....................... 11,732 23,794 20,433
Property and equipment, net.......................... 3,125 4,553 4,590
Other assets......................................... 85 251 251
-------- -------- --------
$ 14,942 $ 28,598 $ 25,274
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable.................... $ 345 $ 371 $ 378
Current portion of capital lease obligations....... 550 1,080 1,153
Accounts payable................................... 3,302 4,488 3,513
Compensation related accruals...................... 767 705 806
Deferred revenue and other......................... 383 1,238 1,427
-------- -------- --------
Total current liabilities.................. 5,347 7,882 7,277
Convertible note..................................... -- 13,554 13,743
Note payable, net of current portion................. 567 196 99
Capital lease obligations, net of current portion.... 859 1,307 1,205
-------- -------- --------
Total liabilities.......................... 6,773 22,939 22,324
-------- -------- --------
Commitments and contingencies (Note 5)
Stockholders' equity:
Convertible preferred stock, $0.005 par value;
aggregate liquidation preference of $34,219 as
of June 30, 1999
Authorized -- 16,500,000 shares at June 30, 1999
and 10,000,000 shares pro forma
Issued and outstanding -- 12,227,822 shares,
13,907,399 shares and 13,907,399 shares as of
March 31, 1998, March 31, 1999 and June 30,
1999, respectively; no shares pro forma....... 60 69 69 $ --
Common stock, $0.005 par value
Authorized -- 40,000,000 shares at June 30, 1999
and 150,000,000 shares pro forma
Issued and outstanding -- 5,078,328 shares,
5,589,729 shares and 6,134,994 shares as of
March 31, 1998, March 31, 1999 and June 30,
1999, respectively; 20,042,393 shares pro
forma......................................... 26 28 31 100
Additional paid-in capital......................... 21,245 37,081 37,283 37,283
Deferred compensation.............................. -- (2,425) (2,103) (2,103)
Accumulated deficit................................ (13,162) (29,094) (32,330) (32,330)
-------- -------- -------- --------
Total stockholders' equity................. 8,169 5,659 2,950 $ 2,950
-------- -------- -------- ========
$ 14,942 $ 28,598 $ 25,274
======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-3
<PAGE> 87
GADZOOX NETWORKS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED MARCH 31, JUNE 30,
----------------------------- ------------------
1997 1998 1999 1998 1999
------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.................. $ 823 $ 9,811 $ 24,821 $ 5,406 $ 9,211
Cost of revenues.............. 483 7,898 18,638 4,181 5,414
------- -------- -------- ------- -------
Gross margin............. 340 1,913 6,183 1,225 3,797
------- -------- -------- ------- -------
Operating expenses:
Research and development.... 2,168 7,178 13,928 3,112 3,917
Sales and marketing......... 1,126 2,974 5,765 1,347 1,888
General and
administrative........... 902 1,774 1,649 262 764
Amortization of deferred
compensation............. -- -- 547 28 322
------- -------- -------- ------- -------
Total operating
expenses............... 4,196 11,926 21,889 4,749 6,891
------- -------- -------- ------- -------
Loss from operations.......... (3,856) (10,013) (15,706) (3,524) (3,094)
------- -------- -------- ------- -------
Other income (expense), net:
Sale of electronic testing
equipment rights, net.... 1,508 -- -- -- --
Interest income............. 264 524 489 47 119
Interest and other
expense.................. (5) (151) (715) (68) (261)
------- -------- -------- ------- -------
Total other income
(expense), net......... 1,767 373 (226) (21) (142)
------- -------- -------- ------- -------
Net loss...................... $(2,089) $ (9,640) $(15,932) $(3,545) $(3,236)
======= ======== ======== ======= =======
Basic net loss per share...... $ (0.59) $ (2.41) $ (3.33) $ (0.79) $ (0.58)
======= ======== ======== ======= =======
Weighted average shares used
in computing basic net loss
per share................... 3,551 3,995 4,789 4,468 5,626
======= ======== ======== ======= =======
Pro forma basic net loss per
share (unaudited)........... $ (0.91) $ (0.21) $ (0.17)
======== ======= =======
Weighted average shares used
in computing pro forma basic
net loss per share
(unaudited)................. 17,594 16,789 19,533
======== ======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-4
<PAGE> 88
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
Issuance of common stock
for cash (Unaudited)... -- -- 545,265 3 202 -- -- 205
Amortization of deferred
compensation
(Unaudited)............ -- -- -- -- -- 322 -- 322
Net loss (Unaudited)..... -- -- -- -- -- -- (3,236) (3,236)
---------- --- --------- --- ------- ------- -------- --------
BALANCE AT JUNE 30, 1999
(UNAUDITED).............. 13,907,399 $69 6,134,994 $31 $37,283 $(2,103) $(32,330) $ 2,950
========== === ========= === ======= ======= ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-5
<PAGE> 89
GADZOOX NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
YEARS ENDED MARCH 31, JUNE 30,
----------------------------- -------------------
1997 1998 1999 1998 1999
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(2,089) $ (9,640) $(15,932) $ (3,545) $ (3,236)
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 1,739 339 566
Amortization of deferred compensation........ -- -- 547 -- 322
Allowance for doubtful accounts.............. 50 15 85 -- --
Accrued interest............................. -- -- 460 -- 202
Loss on disposal of fixed assets............. -- -- 181 -- --
Changes in current assets and liabilities:
Accounts receivable........................ (361) (3,093) (2,642) 19 (1,295)
Inventories................................ (309) (3,036) (1,843) (1,548) 1,374
Prepaid expenses and other assets.......... (40) (239) (250) 83 (75)
Accounts payable and accrued liabilities... 713 3,490 1,939 1,224 (699)
------- -------- -------- -------- --------
Net cash used in operating activities... (3,395) (11,773) (15,716) (3,428) (2,841)
------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............. (807) (1,405) (1,598) (531) (603)
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) (531) (603)
------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible note.................. -- -- 15,000 -- --
Proceeds from note payable...................... -- 1,082 -- -- --
Payments on note payable........................ -- (170) (345) (84) (90)
Payments on capital lease obligations........... (18) (166) (782) 152 (28)
Proceeds from issuance of common stock.......... 93 52 130 5,017 205
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 5,085 87
------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (1,094) 4,477 7,578 1,126 (3,357)
Cash and cash equivalents at beginning of year.... 1,241 147 4,624 4,624 12,202
------- -------- -------- -------- --------
Cash and cash equivalents at end of year.......... $ 147 $ 4,624 $ 12,202 $ 5,750 $ 8,845
======= ======== ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.......................... $ 4 $ 54 $ 240 $ 52 $ 57
======= ======== ======== ======== ========
Property and equipment acquired under capital
lease obligations............................ $ 61 $ 1,532 $ 1,750 $ 316 $ 244
======= ======== ======== ======== ========
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> 90
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
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
The unaudited interim financial statements for the quarters ended June 30,
1998 and 1999 have been prepared on the same basis as the audited financial
statements and, in the opinion of management, reflect all normal recurring
adjustments necessary to present fairly the financial information set forth
therein in accordance with generally accepted accounting principles.
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 consist principally
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
F-7
<PAGE> 91
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
performs ongoing credit evaluations of its customers and maintains an allowance
for potential doubtful accounts.
At March 31, 1998 and 1999 and June 30, 1999, approximately 83%, 76% and
73%, respectively, of accounts receivable were concentrated with five customers,
as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------ JUNE 30,
1998 1999 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Customer A.......................... 59% 44% 24%
Customer B*......................... 11% 32% 32%
Customer C.......................... 13% --% --%
Customer D.......................... --% --% 17%
</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 are as
follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------------- JUNE 30,
1998 1999 1999
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer and laboratory equipment........ $2,407 $ 4,161 $4,466
Software................................. 787 1,678 1,786
Furniture and equipment.................. 551 809 829
Leasehold improvements................... 299 393 464
Construction in progress................. -- 80 179
------ ------- ------
4,044 7,121 7,724
Accumulated depreciation and
amortization........................... (919) (2,568) (3,134)
------ ------- ------
Property and equipment, net.............. $3,125 $ 4,553 $4,590
====== ======= ======
</TABLE>
F-8
<PAGE> 92
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of approximately $1,593,000, $3,370,000 and
$3,587,000, as of March 31, 1998 and 1999 and June 30, 1999, respectively.
Related accumulated amortization of these leased assets was approximately
$213,000, $1,043,000 and $1,335,000 as of March 31, 1998 and 1999 and June 30,
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 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 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.
F-9
<PAGE> 93
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
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.
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, 20,256,699, 17,209,012 and 20,108,479 shares for fiscal
1997, 1998 and 1999 and for the quarters ended June 30, 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> 94
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
The following table presents the calculation of basic and pro forma basic
net loss per share (in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1998 1999
------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss....................... $(2,089) $(9,640) $(15,932) $(3,545) $ (3,236)
======= ======= ======== ======= ========
Basic:
Weighted average shares of
common stock outstanding..... 4,936 4,980 5,374 5,203 5,961
Less: Weighted average shares
of common stock subject to
repurchase................... (1,385) (985) (585) (735) (335)
------- ------- -------- ------- --------
Weighted average shares used in
computing basic net loss per
share........................ 3,551 3,995 4,789 4,468 5,626
======= ======= ======== ======= ========
Basic net loss per share....... $ (0.59) $ (2.41) $ (3.33) $ (0.79) $ (0.58)
======= ======= ======== ======= ========
Pro forma:
Net loss....................... $(15,932) $(3,545) $ (3,236)
======== ======= ========
Shares used above.............. 4,789 4,468 5,626
Pro forma adjustment to reflect
weighted average effect of
assumed conversion of
convertible preferred stock
(unaudited).................. 12,805 12,321 13,907
-------- ------- --------
Weighted average shares used in
computing pro forma basic net
loss per share (unaudited)... 17,594 16,789 19,533
======== ======= ========
Pro forma basic net loss per
share (unaudited)............ $ (0.91) $ (0.21) $ (0.17)
======== ======= ========
</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
F-11
<PAGE> 95
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
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 and for the quarters
ended June 30, 1998 and 1999, product net revenues amounted to 95%, 99%, 98%,
98% and 93%, respectively, 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' 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' 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.
F-12
<PAGE> 96
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
3. SIGNIFICANT CUSTOMERS AND EXPORT SALES
For the years ended March 31, 1997, 1998 and 1999 and the quarters ended
June 30, 1998 and 1999, certain customers individually accounted for more than
10% of net revenues as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED MARCH 31, JUNE 30,
-------------------- --------------
1997 1998 1999 1998 1999
---- ---- ---- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Customer A................. 18% 58% 42% 50% 32%
Customer B................. -- -- 15% -- 29%
Customer C................. -- 11% 10% 17% --
Customer D................. 16% -- -- -- --
Customer E................. -- -- -- 12% --
Customer F................. -- -- -- -- 15%
</TABLE>
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 (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------- JUNE 30,
1998 1999 1999
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials....................... $1,539 $2,565 $1,248
Work-in-process..................... 1,730 210 761
Finished goods...................... 194 2,531 1,923
------ ------ ------
$3,463 $5,306 $3,932
====== ====== ======
</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
F-13
<PAGE> 97
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
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 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
F-14
<PAGE> 98
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
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 June 30, 1999,
there was a total of $13,743,225 of unpaid principal and interest outstanding
under the Convertible Note which, if converted, would have converted into
1,796,500 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 also restricts the
Company's ability to pay cash dividends. During fiscal 1998 and 1999 and as of
June 30, 1999, there were no borrowings outstanding under the line.
F-15
<PAGE> 99
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
9. CONVERTIBLE PREFERRED STOCK
Convertible preferred stock, at par, consists of the following (in
thousands, except share information):
<TABLE>
<CAPTION>
MARCH 31,
------------ JUNE 30,
1998 1999 1999
---- ---- -----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
Series A, 856,600 shares authorized, issued and
outstanding in 1999 and 1998, liquidation preference
of $217............................................. $ 4 $ 4 $ 4
Series B, 660,000 shares authorized, issued and
outstanding in 1999 and 1998, liquidation preference
of $250............................................. 3 3 3
Series C, 1,454,544 shares authorized, issued and
outstanding in 1999 and 1998, liquidation preference
of $800............................................. 7 7 7
Series D, 2,720,000 shares authorized, issued and
outstanding in 1999 and 1998, liquidation preference
of $2,103........................................... 14 14 14
Series E, 4,444,444 shares authorized, issued and
outstanding in 1999 and 1998, liquidation preference
of $8,000........................................... 22 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 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 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 4
--- --- ---
$60 $69 $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,
F-16
<PAGE> 100
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
respectively, plus all declared and unpaid dividends. If undistributed assets
remain after 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 1,796,500 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.
F-17
<PAGE> 101
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
10. COMMON STOCK
At June 30, 1999, shares of common stock were reserved for future issuances
as follows (unaudited):
<TABLE>
<S> <C>
1993 Stock Plan:
Outstanding options and rights................... 4,331,731
Reserved for future grants....................... 894,174
Employee Stock Purchase Plan....................... 150,000
Director Stock Option Plan:
Outstanding options.............................. 25,000
Reserved for future grants....................... 25,000
Conversion of preferred stock...................... 13,907,399
Conversion of Convertible Note..................... 1,796,500
Warrants to purchase Series F preferred stock...... 28,242
Warrants to purchase Series G preferred stock...... 19,607
----------
21,177,653
==========
</TABLE>
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.
F-18
<PAGE> 102
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
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
Authorized (unaudited)............... 500,000 -- --
Granted (unaudited).................. (396,300) 396,300 9.000
Cancelled (unaudited)................ 48,996 (48,996) 1.107
Exercised (unaudited)................ -- (545,265) 0.407
---------- ----------
Balance at June 30, 1999 (unaudited)... 894,174 4,331,731 1.773
========== ==========
</TABLE>
F-19
<PAGE> 103
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
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
F-20
<PAGE> 104
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
$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 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 and the quarters ended June
30, 1998 and 1999.
F-21
<PAGE> 105
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
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
F-22
<PAGE> 106
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
to be added on the first day of the Company's fiscal year, beginning in 2000,
equal to the 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. As of
June 30, 1999, options to acquire 25,000 shares of common stock were outstanding
under the Director Plan.
F-23
<PAGE> 107
APPENDIX - DESCRIPTION OF GRAPHICS
GADZOOX NETWORKS PROSPECTUS WRAPPER
Front inside cover:
Headline: "Growth In Enterprise Data"
Graphics: The following product names, with pictures of each product, are set
forth: "Ventana," "Capellix," Denali," "Gibralter" and "Bitstrip."
The following words appear in the background: "OLTP," "Internet," "Multimedia,"
"E-Commerce," "Decision Support" and "Data Warehousing."
In the upper right-hand corner, the Gadzoox logo is set forth.
Front Gatefold:
Graphics:
A pictorial presentation of the Gadzoox products, and the primary function of
each product, within the SAN topology is presented. A pictorial presentation of
the traditional captive storage architecture is also presented. The "LAN" and
"WAN" topology, relative to the SAN topology, is indicated.
The following text appears in connection with each Gadzoox product: Ventana -
"San Management Software," Capellix - "Chassis Switch," Gibralter - "Managed
Hub," Denali - "Area Switch," and Bitstrip - "Active Hub."
Headline: "the Gadzoox SAN Solution"
Main Text:
*Capacity Scalability
*Increased Performance
*Data Availability and Disaster Tolerance
*Interoperability
*Modular Scalability
*Increased Network Stability
*Advanced Data Management
Headline: "Traditional Captive Storage Architecture"
Main Text:
*Capacity Constraints
*Performance Constraints
*Lack of Management
*Lack of Availability and Disaster Tolerance
In the upper right-hand corner, the Gadzoox logo is set forth.
Back Inside Cover:
Headline: "the Gadzoox Solution"
<PAGE> 108
Main Text:
*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
*Data Availability and Disaster Tolerance - 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
*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
*Advanced Data Management - the ability to provide a platform for the
development of new methods that further increase data availability and
reliability
Set forth at the bottom of the page are the respective logos of "Gadzoox
Strategic Partners," including "Tel," "LSI Logic," "Agate," "Ideal," "ATL
Products," "Sanmina," "Consan," "Hewlett Packard," "NEC," "Veritas,"
"Legato Systems, Inc.," "Cranel," "Exabyte," "Compaq," "Vitesse," "Bull," "Bell
Microproducts," "Anadataco," "Merisel," and "Seagate," "Tektronix," "Avid,"
"EMC," and "Sun."
In the upper right-hand corner, the Gadzoox logo is set forth.
Back Outside Cover:
The Gadzoox logo is set forth in the center of the page.
<PAGE> 109
[Gadzoox Logo]
<PAGE> 110
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................................ 140,000
Legal fees and expenses..................................... 450,000
Accounting fees and expenses................................ 200,000
Blue Sky fees and expenses.................................. 25,000
Transfer Agent and Registrar fees........................... 5,000
Miscellaneous expenses...................................... 30,373
--------
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> 111
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> 112
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.**
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.+**
10.11 First Amended and Restated Registration and Information
Rights Agreement, dated as of October 12, 1998 (previously
filed as Exhibit 4.2).**
10.12 Warrant to purchase shares of Series F Preferred Stock of
the Registrant issued to Comdisco, Inc. (previously filed as
Exhibit 4.3).**
10.13 Warrant to purchase shares of Series G Preferred Stock of
the Registrant issued to Comdisco, Inc. (previously filed as
Exhibit 4.4).**
10.14 First Amended and Restated Series F, G and H Preferred
Stockholders' Agreement, dated as of October 12, 1998
(previously filed as Exhibit 4.5).**
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> 113
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> 114
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993, as amended, the
registrant has duly caused this amendment 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 16th day of July, 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 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 July 16, 1999
- --------------------------------------------------- Executive Officer and
Bill Sickler Director (Principal
Executive Officer)
/s/ CHRISTINE E. MUNSON Chief Financial Officer, July 16, 1999
- --------------------------------------------------- Vice President of
Christine E. Munson Administration
(Principal Financial
Officer)
* Chief Technology Officer July 16, 1999
- --------------------------------------------------- and Director
Dr. Alistair Black
* Director July 16, 1999
- ---------------------------------------------------
Dr. Milton Chang
* Director July 16, 1999
- ---------------------------------------------------
Dr. Denny R. S. Ko
* Director July 16, 1999
- ---------------------------------------------------
Robert Kuhling
* Director July 16, 1999
- ---------------------------------------------------
Stephen J. Luzco
* Director July 16, 1999
- ---------------------------------------------------
Peter Morris
*By: /s/ CHRISTINE E. MUNSON
- ---------------------------------------------------
Christine E. Munson
Attorney-in-fact
</TABLE>
II-5
<PAGE> 115
EXHIBIT INDEX
<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.**
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.+**
10.11 First Amended and Restated Registration and Information
Rights Agreement, dated as of October 12, 1998 (previously
filed as Exhibit 4.2).**
10.12 Warrant to purchase shares of Series F Preferred Stock of
the Registrant issued to Comdisco, Inc. (previously filed as
Exhibit 4.3).**
10.13 Warrant to purchase shares of Series G Preferred Stock of
the Registrant issued to Comdisco, Inc. (previously filed as
Exhibit 4.4).**
10.14 First Amended and Restated Series F, G and H Preferred
Stockholders' Agreement, dated as of October 12, 1998
(previously filed as Exhibit 4.5).**
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> 116
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> 117
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
Quarter ended June 30, 1998:
Allowance for returns and doubtful
accounts........................ $ 65,000 $ -- $ -- $ 65,000
Quarter ended June 30, 1999:
Allowance for returns and doubtful
accounts........................ $150,000 $ -- $ -- $150,000
</TABLE>
S-2
<PAGE> 1
EXHIBIT 1.1
3,500,000
GADZOOX NETWORKS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
July ____, 1999
CREDIT SUISSE FIRST BOSTON CORPORATION
HAMBRECHT & QUIST LLC
MORGAN KEEGAN & COMPANY, INC.,
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. Gadzoox Networks, Inc., a Delaware corporation
("COMPANY"), proposes to issue and sell 3,500,000 shares ("FIRM SECURITIES") of
its Common Stock, par value $0.005 per share, ("SECURITIES") and also proposes
to issue and sell to the Underwriters, at the option of the Underwriters, an
aggregate of not more than 525,000 additional shares ("OPTIONAL SECURITIES") of
its Securities as set forth below. The Firm Securities and the Optional
Securities are herein collectively called the "OFFERED SECURITIES." As part of
the offering contemplated by this Agreement, [CSFB] (the "DESIGNATED
UNDERWRITER") has agreed to reserve out of the Firm Securities purchased by it
under this Agreement, up to 250,000 shares, for sale to the Company's directors,
officers, employees and other parties associated with the Company (collectively,
"PARTICIPANTS"), as set forth in the Prospectus (as defined herein) under the
heading "Underwriters" (the "DIRECTED SHARE PROGRAM"). The Firm Securities to be
sold by the Designated Underwriter pursuant to the Directed Share Program (the
"DIRECTED SHARES") will be sold by the Designated Underwriter pursuant to this
Agreement at the public offering price. Any Directed Shares not orally confirmed
for purchase by a Participant by the end of the business day on which this
Agreement is executed will be offered to the public by the Underwriters as set
forth in the Prospectus. The Company hereby agrees with the several Underwriters
named in Schedule A hereto ("UNDERWRITERS") as follows:
2. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-78029) relating to the
Offered Securities, including a form of prospectus, has been filed with
the Securities and Exchange Commission ("COMMISSION") and either (i) has
been declared effective under the Securities Act of 1933 ("ACT") and is
not proposed to be amended or (ii) is proposed to be amended by
amendment or post-effective amendment. If such registration statement
("INITIAL REGISTRATION STATEMENT") has been declared effective, either
(i) an additional registration statement ("ADDITIONAL REGISTRATION
STATEMENT") relating to the Offered Securities may have been filed with
the Commission pursuant to Rule 462(b) ("RULE 462(B)") under the Act
and, if so filed, has become effective upon filing pursuant to such
1
<PAGE> 2
Rule and the Offered Securities all have been duly registered under the
Act pursuant to the initial registration statement and, if applicable,
the additional registration statement or (ii) such an additional
registration statement is proposed to be filed with the Commission
pursuant to Rule 462(b) and will become effective upon filing pursuant
to such Rule and upon such filing the Offered Securities will all have
been duly registered under the Act pursuant to the initial registration
statement and such additional registration statement. If the Company
does not propose to amend the initial registration statement or if an
additional registration statement has been filed and the Company does
not propose to amend it, and if any post-effective amendment to either
such registration statement has been filed with the Commission prior to
the execution and delivery of this Agreement, the most recent amendment
(if any) to each such registration statement has been declared effective
by the Commission or has become effective upon filing pursuant to Rule
462(c) ("RULE 462(C)") under the Act or, in the case of the additional
registration statement, Rule 462(b). For purposes of this Agreement,
"EFFECTIVE TIME" with respect to the initial registration statement or,
if filed prior to the execution and delivery of this Agreement, the
additional registration statement means (i) if the Company has advised
the Representatives that it does not propose to amend such registration
statement, the date and time as of which such registration statement, or
the most recent post-effective amendment thereto (if any) filed prior to
the execution and delivery of this Agreement, was declared effective by
the Commission or has become effective upon filing pursuant to Rule
462(c), or (ii) if the Company has advised the Representatives that it
proposes to file an amendment or post-effective amendment to such
registration statement, the date and time as of which such registration
statement, as amended by such amendment or post-effective amendment, as
the case may be, is declared effective by the Commission. If an
additional registration statement has not been filed prior to the
execution and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "EFFECTIVE TIME" with
respect to such additional registration statement means the date and
time as of which such registration statement is filed and becomes
effective pursuant to Rule 462(b). "EFFECTIVE DATE" with respect to the
initial registration statement or the additional registration statement
(if any) means the date of the Effective Time thereof. The initial
registration statement, as amended at its Effective Time, including all
information contained in the additional registration statement (if any)
and deemed to be a part of the initial registration statement as of the
Effective Time of the additional registration statement pursuant to the
General Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("RULE
430A(B)") under the Act, is hereinafter referred to as the "INITIAL
REGISTRATION STATEMENT." The additional registration statement, as
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and including
all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "ADDITIONAL REGISTRATION
STATEMENT." The Initial Registration Statement and the Additional
Registration Statement are herein referred to collectively as the
"REGISTRATION STATEMENTS" and individually as a "REGISTRATION
STATEMENT." The form of prospectus relating to the Offered Securities,
as first filed with the Commission pursuant to and in accordance with
Rule 424(b) ("RULE 424(B)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter
referred to as the "PROSPECTUS." No document has been or will be
prepared or distributed in reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (i) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all respects to the requirements of
the Act and the rules and regulations of the Commission ("RULES AND
REGULATIONS") and did not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) on the
Effective Date of the Additional Registration Statement (if any), each
Registration Statement conformed, or will conform, in all
2
<PAGE> 3
respects to the requirements of the Act and the Rules and Regulations
and did not include, or will not include, any untrue statement of a
material fact and did not omit, or will not omit, to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading and (iii) on the date of this Agreement, the
Initial Registration Statement and, if the Effective Time of the
Additional Registration Statement is prior to the execution and delivery
of this Agreement, the Additional Registration Statement each conforms,
and at the time of filing of the Prospectus pursuant to Rule 424(b) or
(if no such filing is required) at the Effective Date of the Additional
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all respects
to the requirements of the Act and the Rules and Regulations, and
neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of
this Agreement: on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement and the Prospectus will
conform in all respects to the requirements of the Act and the Rules and
Regulations, neither of such documents will include any untrue statement
of a material fact or will omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading, and no Additional Registration Statement has been or will be
filed. The two preceding sentences do not apply to statements in or
omissions from a Registration Statement or the Prospectus based upon
written information furnished to the Company by any Underwriter through
the Representatives specifically for use therein, it being understood
and agreed that the only such information is that described as such in
Section 7(b) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate) to own its properties and conduct
its business as described in the Prospectus; the Company is duly
qualified to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification, except where
the failure to so qualify would not individually or in the aggregate
have a material adverse effect on the condition (financial or other),
business, properties or results of operations of the Company taken as a
whole ("MATERIAL ADVERSE EFFECT"); and the Company has no subsidiaries.
(d) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding
shares of capital stock of the Company are, and, when the Offered
Securities have been delivered and paid for in accordance with this
Agreement on each Closing Date (as defined below), such Offered
Securities will have been, validly issued, fully paid and nonassessable
and will conform to the description thereof contained in the Prospectus
in all material respects; none of the outstanding shares of capital
stock of the Company was issued in violation of the preemptive or other
similar rights of any securityholder of the Company; and the
stockholders of the Company have no preemptive rights with respect to
the Securities.
(e) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or any
Underwriter for a brokerage commission, finder's fee or other like
payment in connection with this offering.
(f) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered pursuant
to a Registration Statement or in any securities being registered
3
<PAGE> 4
pursuant to any other registration statement filed by the Company under
the Act which have not been validly satisfied or waived.
(g) The Offered Securities have been approved for listing on the
Nasdaq Stock Market's National Market subject to notice of issuance.
(h) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance and sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and
such as may be required under state securities laws.
(i) The execution, delivery and performance of this Agreement,
and the issuance and sale of the Offered Securities will not result in a
material breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any rule, regulation or order
of any governmental agency or body or any court, domestic or foreign,
having jurisdiction over the Company or any of its properties, or any
material agreement or instrument to which the Company is a party or by
which the Company is bound or to which any of the properties of the
Company is subject, or the charter or by-laws of the Company, and the
Company has full power and authority to authorize, issue and sell the
Offered Securities as contemplated by this Agreement.
(j) This Agreement has been duly authorized, executed and
delivered by the Company.
(k) Except as disclosed in the Prospectus, the Company has good
and marketable title to all real properties and all other properties and
assets owned by it, in each case free from liens, encumbrances and
defects that would materially affect the value thereof or materially
interfere with the use made or to be made thereof by them; and except as
disclosed in the Prospectus, the Company holds any leased real or
personal property under valid and enforceable leases with no exceptions
that would materially interfere with the use made or to be made thereof
by the Company.
(l) The Company possesses adequate certificates, authorities or
permits issued by appropriate governmental agencies or bodies necessary
to conduct the business now operated by it and has not received any
notice of proceedings relating to the revocation or modification of any
such certificate, authority or permit that, if determined adversely to
the Company, would have a Material Adverse Effect.
(m) The Company is not in violation of its charter or by-laws or
in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or other
agreement or instrument to which the Company is a party or by which it
may be bound, or to which any of the property or assets of the Company
is subject except for such defaults that would not be reasonably
expected to result in a Material Adverse Effect.
(n) No labor dispute with the employees of the Company exists
or, to the knowledge of the Company, is imminent that might have a
Material Adverse Effect.
(o) The Company owns, possesses or can acquire on reasonable
terms, adequate trademarks, trade names and other rights to inventions,
know-how, patents, copyrights, confidential information and other
intellectual property (collectively, "INTELLECTUAL PROPERTY RIGHTS")
necessary to conduct the business now operated by it, or presently
employed by it, and has not received any
4
<PAGE> 5
notice of infringement of or conflict with asserted rights of others
with respect to any intellectual property rights that, if determined
adversely to the Company, would individually or in the aggregate have a
Material Adverse Effect.
(p) Except as disclosed in the Prospectus, the Company (i) is
not in violation of any statute, any rule, regulation, decision or order
of any governmental agency or body or any court, domestic or foreign,
relating to the use, disposal or release of hazardous or toxic
substances or relating to the protection or restoration of the
environment or human exposure to hazardous or toxic substances
(collectively, "ENVIRONMENTAL LAWS"), (ii) does not own or operate any
real property contaminated with any substance that is subject to any
environmental laws, (iii) is not liable for any off-site disposal or
contamination pursuant to any environmental laws, and (iv) is not
subject to any claim relating to any environmental laws, which
violation, contamination, liability or claim would individually or in
the aggregate have a Material Adverse Effect; and the Company is not
aware of any pending investigation which might lead to such a claim.
(q) The Company is not in violation of any federal or state law
or regulation relating to occupational safety and health and the Company
has received all permits, licenses or other approvals required of it
under applicable federal and state occupational safety and health laws
and regulations to conduct its businesses, and the Company is in
compliance with all terms and conditions of any such permit, licenses or
other approval, except any such violation of law or regulation, failure
to receive required permits, licenses or approvals or failure to comply
with the terms and conditions of such permits, licenses or approvals
which would not, singly or in the aggregate, have a Material Adverse
Effect on or constitute a materially adverse change in, or constitute a
development involving a prospective Material Adverse Effect on or change
in, the condition (financial or otherwise), earnings, properties,
business affairs or business prospects, net worth or results of
operations of the Company, except as described in or contemplated by the
Prospectus.
(r) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, or any
of its respective properties that, if determined adversely to the
Company, would individually or in the aggregate have a Material Adverse
Effect, or would materially and adversely affect the ability of the
Company to perform its obligations under this Agreement, or which are
otherwise material in the context of the sale of the Offered Securities;
and no such actions, suits or proceedings are threatened or, to the
Company's knowledge, contemplated.
(s) The Company has filed all foreign, federal, state and local
tax returns that are required to be filed or has requested extensions
thereof (except in any case in which the failure so to file would not
have a Material Adverse Effect) and has paid all taxes required to be
paid by it and any other assessment, fine or penalty levied against it,
to the extent that any of the foregoing is due and payable, except for
any such assessment, fine or penalty that is currently being contested
in good faith or as described in or contemplated by the Prospectus.
(t) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
prudent and customary in the businesses in which it is engaged; the
Company has not been refused any insurance coverage sought or applied
for; and the Company has no reason to believe that it will not be able
to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially
and adversely affect the condition (financial or otherwise), earnings,
properties, business affairs or business prospects, net worth or results
of operations of the Company, except as described in or contemplated by
the Prospectus.
5
<PAGE> 6
(u) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event"
(as defined in ERISA) has occurred with respect to any "pension plan"
(as defined in ERISA) for which the Company would have liability; the
Company has not incurred and does not expect to incur liability under
(i) Title IV of ERISA with respect to termination of, or withdrawal
from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder (the "Code"); and each "pension
plan" for which the Company would have any liability that is intended to
be qualified under Section 401(a) of the Code is so qualified in all
material respects and nothing has occurred, whether by action or by
failure to act, which would cause the loss of such qualification.
(v) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of
the Company as of the dates shown and their results of operations and
cash flows for the periods shown, and such financial statements have
been prepared in conformity with the generally accepted accounting
principles in the United States applied on a consistent basis and the
schedules included in each Registration Statement present fairly the
information required to be stated therein and the assumptions used in
preparing the pro forma financial statements included in each
Registration Statement and the Prospectus provide a reasonable basis for
presenting the significant effects directly attributable to the
transactions or events described therein, the related pro forma
adjustments give appropriate effect to those assumptions, and the pro
forma columns therein reflect the proper application of those
adjustments to the corresponding historical financial statement amounts;
and to the Company's knowledge, Arthur Andersen LLP who certified the
financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required by
the 1933 Act and the 1933 Act Regulations.
(w) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with GAAP and
to maintain asset accountability; (iii) access to assets is permitted
only in accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(x) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no material adverse change, nor any development or event involving
a prospective material adverse change, in the condition (financial or
other), business, properties or results of operations of the Company,
and, except as disclosed in or contemplated by the Prospectus, there has
been no dividend or distribution of any kind declared, paid or made by
the Company on any class of its capital stock.
(y) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.
(z) The Company has reviewed its operations and is making
inquiries of the Year 2000 compliance of any third parties with which
the Company has a material relationship to evaluate the extent to which
the business or operations of the Company will be affected by the Year
2000 Problem. As a result of such review and except to the extent
otherwise disclosed in the Prospectus, the Company has no reason to
believe, and does not believe, that the Year 2000 Problem will have a
Material Adverse Effect or result in any material loss or interference
with the Company's business or
6
<PAGE> 7
operations. The "Year 2000 Problem" as used herein means any significant
risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind will not, in the case of
dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring
prior to January 1, 2000.
(aa) The Registration Statement, the Prospectus and any
preliminary prospectus complies, and any further amendments or
supplements thereto will comply, with any applicable laws or regulations
of foreign jurisdictions in which the Prospectus or any preliminary
prospectus, as amended or supplemented, if applicable, are distributed
in connection with the Directed Share Program, and that (ii) no
authorization, approval, consent, license, order, registration or
qualification of or with any government, governmental instrumentality or
court, other than such as have been obtained, is necessary under the
securities law and regulations of foreign jurisdictions in which the
Directed Shares are offered outside the United States.
(bb) The Company has not offered, or caused the Underwriters to
offer, any Offered Securities to any person pursuant to the Directed
Share Program with the specific intent to unlawfully influence (i) a
customer or supplier of the Company to alter the customer's or
supplier's level or type of business with the Company or (ii) a trade
journalist or publication to write or publish favorable information
about the Company or its products.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $ - per share, the respective Firm
Securities set forth opposite the names of the Underwriters in Schedule A
hereto.
(a) The Company will deliver the Firm Securities to the
Representatives for the accounts of the Underwriters, against payment of
the purchase price in Federal (same day) funds by official bank check or
checks or wire transfer to an account at a bank reasonably acceptable to
Credit Suisse First Boston Corporation ("CSFBC") drawn to the order of
the Company at the office of Wilson, Sonsini, Goodrich & Rosati, P.C.
("WSGR"), 650 Page Mill Road, Palo Alto, California 94304 at 6:30 A.M.,
local time, on - , or at such other time not later than seven full
business days thereafter as CSFBC and the Company determine, such time
being herein referred to as the "FIRST CLOSING DATE." For purposes of
Rule 15c6-1 under the Securities Exchange Act of 1934, the First Closing
Date (if later than the otherwise applicable settlement date) shall be
the settlement date for payment of funds and delivery of securities for
all the Offered Securities sold pursuant to the offering. The
certificates for the Firm Securities so to be delivered will be in
definitive form, in such denominations and registered in such names as
CSFBC requests and will be made available for checking and packaging at
the above office of WSGR at least 24 hours prior to the First Closing
Date.
(b) In addition, upon written notice from CSFBC given to the
Company from time to time not more than 30 days subsequent to the date
of the Prospectus, the Underwriters may purchase all or less than all of
the Optional Securities at the purchase price per Security to be paid
for the Firm Securities. The Company agrees to sell to the Underwriters
the Optional Securities specified in such notice and the Underwriters
agree, severally and not jointly, to purchase such Optional Securities.
Such Optional Securities shall be purchased for the account of each
Underwriter in the same proportion as the Firm Securities set forth
opposite such Underwriter's name bears to the total number of shares of
Firm Securities (subject to adjustment by CSFBC to eliminate fractions)
and may be purchased by the Underwriters only for the purpose of
covering over-allotments made in
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<PAGE> 8
connection with the sale of the Firm Securities. No Optional Securities
shall be sold or delivered unless the Firm Securities previously have
been, or simultaneously are, sold and delivered. The right to purchase
the Optional Securities or any portion thereof may be exercised from
time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the
Company.
(c) Each time for the delivery of and payment for the Optional
Securities, being herein referred to as an "OPTIONAL CLOSING DATE",
which may be the First Closing Date (the First Closing Date and each
Optional Closing Date, if any, being sometimes referred to as a "CLOSING
DATE"), shall be determined by CSFBC but shall be not later than five
full business days after written notice of election to purchase Optional
Securities is given. The Company will deliver the Optional Securities
being purchased on each Optional Closing Date to the Representatives for
the accounts of the several Underwriters against payment of the purchase
price therefor in Federal (same day) funds by official bank check or
checks or wire transfer to an account at a bank acceptable to CSFBC
drawn to the order of the Company, at the above office of WSGR. The
certificates for the Optional Securities being purchased on each
Optional Closing Date will be in definitive form, in such denominations
and registered in such names as CSFBC requests upon reasonable notice
prior to such Optional Closing Date and will be made available for
checking and packaging at the above office of WSGR at a reasonable time
in advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement, the Company
will file the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented to
by CSFBC, subparagraph (4)) of Rule 424(b) not later than the earlier of
(A) the second business day following the execution and delivery of this
Agreement or (B) the fifteenth business day after the Effective Date of
the Initial Registration Statement. The Company will advise CSFBC
promptly of any such filing pursuant to Rule 424(b). If the Effective
Time of the Initial Registration Statement is prior to the execution and
delivery of this Agreement and an additional registration statement is
necessary to register a portion of the Offered Securities under the Act
but the Effective Time thereof has not occurred as of such execution and
delivery, the Company will file the additional registration statement
or, if filed, will file a post-effective amendment thereto with the
Commission pursuant to and in accordance with Rule 462(b) on or prior to
10:00 P.M., New York time, on the date of this Agreement or, if earlier,
on or prior to the time the Prospectus is printed and distributed to any
Underwriter, or will make such filing at such later date as shall have
been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to
amend or supplement the initial or any additional registration statement
as filed or the related prospectus or the Initial Registration
Statement, the Additional Registration Statement (if any) or the
Prospectus and will not effect such amendment or supplementation without
CSFBC's consent; and the Company will also advise CSFBC promptly of the
effectiveness of each Registration Statement (if its Effective Time is
subsequent to the execution and delivery of this Agreement) and of any
amendment or supplementation of a Registration Statement or the
Prospectus and of the institution by the Commission of any stop order
proceedings in respect of a Registration Statement and will use its best
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<PAGE> 9
efforts to prevent the issuance of any such stop order and to obtain as
soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company will promptly notify CSFBC of such event and will promptly
prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an
amendment which will effect such compliance. Neither CSFBC's consent to,
nor the Underwriters' delivery of, any such amendment or supplement
shall constitute a waiver of any of the conditions set forth in Section
6.
(d) As soon as practicable, but not later than the Availability
Date (as defined below), the Company will make generally available to
its securityholders an earnings statement covering a period of at least
12 months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional
Registration Statement) which will satisfy the provisions of Section
11(a) of the Act. For the purpose of the preceding sentence,
"AVAILABILITY Date" means the 45th day after the end of the fourth
fiscal quarter following the fiscal quarter that includes such Effective
Date, except that, if such fourth fiscal quarter is the last quarter of
the Company's fiscal year, "AVAILABILITY DATE" means the 90th day after
the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of
each Registration Statement (four of which will be signed and will
include all exhibits), each related preliminary prospectus, and, so long
as a prospectus relating to the Offered Securities is required to be
delivered under the Act in connection with sales by any Underwriter or
dealer, the Prospectus and all amendments and supplements to such
documents, in each case in such quantities as CSFBC requests. The
Prospectus shall be so furnished on or prior to 3:00 P.M., New York
time, on the business day following the later of the execution and
delivery of this Agreement or the Effective Time of the Initial
Registration Statement. All other documents shall be so furnished as
soon as available. The Company will pay the expenses of printing and
distributing to the Underwriters all such documents.
(f) The Company will arrange for the qualification of the
Offered Securities for sale under the laws of such jurisdictions as
CSFBC designates and will continue such qualifications in effect so long
as required for the distribution.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year,
a copy of its annual report to stockholders for such year; and the
Company will furnish to the Representatives (i) as soon as available, a
copy of each report and any definitive proxy statement of the Company
filed with the Commission under the Securities Exchange Act of 1934 or
mailed to stockholders, and (ii) from time to time, such other
information concerning the Company as CSFBC may reasonably request.
(h) The Company will pay all expenses incident to the
performance of its obligations under this Agreement, for any filing fees
and other expenses (including fees and disbursements of counsel)
incurred in connection with qualification of the Offered Securities for
sale under the laws of such jurisdictions as CSFBC designates and the
printing of memoranda relating thereto for the filing fee incident to,
and the reasonable fees and disbursements of counsel to the Underwriters
in
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<PAGE> 10
connection with, the review by the National Association of Securities
Dealers, Inc. of the Offered Securities, for any travel expenses of the
Company's officers and employees and any other expenses of the Company
in connection with attending or hosting meetings with prospective
purchasers of the Offered Securities and for expenses incurred in
distributing preliminary prospectuses and the Prospectus (including any
amendments and supplements thereto) to the Underwriters.
(i) For a period of 180 days after the date of the initial
public offering of the Offered Securities, the Company will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under
the Act relating to, any additional shares of its Securities or
securities convertible into or exchangeable or exercisable for any
shares of its Securities, or publicly disclose the intention to make any
such offer, sale, pledge, disposition or filing, without the prior
written consent of CSFBC except issuances of Securities pursuant to the
conversion or exchange of convertible or exchangeable securities or the
exercise of warrants or options, in each case outstanding on the date
hereof, grants of employee stock options pursuant to the terms of a plan
in effect on the date hereof, issuances of Securities pursuant to the
exercise of such options.
(j) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the National Association of Securities Dealers, Inc. (the
"NASD") or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. The Designated Underwriter
will notify the Company as to which Participants will need to be so
restricted. The Company will direct the transfer agent to place stop
transfer restrictions upon such securities for such period of time.
(k) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Shares
Program and stamp duties, similar taxes or duties or other taxes, if
any, incurred by the Underwriters in connection with the Directed Share
Program. Furthermore, the Company covenants with the Underwriters that
the Company will comply with all applicable securities and other
applicable laws, rules and regulations in each foreign jurisdiction in
which the Directed Shares are offered in connection with the Directed
Share Program.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the
date of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to
the execution and delivery of this Agreement, shall be prior to the
filing of the amendment or post-effective amendment to the registration
statement to be filed shortly prior to such Effective Time), of Arthur
Andersen LLP that they are independent public accountants within the
meaning of the Act and the applicable published Rules and Regulations
thereunder and stating to the effect that:
(i) in their opinion the financial statements and schedules
examined by them and included in the Registration Statements
comply as to form in all material respects
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<PAGE> 11
with the applicable accounting requirements of the Act and the
related published Rules and Regulations;
(ii) they have performed the procedures specified by the
American Institute of Certified Public Accountants for a review
of interim financial information as described in Statement of
Auditing Standards No. 71, Interim Financial Information, on the
unaudited financial statements included in the Registration
Statements;
(iii) on the basis of the review referred to in clause (ii)
above, a reading of the latest available interim financial
statements of the Company, inquiries of officials of the Company
who have responsibility for financial and accounting matters and
other specified procedures, nothing came to their attention that
caused them to believe that:
(A) the unaudited financial statements included in the
Registration Statements do not comply as to form in all
material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations or any material modifications should be made to
such unaudited financial statements for them to be in
conformity with generally accepted accounting principles;
(B) at the date of the latest available balance sheet
read by such accountants, or at a subsequent specified date
not more than three business days prior to the date of such
letter, there was any change in the capital stock or any
increase in short-term indebtedness or long-term debt of the
Company or, at the date of the latest available balance
sheet read by such accountants, there was any decrease in
net assets, as compared with amounts shown on the latest
balance sheet included in the Prospectus; or
(C) for the period from the closing date of the latest
income statement included in the Prospectus to the closing
date of the latest available income statement read by such
accountants there were any decreases, as compared with the
corresponding period of the previous year and with the
period of corresponding length ended the date of the latest
income statement included in the Prospectus, in net sales or
net operating income (loss) or in the total or per share
amounts of net income,
except in all cases set forth in clauses (B) and (C) above for
changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such
letter; and
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other
financial information contained in the Registration Statements
(in each case to the extent that such dollar amounts,
percentages and other financial information are derived from the
general accounting records of the Company subject to the
internal controls of the Company's accounting system or are
derived directly from such records by analysis or computation)
with the results obtained from inquiries, a reading of such
general accounting records and other procedures specified in
such letter and have found such dollar amounts, percentages and
other financial information to be in agreement with such
results, except as otherwise specified in such letter.
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<PAGE> 12
For purposes of this subsection 6(a), (i) if the Effective Time
of the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement, "REGISTRATION
STATEMENTS" shall mean the initial registration statement as
proposed to be amended by the amendment or post-effective
amendment to be filed shortly prior to its Effective Time, (ii)
if the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement but the
Effective Time of the Additional Registration is subsequent to
such execution and delivery, "REGISTRATION STATEMENTS" shall mean
the Initial Registration Statement and the additional
registration statement as proposed to be filed or as proposed to
be amended by the post-effective amendment to be filed shortly
prior to its Effective Time, and (iii) "PROSPECTUS" shall mean
the prospectus included in the Registration Statements.
(b) If the Effective Time of the Initial Registration Statement
is not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New York
time, on the date of this Agreement or such later date as shall have
been consented to by CSFBC. If the Effective Time of the Additional
Registration Statement (if any) is not prior to the execution and
delivery of this Agreement, such Effective Time shall have occurred not
later than 10:00 P.M., New York time, on the date of this Agreement or,
if earlier, the time the Prospectus is printed and distributed to any
Underwriter, or shall have occurred at such later date as shall have
been consented to by CSFBC. If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, the Prospectus shall have been filed with the Commission in
accordance with the Rules and Regulations and Section 5(a) of this
Agreement. Prior to such Closing Date, no stop order suspending the
effectiveness of a Registration Statement shall have been issued, and no
proceedings for that purpose shall have been instituted or, to the
knowledge of the Company or the Representatives, shall be contemplated
by the Commission.
(c) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or
event involving a prospective change, in the condition (financial or
other), business, properties or results of operations of the Company
which, in the judgment of a majority in interest of the Underwriters
including the Representatives, is material and adverse and makes it
impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities; (ii) any
material suspension or material limitation of trading in securities
generally on the New York Stock Exchange, or any setting of minimum
prices for trading on such exchange, or any suspension of trading of any
securities of the Company on any exchange or in the over-the-counter
market; (iii) any banking moratorium declared by U.S. Federal or New
York authorities; or (iv) any outbreak or escalation of major
hostilities in which the United States is involved, any declaration of
war by Congress or any other substantial national or international
calamity or emergency if, in the judgment of a majority in interest of
the Underwriters including the Representatives, the effect of any such
outbreak, escalation, declaration, calamity or emergency makes it
impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated
such Closing Date, of Wilson Sonsini Goodrich & Rosati, counsel for the
Company, to the effect that:
(i) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the
State of Delaware, with corporate power and authority to own its
properties and conduct its business as described in the
Prospectus; the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions
in which its ownership or lease of property or the conduct of
its business requires such qualification, except where the
failure to be so qualified would not have a material
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<PAGE> 13
adverse effect on the financial condition of the Company; and
the Company has no subsidiaries.
(ii) The Offered Securities delivered on such Closing Date
and all other outstanding shares of the Common Stock of the
Company have been duly authorized and validly issued, are fully
paid and nonassessable and conform to the description thereof
contained in the Prospectus, and the stockholders of the Company
have no preemptive rights pursuant to the Company's Certificate
of Incorporation or by-laws, and, to such counsel's knowledge,
the stockholders of the Company do not have any contractual or
other preemptive rights with respect to the Offered Securities.
(iii) Except as disclosed in the Prospectus and which such
rights have been waived, there are no contracts, agreements or
understandings known to such counsel between the Company and any
person granting such person the right to require the Company to
file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or
to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or
in any securities being registered pursuant to any other
registration statement filed by the Company under the Act;
(iv) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application
of the proceeds thereof as described in the Prospectus, will not
be an "investment company" as defined in the Investment Company
Act of 1940.
(v) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is
required for the consummation of the transactions contemplated
by this Agreement in connection with the issuance or sale of the
Offered Securities by the Company, except such as have been
obtained and made under the Act and such as may be required
under state securities laws;
(vi) The execution, delivery and performance of this
Agreement and the issuance and sale of the Offered Securities
will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any
rule, regulation or order of any governmental agency or body or
any court having jurisdiction over the Company or any of its
properties, or any agreement or instrument required to be filed
as an exhibit to the Registration Statement pursuant to Item
601(b)(10) of Regulation S-K to which the Company is a party or
by which the Company is bound or to which any of the properties
of the Company is subject, or the charter or by-laws of the
Company, and the Company has full power and authority to
authorize, issue and sell the Offered Securities as contemplated
by this Agreement;
(vii) To the best of the knowledge of such counsel, there is
not pending or threatened any action, suit, proceeding, inquiry
or investigation, to which the Company is a party, or to which
the property of the Company is subject, before or brought by any
court or governmental agency or body, domestic or foreign, which
might reasonably be expected to result in a Material Adverse
Effect, or which might reasonably be expected to materially and
adversely affect the properties or assets or the consummation of
the transactions contemplated in the Agreement or the
performance by the Company of its obligations thereunder;
(viii)The information in the Prospectus under "Description
of Capital Stock," in the fifth and sixth paragraphs of "Shares
Eligible" and in the Registration Statement under
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<PAGE> 14
Item 14, in each case insofar as such statements constitute
summaries of the legal matters, documents or proceedings
referred to therein, fairly present the information called for
with respect to such legal matters, documents and proceedings
and fairly summarize the matters referred to therein in all
material respects;
(ix) To the best of the knowledge of such counsel, the
Company is not in violation of its charter or by-laws and no
default by the Company exists in the due performance or
observance of any material obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument that is
described or referred to in the Registration Statement or the
Prospectus or filed as an exhibit to the Registration Statement;
(x) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in
such opinion, the Additional Registration Statement (if any) was
filed and became effective under the Act as of the date and time
(if determinable) specified in such opinion, the Prospectus
either was filed with the Commission pursuant to the
subparagraph of Rule 424(b) specified in such opinion on the
date specified therein or was included in the Initial
Registration Statement or the Additional Registration Statement
(as the case may be), and, to the best of the knowledge of such
counsel, no stop order suspending the effectiveness of a
Registration Statement or any part thereof has been issued and
no proceedings for that purpose have been instituted or are
pending or contemplated under the Act, and each Registration
Statement and the Prospectus, and each amendment or supplement
thereto, as of their respective effective or issue dates,
complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations; such
counsel have no reason to believe that any part of a
Registration Statement or any amendment thereto, as of its
effective date or as of such Closing Date, contained any untrue
statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus or any
amendment or supplement thereto, as of its issue date or as of
such Closing Date, contained any untrue statement of a material
fact or omitted to state any material fact necessary in order to
make the statements therein, in the light of the circumstances
under which they were made, not misleading; the descriptions in
the Registration Statements and Prospectus of statutes, legal
and governmental proceedings and contracts and other documents
are accurate and fairly present the information required to be
shown; and such counsel do not know of any legal or governmental
proceedings required to be described in a Registration Statement
or the Prospectus which are not described as required or of any
contracts or documents of a character required to be described
in a Registration Statement or the Prospectus or to be filed as
exhibits to a Registration Statement which are not described and
filed as required; it being understood that such counsel need
express no opinion as to the financial statements or other
financial data contained in the Registration Statements or the
Prospectus; and
(xi) This Agreement has been duly authorized, executed and
delivered by the Company.
(e) The Representatives shall have received from Morrison &
Foerster LLP, counsel for the Underwriters, such opinion or opinions,
dated such Closing Date, with respect to the incorporation of the
Company, the validity of the Offered Securities delivered on such
Closing Date, the Registration Statements, the Prospectus and other
related matters as the Representatives may require, and the Company
shall have furnished to such counsel such documents as they request for
the purpose of enabling them to pass upon such matters.
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<PAGE> 15
(f) The Representatives shall have received a certificate, dated
such Closing Date, of the President or any Vice President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable investigation,
shall state that: the representations and warranties of the Company in
this Agreement are true and correct; the Company has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied hereunder at or prior to such Closing Date; no stop order
suspending the effectiveness of any Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
contemplated by the Commission; the Additional Registration Statement
(if any) satisfying the requirements of subparagraphs (1) and (3) of
Rule 462(b) was filed pursuant to Rule 462(b), including payment of the
applicable filing fee in accordance with Rule 111(a) or (b) under the
Act, prior to the time the Prospectus was printed and distributed to any
Underwriter; and, subsequent to the date of the most recent financial
statements in the Prospectus, there has been no material adverse change,
nor any development or event involving a prospective material adverse
change, in the condition (financial or other), business, properties or
results of operations of the Company taken as a whole except as set
forth in or contemplated by the Prospectus or as described in such
certificate.
(g) The Representatives shall have received a letter, dated such
Closing Date, of Arthur Andersen LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred
to in such subsection will be a date not more than three days prior to
such Closing Date for the purposes of this subsection.
The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as the Representatives reasonably
requests. CSFBC may in its sole discretion waive on behalf of the Underwriters
compliance with any conditions to the obligations of the Underwriters hereunder,
whether in respect of an Optional Closing Date or otherwise.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each
Underwriter, its partners, directors and officers and each person, if
any, who controls such Underwriter within the meaning of Section 15 of
the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse each Underwriter
for any legal or other expenses reasonably incurred by such Underwriter
in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided,
however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or
is based upon an untrue statement or alleged untrue statement in or
omission or alleged omission from any of such documents in reliance upon
and in conformity with written information furnished to the Company by
any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
furnished by any Underwriter consists of the information described as
such in subsection (b) below.
The Company agrees to indemnify and hold harmless the Designated
Underwriter and each person, if any, who controls the Designated
Underwriter within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act (the "Designated Entities"), from
and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other
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<PAGE> 16
expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue
statement or alleged untrue statement of a material fact contained in
any material prepared by or with the consent of the Company for
distribution to Participants in connection with the Directed Share
Program or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading; (ii) caused by the failure of any
Participant to pay for and accept delivery of Directed Shares that the
Participant agreed to purchase; or (iii) related to, arising out of, or
in connection with the Directed Share Program, other than losses,
claims, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from the bad faith or
gross negligence of the Designated Entities.
(b) Each Underwriter will severally and not jointly indemnify
and hold harmless the Company, its directors and officers and each
person, if any who controls the Company within the meaning of Section 15
of the Act, against any losses, claims, damages or liabilities to which
the Company may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration
Statement, the Prospectus, or any amendment or supplement thereto, or
any related preliminary prospectus, or arise out of or are based upon
the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity
with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein, and will
reimburse any legal or other expenses reasonably incurred by the Company
in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being
understood and agreed that the only such information furnished by any
Underwriter consists of the following information in the Prospectus
furnished on behalf of each Underwriter: the concession and reallowance
figures appearing in the fourth paragraph under the caption
"Underwriting," the last paragraph under the caption "Underwriting"
regarding stabilizing and passive market making.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under subsection (a) or (b) above, notify the
indemnifying party of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability
which it may have to any indemnified party otherwise than under
subsection (a) or (b) above. In case any such action is brought against
any indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall
not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and after notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof,
the indemnifying party will not be liable to such indemnified party
under this Section for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have
been sought hereunder by such indemnified party unless such settlement
(i) includes an unconditional release of such indemnified party from all
liability on any claims that are the subject matter of such action and
(ii) does not include a statement as to, or an admission of, fault,
culpability or a failure to act by or on behalf of an indemnified party.
16
<PAGE> 17
Notwithstanding anything contained herein to the contrary, if indemnity
may be sought pursuant to the last paragraph in Section 7 (a) hereof in
respect of such action or proceeding, then in addition to such separate
firm for the indemnified parties, the indemnifying party shall be liable
for the reasonable fees and expenses of not more than one separate firm
(in addition to any local counsel) for the Designated Underwriter for
the defense of any losses, claims, damages and liabilities arising out
of the Directed Share Program, and all persons, if any, who control the
Designated Underwriter within the meaning of either Section 15 of the
Act or Section 20 of the Exchange Act.
(d) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a
result of the losses, claims, damages or liabilities referred to in
subsection (a) or (b) above (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand
and the Underwriters on the other from the offering of the Securities or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and the Underwriters on
the other in connection with the statements or omissions which resulted
in such losses, claims, damages or liabilities as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the
total underwriting discounts and commissions received by the
Underwriters. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company or the Underwriters
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The
amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities referred to in the first sentence of this
subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim which is the subject of
this subsection (d). Notwithstanding the provisions of this subsection
(d), no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be
in addition to any liability which the Company may otherwise have and
shall extend, upon the same terms and conditions, to each person, if
any, who controls any Underwriter within the meaning of the Act; and the
obligations of the Underwriters under this Section shall be in addition
to any liability which the respective Underwriters may otherwise have
and shall extend, upon the same terms and conditions, to each director
of the Company, to each officer of the Company who has signed a
Registration Statement and to each person, if any, who controls the
Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are
17
<PAGE> 18
obligated to purchase on such Closing Date, CSFBC may make arrangements
satisfactory to the Company for the purchase of such Offered Securities by other
persons, including any of the Underwriters, but if no such arrangements are made
by such Closing Date, the non-defaulting Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Offered Securities that such defaulting Underwriters agreed but failed to
purchase on such Closing Date. If any Underwriter or Underwriters so default and
the aggregate number of shares of Offered Securities with respect to which such
default or defaults occur exceeds 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date
and arrangements satisfactory to CSFBC and the Company for the purchase of such
Offered Securities by other persons are not made within 36 hours after such
default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company, except as provided in Section 9
(provided that if such default occurs with respect to Optional Securities after
the First Closing Date, this Agreement will not terminate as to the Firm
Securities or any Optional Securities purchased prior to such termination). As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company and the Underwriters pursuant to Section 7 shall
remain in effect, and if any Offered Securities have been purchased hereunder
the representations and warranties in Section 2 and all obligations under
Section 5 shall also remain in effect. If the purchase of the Offered Securities
by the Underwriters is not consummated for any reason other than solely because
of the termination of this Agreement pursuant to Section 8 or the occurrence of
any event specified in clause (ii), (iii) or (iv) of Section 6(d), the Company
will reimburse the Underwriters for all out-of-pocket expenses (including fees
and disbursements of counsel) reasonably incurred by them in connection with the
offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives, at c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department--Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at Gadzoox Networks, Inc.,
5850 Hellyer Avenue, San Jose, California 95138, Attention: Bill Sickler, with a
copy to Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, CA
94304, Attention: Bruce M. McNamara; provided, however, that any notice to an
Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and
confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives, jointly or by CSFBC will be binding
upon all the Underwriters.
18
<PAGE> 19
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
19
<PAGE> 20
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
GADZOOX NETWORKS, INC.
By:
-------------------------------
William Sickler
President and Chief Executive Officer
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first above
written.
CREDIT SUISSE FIRST BOSTON CORPORATION
- -------------------------------
- -------------------------------
Acting on behalf of themselves and as the
Representatives of the several Underwriters
CREDIT SUISSE FIRST BOSTON CORPORATION
HAMBRECHT & QUIST LLC
MORGAN KEEGAN & COMPANY, INC.
Acting on behalf of themselves and as the
Representatives of the several Underwriters
By CREDIT SUISSE FIRST BOSTON CORPORATION
By
-------------------------------
[Insert title]
20
<PAGE> 21
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER FIRM SECURITIES
----------- ---------------
<S> <C>
Credit Suisse First Boston Corporation.........................
Hambrecht & Quist LLC..........................................
Morgan Keegan & Company, Inc...................................
Total [$]
</TABLE>
21
<PAGE> 1
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.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
San Jose, California
July 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1999 MAR-31-1999
<PERIOD-START> APR-01-1997 APR-01-1998 APR-01-1999
<PERIOD-END> MAR-31-1998 MAR-31-1999 JUN-30-1999
<CASH> 4,624 12,202 8,845
<SECURITIES> 0 0 0
<RECEIVABLES> 3,489 6,131 7,426
<ALLOWANCES> (65) (150) (150)
<INVENTORY> 3,463 5,306 3,932
<CURRENT-ASSETS> 11,732 23,794 20,433
<PP&E> 4,044 7,121 7,724
<DEPRECIATION> (919) (2,568) (3,134)
<TOTAL-ASSETS> 14,942 28,598 25,274
<CURRENT-LIABILITIES> (5,347) (7,882) (7,277)
<BONDS> 0 0 0
0 0 0
(60) (69) (69)
<COMMON> (26) (28) (31)
<OTHER-SE> (8,083) (5,562) (2,850)
<TOTAL-LIABILITY-AND-EQUITY> (14,942) (28,598) (25,274)
<SALES> (9,811) (24,821) (9,211)
<TOTAL-REVENUES> (9,811) (24,821) (9,211)
<CGS> 7,898 18,638 5,414
<TOTAL-COSTS> 7,898 18,638 5,414
<OTHER-EXPENSES> 11,926 21,889 6,891
<LOSS-PROVISION> 15 85 0
<INTEREST-EXPENSE> (373) 226 142
<INCOME-PRETAX> (9,640) (15,932) (3,236)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (9,640) (15,932) (3,236)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (9,640) (15,932) (3,236)
<EPS-BASIC> (2.41) (3.33) (0.58)
<EPS-DILUTED> (2.41) (3.33) (0.58)
</TABLE>
